Haverty Furniture Companies, Inc. (NYSE:HVT) Q3 2023 Earnings Call Transcript

Haverty Furniture Companies, Inc. (NYSE:HVT) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Greetings, and welcome to Haverty’s Third Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Richard Hare, Chief Financial Officer. Thank you. You may begin.

Richard Hare: Thank you, operator, and good morning. During this conference call, we will make forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those made or implied in such statements, which speak only as the date they are made and which we undertake no obligation to publicly update or revise. Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed in the company’s reports filed with the SEC. Our Chairman and CEO, Clarence Smith, will now give you an update on our results and our President, Steve Burdette, will provide some additional commentary about our business.

A close-up view of a furniture piece in the company’s showroom.

Clarence Smith: Thank you for joining our third quarter conference call. Our net sales of $220.3 million were down 19.7% over last year with comparable store sales down 20.7%. Total written sales were down 11.5% and written comp-store sales declined 12.6%. These trends reflect the strong deliveries of backordered goods last year and the current difficult headwinds and the shift in consumer spending and housing declines related to elevated mortgage rates. Our Q3 delivered sales compared to Q3 of 2019 pre-COVID were up 5.3%. This quarter, our teams did a fine job in expense control, improving gross margins, managing inventories and executing high-quality service, which helped produce double-digit pretax margins of 10.4% or $22.9 million.

Our growing design service with special order and custom upholstery continues to separate us from the more promotional players in the industry. Our relationships and partnerships throughout the industry, both domestic and international, have helped us develop terrific merchandise values, which we believe is gaining share in building our reputation as a top-quality home furnisher. Several of our merchandising team recently returned from the international home furnishings market in High Point, followed by a trip to visit our key case goods suppliers in Vietnam. John Gill, Executive Vice President of Merchandising led these trips and reports that while orders are significantly down in the factories in these factories, Haverty’s is moving exciting new collections through production to ship before Chinese New Year.

I believe that our long-term relationships and partnerships are major strength across the industry. Our collection of outdoor products, a new category for our stores will be hitting the floors late this year and early next year in time for the key selling season. Several updated bedroom and dining room products are in the process of arriving early next year. Recently committed major upholstery collections have hit our floors and quickly moved up as best sellers. The recent acquisition of four Bed Bath & Beyond leases are on track for converting to Haverty stores in the first half of 2024. We’re in due diligence on several existing store opportunities in our regions and expect to be on track of our goal of five new stores per year in 2024 and 2025.

The furniture industry is clearly in a recession directly related to higher interest and mortgage rates and the consumers move to travel and entertainment. We believe that these are times when our strong balance sheet, outstanding long-term supplier relationships and excellent new store opportunities aligned to set up real market share gains throughout our regions. We continue to focus on helping our customers’ vision of their home come to life. We’re in an excellent position throughout our regions to make that happen and grow our business. And now I would like to turn the call over to Steve Burdette, President.

Steve Burdette: Thank you, Clarence, and good morning. Our third quarter results were weaker than expected, fueled by weak Labor Day event proving to be slower than anticipated as our written sales were down roughly 16% from our record Labor Day event last year. Store traffic continues to be our biggest obstacle. However, we were pleased to see our overall ticket – average ticket rise low single digits, and our closing rate percentage remained basically flat for the quarter when compared to Q3 last year. Our supply chain network is continuing to experience no headwinds with production or shipping times from our vendors. Our inventories were down approximately 26% from Q3 last year. Our backlogs continue to remain consistent with pre-pandemic levels, and our inventories are balanced to the current business conditions.

Our lead times from our vendors continue to help drive our special order business. For Q3, our special order business was up approximately 47% over last year and represents 33% of our upholstery business for the quarter. These increases have continued to be driven by our design business, which grew to 29% of our business for the quarter, with our designer average ticket growing just over 10%. Our focus is to continue to make sure that we are exposing all our customers to our complementary design services and increasing the number of customers that are engaging with our designers, which will help drive – continue to drive our average ticket higher. Our business partner continues to work with us as we are seeing improvements in our websites performance.

