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Q1 2024 Haverty Furniture Companies Inc Earnings Call

Participants

Richard Hare; Chief Financial Officer, Executive Vice President; Haverty Furniture Companies Inc

Clarence Smith; Chairman of the Board, Chief Executive Officer; Haverty Furniture Companies Inc

Steven Burdette; President; Haverty Furniture Companies Inc

Michael Legg; Analyst; The Benchmark Company, LLC

Anthony Lebiedzinski; Analyst; Sidoti & Company, LLC

Budd Bugatch; Analyst; Water Tower Research LLC

Cristina Fernández; Analyst; Telsey Advisory Group LLC

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to Haverty's First Quarter 2024 earnings call. (Operator Instructions) Please note this conference is being recorded.
I will now turn the conference over to your host, Richard Hare, Chief Financial Officer.

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Richard Hare

Thank you, operator. During this conference call, we'll 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 of the date they are made and which we undertake no obligation to publicly update or revise the 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 and Ed will provide additional commentary about our business.

Clarence Smith

Thank you for joining our first quarter conference call, our Q1 sales were down 18.1% to $184 million, with comparable store sales down 18.5%. Total written sales were down 12.6%, and we continued with strong gross margins of 60.3% and controlled cost, which allowed us to produce a pretax profit of $3.2 million compared to $15.4 million in last year's Q1. We're well prepared for the Memorial Day event, the most important of the first half with energized marketing plans an exciting lineup of new products, excellent balanced inventories and new in-store signage.
Our Board approved a 6.7% increase in our quarterly dividend, which is our 12 year of consistent dividend increases. Paredes has paid a dividend every year since 1935. A strong balance sheet with over $100 million in cash allows us to return capital to our shareholders and invest in infrastructure and stores in our markets in 139 years of furnishing homes throughout our regions, Havertys has consistently gained market share, especially in difficult times the falloff in furniture demand following the dramatic sales increases due to COVID has had a major impact on the industry.
The industry struggled to supply timely furniture deliveries and the gang buster years during COVID. But once that backlog cleared up, we experienced a significant negative impact throughout the industry. We pulled forward roughly two years of sales and then experienced a two year slot back to pre-COVID. This time, there will be many players who won't survive the recovery.
While the first weakness was felt at the lower end of the market, it has impacted all the industry and we believe that that will continue until housing begins to edge back positive home sales in the south have a very high correlation to our business clearly, interest rates are a major factor in housing. In the past year, we've seen numerous furniture failures of many, many major manufacturers and retailers with the demand slot, and we expect to see more competitors struggling and players fail.
These are times when it becomes clear that this industry closely tied to housing cannot handle heavy debt leverage, major debt positions combined with higher interest rates as a fast slide to bankruptcy in the financial world, we have zero funded debt and are strongly positioned in the best states and fastest growing markets in the country. We believe that we are uniquely well positioned to continue to grow our market share in these important growth areas in the coming years, we are investing in store growth and upgrading our store and operating systems to better serve our customers.
We have a couple of major remodeling projects underway and major markets which should be completed by next month. We believe in financial resilience for sustained financial growth. We are on track to reach our goal of opening five new stores this year and five in 2025. I recently attended our new store opening in Southaven, Mississippi entering our 17 state and a major growth suburb of Memphis, Tennessee. South Haven was the first store opening of four from former Bed Bath & Beyond stores, which will allow us to gain strong locations in market areas where we have not been able to find sites in the next three months, we will be opening stores in three markets in Florida, destined central to the Emerald Coast St. Peters for submitting the full southern coastal site in our Tampa region and Pembroke Pines, our southernmost store in southeast Florida reaching into Miami.
All these stores are in adjacent markets and locations where we have significant brand awareness, existing distribution and experienced management in place. We know that these strengths combined with excellent locations at below market rates for a solid foundation for success. By Labor Day, we will have 33 stores throughout Southern's sunset Sunshine State, our largest state, followed by Texas with 22 stores. We're very excited to announce plans to return to Houston, Texas Havertys less left Houston over 40 years ago, and it is the largest market in our footprint where we do not have stores.
We will open our first store in a former Bed Bath & Beyond building in The Woodlands area later this year and follow with the Baybrook village store in Q1 2025, we expect to have more stores positioned to serve the greater Houston market in the next two years. We have delivered furniture in the northern suburbs of Houston for many years from our Austin and College Station stores. We believe that will be well positioned and well received in Houston and a major strengthening of our position in Texas. We are investing in brick and mortar, building our teams expertise, growing our design service, upgrading products and expanding customization and special order capabilities. All our teams are driven to be the best home furniture in the country, and again, profitable market share throughout our regions.
I'll now turn the call over to Steve but the president.

