May 9, 2008
Executives
Dennis L. Fink – Executive Vice President and Chief Financial Officer Clarence H.
Smith – President and Chief Executive Officer
Analysts
Rexford Henderson – Raymond James Todd Schwartzman – Sidoti & Co. Laura Champine – Morgan Keegan & Company Analyst for John Baugh – Stifel Nicolaus & Company, Inc.
Carlos Ryerson – Luxor Capital Group
Operator
Welcome to the first quarter 2008 earnings release conference call. (Operator Instructions) I would now like to turn the conference over to Dennis Fink, Executive Vice President and CFO.
Dennis L. Fink
During this call we will make forward-looking statements which are subject to risks and uncertainties and assumptions that are difficult to predict. Actual results may differ materially from those expressed in such statements.
We speak only as of the date that they are made and we undertake no obligation to publicly update or revise. Factors that could cause Haverty’s actual results to differ materially from the expected results are disclosed in the company’s reports filed with the SEC and we caution you to give consideration to those possibilities.
Our President and CEO, Clarence Smith, will now give you his update.
Clarence H. Smith
Sales for the quarter came in at $185 million, down 3% from last year. Margins were greatly improved, ahead of our budget, at 52.1%.
And we held our SG&A expenses flat producing an increase in net income to slightly over $1 million, or $0.05 per share versus $0.04 last year. We outlined the three areas that affected our gross margin increase in our press release.
These improvements were due approximately 1/3 to our exclusive product, 1/3 due to better inventory management, and 1/3 due to our move to more third-party credit. I would add that our team has adapted well to the shift to global supply of our product from our former model of domestic suppliers located a few hours from our DCs.
We are finally beginning to get some credit for the exclusive product development our merchandising team has undertaken and we’re handling the flow and movement of the product from the worldwide factories to our customers’ homes much more efficiently. This has helped us significantly reduce our markdowns, closeouts, and demurrage, while we are reacting quicker and better to solve our customers’ home furnishings needs.
We are much further along the learning curve of being a fully developed branded retailer from one only selling other manufacturers’ brands. Our inventories are 7% higher than last year end due in part to building stock because the impact of Chinese New Year.
However, inventories were 8.5% below the March 2007 level, in line with budget and balanced. We are continuing to bring down our account receivables but because our inventory did increase, we have a balance on our bank revolve of $8.3 million at the end of the quarter.
Our debt-to-cap ratio is 11.2%. We have not bought back any stock since January 2008, when it traded below $8.00 per share.
During that month we bought 227,000 shares at an average of $7.95 for a total of $1.8 million. As we have mentioned in past conference calls, we remain focused on maintaining our strong balance sheet.
We see our financial strength as a major advantage in the current environment and for the potential difficult months ahead. We have adjusted our advertising to reach our specific customers better and I am pleased with the progress we have made in the efficient targeted advertising that our marketing team has developed.
Advertising expense was 6.7% of net sales, down from 7% last year. We fine-tune our marketing for each market, with detailed follow-up analysis on the effectiveness of each promotion to track results.
We are now operating as a unified brand versus a local furniture operator. Our research has shown that our brand recognition has strengthened in our key markets while we have lowered our total dollars and expense.
We are encouraged by the initiatives that we undertook last year to lower our SG&A across most areas of our business. We believe that we will leverage our existing organization and fixed cost structure with any positive sales momentum.
We began selling on the Web in the quarter with very few problems. Havertys.com had nearly 500,000 unique monthly visitors in March.
Just this week we added a new room planner to our site that will further assist our customers in their decorating efforts. We have recently begun promoting our site with several new events such as Win Your Wish List and expect to see increases in website usage in the second Quarter.
We expect our 2008 store growth plans to be flat in square footage with last year. This year we plan to open three to four stores, remodel and expand two stores, and close four stores.
We are evaluating all our markets to make sure we’re positioned properly and reviewing possibilities for improved lease terms as renewals and options mature. In these difficult times for furniture retailers we believe that our financial strength will allow us to acquire better real estate terms that we have been able to do in the recent past.