Additionally, our more robust analytics have allowed us to make progress on our AB testing road map that is leading to more personalization and improved user experience. We continue to get good feedback from our sales and design teams on the new products that our merchandising teams are bringing to our stores. Extended financing continues to play an important part in our largest promotional holiday events each quarter as we manage these costs with rising interest rates. Distribution, home delivery and service are executing well, staying focused on getting it right the first time for our customers. Finally, I want to thank all of our team members throughout the company for all they do every day to help set Haverty’s apart from our competition.

Now I’ll turn the call over to Richard.

Richard Hare: Thank you, Steve. Looking at our income statement in the third quarter of 2023. Net sales were $220.3 million, a 19.7% decrease over the prior year quarter. Comparable store sales were down 20.7% over the prior year period. Our gross profit margin increased 370 basis points to 60.8% from 57.1% due to reductions in freight, the positive LIFO inventory adjustment and better pricing discipline. SG&A expenses decreased $11.8 million or 9.5% to $112.7 million. As a percent of sales, these costs approximated 51.1% of sales, up from 45.4% in the prior year quarter. We experienced decreased selling costs, advertising, distribution and transportation expenses during the quarter. Other income and expense in the third quarter of 2023 was negligible and interest income was approximately $1.7 million during the third quarter as we earned more on our cash deposits due to higher interest rates.

Income before income taxes decreased $9.7 million to $22.9 million. Our tax expense was $5.8 million during the third quarter of 2023, which resulted in an effective tax rate of 25.2%. The primary difference in the effective rate and statutory rate is due to state income taxes. Net income for the third quarter of 2023 was $17.2 million or $1.02 per diluted share on our common stock compared to net income of $24.6 million or $1.46 per share in the comparable quarter last year. Now turning to our balance sheet. At the end of the third quarter, our inventories were $102.3 million, which was down $16 million from December 31, 2022, balance and down $35 million versus Q3 2022 balance. At the end of the third quarter, our customer deposits were $46.3 million, which was down $1.7 million from December 31, 2022, and down $33.4 million versus the Q3 2022 balance.

We ended the quarter with $134.3 million of cash and cash equivalents, and we have no funded debt on our balance sheet at the end of the third quarter of 2023. Looking at some of our uses of cash flow, capital expenditures were $46.4 million for the first nine months of 2023. As a reminder, we repurchased our Florida distribution facility in the second quarter for $28.2 million. In addition, during the first nine months of 2023, we paid $14.3 million in quarterly dividends. During the third quarter, we purchased 104,221 shares of common stock under our existing buyback program for $3.2 million. We have approximately $16.8 million of existing authorization in our buyback program. Our earnings release list out several additional forward-looking statements indicating our future expectations of certain financial metrics.

I will highlight a few, but please refer to our press release for additional commentary. We expect our gross margins for 2023 to be between 60% and 60.2%. We anticipate gross profit margins will be impacted by our current estimate of product and freight costs and changes in our LIFO reserve. Our fixed and discretionary type SG&A expenses for 2023 are expected to be in the $286 million to $288 million range. The variable-type costs within SG&A for 2023 are expected to be in the range of 19.6% to 19.8%. Our planned CapEx for 2023 is $55 million, anticipated new or replacement stores, remodels and expansions account for $19 million. Investments in our distribution network are expected to be $33.5 million and investments in our information and technology are expected to be approximately $2.5 million.

Our anticipated effective tax rate in 2023 is expected to be 25%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes my financial commentary on the third quarter results. Operator, we would like to open up the call for questions at this time.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.

Anthony Lebiedzinski: Good morning, gentlemen, and thank you for taking my questions.

Clarence Smith: Good morning.

Anthony Lebiedzinski: So as – good morning, yes. So I look actually the third quarter of written trends, they were actually down less than what you guys had in the second quarter. So I guess there was some sequential improvement there. I know you guys talked about Labor Day, but just wondering as far as the rest of the business throughout the quarter, how did that perform versus your expectations? And did you see any big change versus what you had thought about as far as business progression?