Steven Burdette

Thank you, Clarence, and good morning. Our first quarter results continue to show the headwinds that we're facing with the housing crisis in interest rates. However, we continue to be encouraged by our team's efforts to ensure that Haverty's is furnishing happiness to our customers. Store traffic continues to be a struggle in all markets. However, we did see a slight improvement in February and March in our traffic numbers coming off January, which was impacted by weather.
Our design business continues to gain momentum with an increase of over 10% in total dollars for the quarter, driven by our average design ticket increasing over 3%. The number of customers engaging with our design program was up over 19%, and our supply chain network continues to operate without any significant disruptions. We have been able to negotiate our new freight rates for 2024 beginning in May, so that we feel comfortable with our margin projections for the year.
Our inventories continue to be in excellent condition, and we're down at quarter end, almost 20% from Q1 2023 and almost 2% from year end 2023 vendors continued to be great partners as lead times remain from four to seven weeks. This has helped to continue to drive our special order business, which was up 13.5% in dollars for the quarter.
As you know, we introduced our new marketing campaign furnishing happiness to include with regret free experience. This messaging circles around four pillars that we feel are key to our customers' happiness and experience choices. Quality design service are concerned with the decrease in written business has centered around our decrease in traffic.
As a result, we recently recently made a change in our media planning and buying partner effective April first, we brought in Carmichael Lynch media to overhaul our paid media approach. We believe that how they manage and optimize media will result in better targeting and greater efficiencies resulting in a higher return on media investments. Carmichael Lynch media will partner with EP. and CO., our agency of record to develop impactful communication strategies tailored to increase awareness of Havertys and are furnishing happiness with a regret free guarantee campaign. Our new media approach will be fully implemented for Memorial Day, our largest promotion first half of the year. Additionally, we are focusing our more on more local store marketing efforts to help complement our paid advertising campaigns. We feel this combination of awareness, building media with community building local store efforts will positively impact traffic. Extending financing will continue to be a part of our holiday promotional events, and we continue to rightsize our staffing to match our current conditions through attrition and the business.
Now I will turn the call over to Richard.

Richard Hare

Thanks, Steve, and good morning. In the first quarter of 2024. Net sales were $184 million or 18.1% decrease over the prior year quarter. Comparable store sales were down 18.5% over the prior year period.
Our gross profit margin increased 120 basis points to 60.3% from 59.1%, primarily due to product selection and merchandising mix. Sg&a expenses decreased $9 million or 7.6% to $109.4 million. As a percentage of sales, these costs approximated 59.4% of sales, up from 52.7% in the prior year quarter. We experienced decreased selling costs, advertising, distribution, and transportation expenses. During the quarter, our interest income was approximately $1.6 million during the first quarter as we earned more on our cash deposits due to higher interest rates.
Income before income taxes decreased $12.2 million to $3.2 million. Our tax expense was $800,000 during the first quarter of 2024, which resulted in an effective annual tax rate of 25.1%. Primary difference in the effective rate and statutory rate is due to state income taxes and additional tax benefit from the vesting of stock awards during the year. Net income for the first quarter of 2024 was $2.4 million, or $0.14 per diluted share on our common stock compared to a net income of $12.4 million or $0.74 per share in the comparable quarter last year.
Now turning to our balance sheet, at the end of the first quarter, our inventories were $92.1 million, which was down $1.9 million from the year-end balance and down $22.2 million versus Q1 of 2023. At the end of the first quarter, our customer deposits were $40.9 million, which was up$ 5.1 million from the December 31, 2023 balance and down $5.5 million versus the Q1 2023 balance. We ended the quarter with $111.8 million of cash and cash equivalents. And we have or we had no funded debt on our balance sheet at the end of the first quarter.
Looking at some of the uses of our cash flow, CapEx was $6.4 million in the first quarter, and we also paid out $4.8 million of regular dividends. We did not utilize any of our share repurchase program during the first quarter of 2024 and we have approximately $13.1 million of existing authorization in our buyback program. Our earnings release lists 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 do expect our gross margins for 2024 to be between 60% and 60.5%. We anticipate gross profit margins will be impacted by current estimates of product and freight costs. Our fixed and discretionary type SG&A expenses through 2024 are expected to be in the $290 million to $292 million range. The variable type costs within SG&A for 2024 are expected to be in the range of 19.9% to 20.2%.
Our planned CapEx for 2024 remains $32 million. Anticipated new or replacement stores, remodels and expansions account for $27 million. Investments in our distribution network are expected to be $2.5 million, and investments in our information technology are expected to be approximately $2.5 million. We do expect our anticipated effective tax rate in 2024 to be 26.5%. This projection excludes the impact of vesting of stock awards and any potential new tax legislation.
This completes my commentary on the first quarter financial results. Operator, we would like to open up the call for questions at this time.