Our plans are to grow retail locations only in markets that our existing distribution can serve. While we are encouraged by our performance in a number of our markets, we still see real weaknesses in many of the cities that we serve.
We are well positioned to gain real market share from the weaker players in our industry. We are committed to do all that is possible to serve our customers better than our competition to earn there continued business and to grow our profitable share in the months and years ahead.
Now I would like to turn the call over to Dennis Fink, CFO.
Dennis L. Fink
Our first quarter SG&A expenses were flat with the first quarter of last year, and actually decreased $7.4 million sequentially from the fourth quarter of 2007. We were pleased with achieving that 7% reduction from the fourth quarter to the first quarter and it helped buffer the impact of the lower sales being generated.
The cost of our outsourced credit promotions were up considerably from the first quarter of the prior year as longer free-interest periods were offered. Those longer free-interest credit promotions had been de-emphasized early last year.
In the first quarter this year the cost of the credit promotions was about equal as a percent of sales with the second half levels in 2007. Our allowance for doubtful accounts on our in-house receivables portfolio is at $2 million at the end of the first quarter and is approximately 3.5% of the A/R balance.
A year ago that allowance was slightly lower at $1.8 million but at that time it was only 2.2% of the total A/R balance. Delinquency and problem category percentages have risen over the last year and thus the increase in the allowance as a percent of total A/R.
Total gross A/R is now $56.7 million. That’s $24 million, or 30%, lower than a year ago.
Our store expansion and capital expenditures are modest this year, as Clarence pointed out. We are now expecting total CapEx this year will be approximately $10.5 million.
That’s about $1.6 million that we had previously estimated. Our book value is slightly over $13.00 a share.
As a reminder, our inventory is valued at LIFO cost and the reserve is about $16.5 million. We also have no good will recorded on our books, so the book value figure is all tangible and conservative.
We will take questions from the audience now. We would like for everyone to have an opportunity to ask a question so please limit yourself to two questions and if you have follow ups we would appreciate it if you would re-enter the queue.
Operator
(Operator Instructions) Your first question comes from Rex Henderson - Raymond James.
Rexford Henderson – Raymond James
Could you go through each of these improvements in gross margin that you outlined in the press release and give a little more color on exactly what each of those means, what the source of those were.
Clarence H. Smith
Let me comment on the inventory management. Last year at this time we had some significant markdowns that we had to take that we got behind us.
Those are not affecting us like they were in the past. We are doing a much better job of managing the inventories and not allowing obsolescence to come in our stores.
That was about 1/3 of the margin improvement. I also think we are getting a little better margins on some of our exclusive product and getting, frankly, better credit for that.
The out sourced credit did impact it, also.
Dennis L. Fink
Yes. That’s really just where it appears on the P&L.
And when it’s in-house and it’s longer than 12 months we have to accrue a discount on that. And we ran more of those promotions outside so it actually hit a little harder on the SG&A line.
It did save us on the gross profit line.
Clarence H. Smith
I will say that it was stronger than we had planned but it was certainly a positive and we want to try to maintain the margins the best we can in the environment that we are in, which is pretty difficult and we certainly want to drive our sales and be promotional where we need to be, but we’re seeing a lot of pressures, as you would guess, with fuel and steel and foam, currency issues. And we’re doing everything we can to hold our pricing and to make sure we do maintain our margins.
Rexford Henderson – Raymond James
Now, returning to that topic and trying to figure out how much of this is sustainable, the mark downs that you had last year, did those mark downs continue into the second or third quarter or were they pretty much done at the end of the first quarter.
Clarence H. Smith
They did continue into the second quarter and pretty much were done. We will see some months where that is a comparative part of it but that will be behind us after the first half.
Rexford Henderson – Raymond James
So we will continue to see that benefit through the second quarter but not in the third and fourth.