Richard Hare: Anthony, good morning. This is Richard. Just in terms of our written business and cadence during the quarter, if you recall, in the second quarter, I believe we were down around 14.7%. In July, we were down a little slightly over 8% down. So there was a nice improvement there. And then in August and September, we kind of went back to the same range that we saw for the quarter in the second quarter overall. So we saw some slight improvement in July and then back to the 14.7% range in August and then slightly lower than that, but still double digits in September.

Anthony Lebiedzinski: Okay. That’s helpful color, Richard. So – and do you know as far as like what drove that? Was there anything competitively happening in your marketplace? Or is it just macro headwinds?

Clarence Smith: I think it’s just macro. We haven’t seen anything dramatically different with any of our competition and wasn’t anything happening differently with us. So I think it’s just the overall mood of the market.

Steve Burdette: And as I commented, Richard, I mean, Anthony, about the Labor Day of that, that drove the August, September number, looking at it over a two-week promotional period. I mean, we were just – we were down more over that two weeks than we were outside of it for those two months, but it drove the overall on both of them. We were encouraged coming out of July with the single digits. But certainly, we were going against a record Labor Day last year. We had a fabulous promotional period last year at an all-time high. So we were down off of that, and that’s what’s contributed to the bigger decreases in August and September.

Anthony Lebiedzinski: Okay. So it sounds like it was a tough comparison. Okay. And then Clarence, you mentioned outdoor furniture. Just wondering about the opportunity there as far as what we can see whether this – and also will this be in all stores or in just some stores? How should we think about that?

Clarence Smith: Well, I said it was a new category. It’s a new category because we dropped the last iteration of it several years back. We’re going to do it the right way this time. It will not be in all of our stores, but it will be in the ones that make the most sense for us and eventually probably all of our stores. So it will be a more limited program and there are some special order opportunities in it. I don’t see it as a significant part of our business. It could be a couple of percent, maybe 2% to 3%, ultimately. But I think it’s important, particularly for our special order custom design sales, which is now a bigger part of our business. Our customers want to have a whole home done, and this allows us to do that. So we’re excited about it.

Anthony Lebiedzinski: Okay. Thanks, Clarence. And then last question for me before I pass it on to others. So your gross margin has certainly done very well. It’s had a nice tail end – tailwind, I’m sorry, from LIFO. So how should we think about the overall gross margins beyond this year?

Richard Hare: Anthony, its Richard. That’s a great question. So this particular quarter, we had a pickup of around $2.3 million in the third quarter. Last year, it was an expense of about the same amount, $2.5 million. So the overall improvement in gross margins for the quarter in terms of a merchandise margins, freight and product discipline, that was about 45% of the increase. 55% of it is LIFO. We expect that to continue for the remainder of this year. We’re still forecasting next year, and we’ll release our – on the fourth quarter call, we’ll give guidance for gross margins for 2024.

Anthony Lebiedzinski: Got you. Okay. Well, thank you very and best of luck.

Clarence Smith: Thanks, Anthony.

Operator: Our next question comes from the line of Michael Legg with The Benchmark Company. Please proceed with your question.

Michael Legg: Thanks. Good morning, everyone. Congrats on the nice quarter. Can you talk – just a couple of quick questions? One, from a competition perspective, what you’re seeing from a promotional perspective in your regions and how that’s playing out. Second, your design initiatives obviously are doing well. Can you talk about any opportunity to expand that? How many designers do you have in each store? Is that something you’re looking to expand? And then just on the outdoor furniture, what’s that margin profile like compared to the rest of the company products? Thanks.

Steve Burdette: Okay. So – Mike, this is Steve. So from a competitive standpoint, I would say activity certainly has picked back up. People are – have seen probably a little more conservative approach to the financing. People are looking at that because of the rising cost and what goes on there. But obviously, you’re still seeing the activity around the holiday events. And from the promotional players you’re seeing maybe increased activity at those levels as well. But really no real change overall from discounts or anything like that, that they’re offering. Those have been pretty consistent. From a designer opportunity, I think we have certainly opportunity to grow that. We average right now about one designer per showroom.