Question and Answer Session

Operator

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at anytime you wish to remove your question from the queue, please press star two For participants using speaker equipment. It may be necessary to pickup your handset before pressing the star keys. Once again, to ask a question, please press star one for our first question is from Mickey Legg with The Benchmark Company.

Michael Legg

Hey, guys, good morning. Thanks for taking my questions for more. Just trying to dig into the decision to enter the Houston market again, maybe can you elaborate on why you chose Houston and the opportunity you see there? Thanks.

Clarence Smith

Well, Houston is the largest market that is in our distribution footprint. We used to be there. We talked about that and we've been trying to figure out a strategy to come back in for quite a while. So we've got one store that a main store that we're going into in The Woodlands area is a former Bed Bath & Beyond store that we've got under lease and it's an extraordinary good lease. Second store down in Baybrook Village is also one of their spin-off companies and also in a great position. So we know that it's a major market and we need to have more than a couple of stores. So we have plans to expand that over the next several years and reach out to the growth areas of Houston. We can serve it now from our Dallas facility that's in place. We already deliver there. As I mentioned in the northern markets. It is a terrific large market where they know who we are, and we can serve it well, and we're finally getting positioned to move Bakken.
Great. Yes, that's super helpful. Great here. And then as a follow-up, maybe if you could just comment on the competition and promotion you're seeing out there in the industry. You know, how promotional Are some of your competitors getting in this market environment? And then maybe a quick comment on just any price increases you've been able to put in place. Thanks.

Steven Burdette

Yes, this is Steve. I would tell you, we really haven't seen a change in our the cadence from a how our competitors are promotion and pricing things out. So we really have not seen a change there and adjustment commented on the last call, we did see credit promotions are being tightened down because of the cost we have seen that are not being offered on that side of it. So from that vantage point, we don't see any real changes off of that.
Now from our side of, as I commented, we made a change in our media partner and we're very excited about that and what that can bring to us and we're focused on driving traffic. And one thing they're really going to do is look at a plan by market and individual last plan, instead of being more of a fewer plans, we're going to basically have an individual plans by market that we're really excited about because Dallas is going to be different than Birmingham is going to be different than Tamiflu. We're really excited about that, and we're looking forward to seeing the results of that and what they're going to do for us.

Michael Legg

Great. Great. That's all I have. Thanks for the time, guys.

Steven Burdette

Thanks for taking.

Operator

Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski

Good morning, and thank you for taking the questions. Certainly nice to see the balance sheet strength here and the dividend increase as some are so low. I know you touched on a little bit, but just wanted to see if you guys can quantify as far as the trends in the written business, you mentioned that February March was better than January because of the weather. So if you could just maybe go over the numbers, if you could, and also I don't know if this is significant to you guys or not, but the Easter that fell and earlier this year than last year. Did that have any notable impact on the business?

Richard Hare

Anthony, it's Richard. Let me let me hit the written business and then Steve's got some comments on Easter. But in terms of the cadence, January, we were down and read business on almost 20%, a very difficult month. In February, we were down about 8% and then March improved, we were down about 5%. So you can kind of see started out really difficult the environment in January with the improvements in February and March.

Steven Burdette

Yes, the Easter effect was really offset by the leap year effect of February. So we kind of look at those two together. When you look at it, Anthony, and if you combine them I think we were down less than 7% combined between the two months. So there were equal days there when you lost Easter, which picked up leap year.

Anthony Lebiedzinski

Got it. Okay. Yes, I forgot about that and thanks for pointing that out. So the obviously you have the good things that you are reentering Houston, you do have a strong balance sheet. Would it be possible for you guys as you think to accelerate the growth? I know you talked about five stores that you're looking to open this year and next. But again, given the dynamics in the marketplace that are going on now, is there a chance that you may accelerate that in future years? The pace of store openings?

Clarence Smith

I think so. It depends on the opportunities. We as I mentioned, I think they're going to be more opportunities. We are very good at converting existing space to Haverty's. Most of our growth has been that we open and will open a new store that's being built when we have to do that. And there will be a few of those in the next few years or we are planning, but I do believe they're going to be more opportunities for us, and we're prepared to do it. We've got a team to do it and a staff to do it. And we're we're good at converting. So as those things happen, we're ready and we're going to be ready to jump on them. So yes, if you look way back and Anthony, the biggest acquisitions of stores we did was that they were home life. It was Sears Home Life done around 2000, and I think we opened 9 or 10 at one time and we're able to execute that. And that was 20 years ago. So we know we can do it. We just want to make sure there are good opportunities. We expect that to be there.

Anthony Lebiedzinski

I think have plans for that. And then, Steve, you mentioned some efforts to rightsize staffing. Have the data ready to take place in the first quarter are you looking to do that should be coming up here and kind of which areas of the business? I know you guys did a big staffing reduction right after COVID initially hit four years ago that you hired some people back, but and how should we think about that as far as timing and its potential size as far as personnel reductions?

Steven Burdette

I would think about it is is ongoing and it's fluid, and we're managing it to the business and as we go. So we're constantly looking at that and evaluate that Anthony.

Richard Hare

And let me let me add to that, Steve. Antony, we continue to we always reassess and evaluate all areas of our business for cost efficiency. So during this past quarter, I believe our headcount was down to 2,487. I think we were down 71 people versus the end of the year. Most of that was in distribution home delivery as the demand came down. So did the need for additional support there?
And Justin, and generally speaking in other areas of businesses, one in particular, we're evaluating our entire lease portfolio for opportunities for further reduction of expenses, looking at all of our retail distribution and corporate leases for areas where we can get savings and extend the term on certain leases. So it's a constant process.

Anthony Lebiedzinski

Got it. And the last question from me before I pass it onto others. So kind of given where your share price is today, what is your appetite now for share repurchases?

Clarence Smith

Well, we meet with our Board every quarter and we've got a meeting later this in a few weeks and we evaluate it every quarter. We've got authority now for about $13 million and up we'll get in as it makes sense for us.

Anthony Lebiedzinski

Understood. Well, thank you very much and best of luck to you and again.

Clarence Smith

Thank you.

Operator

And our next question is from Budd Bugatch with Water Tower Research.

Budd Bugatch

Good morning, Clarence. Steve and Richard comes on and I know it's right, these are challenging times for the industry, as you noted, Clarence, Amin, you talked about expecting to see more disruption and we've seen enough of it already. Are you seeing any of that with your suppliers I know you too, Steve, you mentioned you got four to seven weeks in good supply pattern with your suppliers. But I'm just curious to see if you can give us any more color that you may be seeing?

Clarence Smith

I can't say I've seen anything that will impact our direct suppliers. I must admit I was a little concerned with Liggett release, so they're the main player in the industry. It tells you a lot about what the industry is going through there, but we haven't seen anything that's disrupted our flow of product with our main I mean those suppliers.

Budd Bugatch

Okay. And you talked about January and February and gave us the cadence on that, but done in conjunction with what you just mentioned and other things that we're hearing on April has seemed to have hit a another real Signia significant air pocket. And I know you don't like to comment on the current quarter, but I also know you don't want to surprise people either. So can you give us a flavor of what you're seeing in the industry now or macro from a macro, but I'm wondering how it affects Havertys.

Clarence Smith

We've both been around a long time, and I will say that historically, April is the slowest month, one of if not the slowest month of the year for a couple of reasons. One is because of Easter and the other is because of tax season, that type of thing tax day, I don't think you'll see anything much different than what we've historically seen about April.

Budd Bugatch

Okay. I mean, T.S. Eliot made the same comments, so that being the coolest months. So yes, I know I know April and Easter and Passover we always used to joke when I was doing what you do on it was either late or earlier, whether it was never on time.

Clarence Smith

And well, the good thing is is behind us. You know, Easter hit early. So it's behind us and now we're moving on.

Budd Bugatch

Okay. Why do you open up St. Petersburg? Just curious from that standpoint.

Steven Burdette

Bud we're hoping third quarter mid-third quarter, hoping to get before Labor Day.

Clarence Smith

All of the problems have just been getting the approvals from from Florida, as you know, how difficult it is to get his Q&A. If you have had a reasonable level of our Geysers thing and so on, we were able to open very quickly our store outside of Memphis. But Florida is a little different.

Budd Bugatch

I got you. And last for me on the expense side, Richard, and thank you for all the detail on the color you gave. And that's really very helpful to help people understand the structure of furniture retail. Are you seeing any cost issues that are worrisome?
We were starting to see rate issue for the way people are paid. So I'm curious if you're seeing that or how you can what you can give us color on that.

Richard Hare

Yes. I would just say nothing that really keeps me up at night. Just your standard inflationary increases, but they're low single digit. Steve, I think mentioned it in his opening remarks that we've locked in our freight contracts. So we've got that behind us and things are back to more historical levels there. But the way I guess is probably not so much a cost problem, but a revenue revenue issue with the way businesses. But we continuously look at other areas to find cost efficiencies, and we'll continue to do that.

Budd Bugatch

And is the freight issue NEM do with Baltimore or any of the turmoil in the ocean is giving you problems?

Steven Burdette

No, but we're not have we do not use the Baltimore port. So that has not caused us will not cause us any disruptions in the the overseas. What's going on the Red Sea and all that, that movement going around, you know, already have already gone a different path is just extending the lead time by a couple of weeks but that's not any impact to our customers. We plan for that and we know where it is. So no disruptions there from to impact our customers and for.

Budd Bugatch

Thank you very much in terms of best wishes on the balance of this year and beyond.

Richard Hare

Thank you, Bodo.

Operator

Our next question is from Cristina Fernández with Telsey Group.

Cristina Fernández

Hi, good morning, everyone. I wanted to ask about the industry or revenue assumptions behind the guidance and maybe Clarence, you can touch on. It seems like the order trends were got a little bit better or less worse as the quarter progressed. But at the same time, you talked about the challenges in the industry in E&O and some business, some companies going out of business. So do you think we should expect similar trends as we saw in the first quarter? Or were getting closer to that point where that could be at an inflection in demand at some point this year?

Clarence Smith

Well, we have we have said that we thought things would be better in the second half. I don't know if we're feeling that or expect that from what we're hearing from the Fed and in the marketplace, it is definitely difficult. We've been down for a long time in written business. I think that we'll be softening up. I think it will be less down. But we don't see I don't have visibility to the point where we think it's going to be positive anytime real soon. But I think we're saying the same thing in the industry. I haven't heard anything positive from other players. I think it's across the board, frankly, and it's now moved into the better end of the market as I mentioned, I mean, it started in the lower and the market has now hit. I think it's hit everywhere, and we're not a lot of people release retail sales, but I think it's a trend that is in place. I hope that it turns around soon. We're certainly positioned to do that. And we hope some of the new things that Steve talked about with the new marketing and certainly new merchandise will we'll resonate to help that happen.

Cristina Fernández

And that makes sense. And that seems consistent with what we're hearing. So I wanted to follow up on that point, Steve, on the on the marketing side, can you expand more on like where are the efficiencies or kind of what's changing to what you've been doing versus what they're going to do going forward.
Anything else in addition to the comp, I guess, market-specific on marketing, are you going to see a change in like medium digital versus on print. I don't think you have too much print, but perhaps TV or some of the other channels that you've been traditionally using.

Steven Burdette

You know, Kristina, we're not going to play our hand, obviously because we haven't we haven't done it yet. I mean, we're just now starting in our big advertising for the quarter will be around and focused on Memorial Day. But obviously, all those things that you just mentioned around the table. I mean, we're looking at it by market to me, that's one of the most exciting things you know, at The Villages, for example, will be different marketing than Alana and those type things. So yes, there will be in some markets. We could use print in some markets. We may be doing more broadcast. We will look at individually and attack it to how we can create more awareness to drive people into the funnel and get into our store. So there will be more to report on that as we go forward with it. But we are excited about it. They are making changes that are different from our approach that we had been executing out. And so that's what you know. We'll have to see the results as it goes forward.

Cristina Fernández

And the last question I had was on the merchandising. So last call we there was some talk about outdoor and the introduction and expansion of that category. Any comment on the early reads, how that's doing or any other merchandising initiatives we can track for the rest of the year.

Steven Burdette

From an outdoor perspective, it is in now we got it in and we will guide to say it.
We've got some early results is not in all our stores, US and about less than half our stores. But the early results have been very positive. It's two different groups and some of our peers and things with it. So it's not a huge assortment, but a assortment enough that we can satisfy that customer's our request that they need that.
From a category perspective, we're seeing strength, obviously, in upholstery that continues to do well. I talked about special order business continues to trend up. It was up 13.5%. So we're very excited about that. And what our designers are able to provide and options we're able to offer our customers from that side of it.
Bedroom dining room had been a little bit of a struggle, been softer than we had hoped in the first quarter of things and bedding has been pretty stable, I would say right now. So that kind of gives you kind of an overview, but we do have a lot of new product coming in that cadence. Now we've gotten back into that. Our merchants are flowing new product in it, and we're excited about our teams are excited about it because obviously that gives you new choices for our costs.

Cristina Fernández

Okay. Thank you.

Clarence Smith

Thank you, Kristian.

Operator

Gentlemen, there are no further questions at this time. I'd like to turn the call back to Richard Hare for closing comments.

Richard Hare

We appreciate and thank you for your participation in today's call, and we look forward to talking to you in the future. When we release our second quarter results later this year.