Clarence H. Smith
I would say that is true.
Rexford Henderson – Raymond James
And the benefits you’re getting from fewer, less damaged, do you think you will continue to see that through the rest of the year? Can you talk about that a little bit?
Clarence H. Smith
I don’t know how to put that into numbers but I do know that we are managing that a lot better and I don’t see that as a problem going forward. It’s hard to articulate exactly how that will affect us, but I don’t think it will be a negative, which it was last year.
Rexford Henderson – Raymond James
And when will you begin to anniversary those improvements in the way you are handling merchandise and limiting damages?
Clarence H. Smith
I would say in the second half.
Operator
Your next question comes from Todd Schwartzman - Sidoti & Co.
Todd Schwartzman – Sidoti & Co.
Clarence, could you shed a little bit more light on the color you did provide on the three sources of the margin improvement with respect to the exclusive product? Maybe speaking in terms of what categories you’re referring to, are there specifics collections?
Just want to get a handle on the true degree of exclusivity, if you will, and how you are differentiating the product and how customers in your key markets are making that, are differentiating.
Clarence H. Smith
Well, most of our wood product comes from Asia and we do have a team over there, we are in Asia, we are working with our vendors there, some of them directly. And we have designers that we are using to develop our collections and those are now coming in and have been very well accepted.
I do think we’ve got some terrific values because we have, in many cases, eliminated or reduced the middlemen that are involved in the process. And it is coming in.
It’s been a good while in developing this but I think we’re getting more expertise in developing exclusive product, exclusive designs, and it’s now on the floors and we’re getting better margins for it. So I would say it is mostly in the case-goods collections, however, we are doing more in upholstery and that is coming directly from some factories and also through some agents in Asia.
But it’s product that is different than what most people have on their floors and it is being accepted. We are separating ourselves and becoming more of a unique furniture retailer than we were in the past.
Todd Schwartzman – Sidoti & Co.
With respect to both upholstery and case goods, can you talk about average delivery time versus a year ago?
Clarence H. Smith
Well, from the product development all the way through the end, it’s a longer process. But I will say that in working directly with some of these factories in Asia, sometimes it’s quicker than what we had to do with working through agents or other manufacturers.
Just because they know it’s going specifically to us, they can get the product cut and once it’s designed and made they know how much is going to come to our stores because it generally comes through all of our floors. So, on a new collection, it’s still probably six months in developing, or maybe even more.
We’re tightening that and I think getting better at it and as we work closer with these direct manufacturers they’re getting more comfortable with us. But the design process does take generally probably about at least six months.
We would like to get that narrower but that’s about what it is. And in the past some of that was done by a middle man or a manufacturer and it probably took them that long, it’s just by the time it got to us it was probably four to five months in getting it from Asia or on our floors.
Operator
Your next question comes from Laura Champine - Morgan Keegan.
Laura Champine – Morgan Keegan & Company
You mentioned briefly some of the pressures on your vendors from fuel and from foam and from some other input costs and we’re hearing a lot about price increases. But I know that you’re able to offset some of that by reducing your middleman cost.
Can you cite a blended trend for your product cost, whether you’re seeing that pick up or down on like-to-like products?
Clarence H. Smith
Well, I don’t think we’ll see deflation any time soon. We’re certainly seeing a lot of pressures, Laura, as you well know.
And we’re trying to resist and try to make it make sense for our stores and our customer, taking it on some items but not on others in the collection, that type of thing. We are resisting greatly across the board increases but there are certain items we are going to have to take some increases, particularly those that have a lot of steel in them.
Foam has gone up dramatically. So it’s hard to know what the impact of that is going to be but we want to maintain our margins the best we can and reduce those increases as much as we can.
Operator
Your next question comes from Analyst for John Baugh - Stifel Nicolaus.
Analyst for John Baugh – Stifel Nicolaus & Company, Inc.
As far as April, last year had Easter in that mix, in that month. Can you give us more of an apples-to-apples comparison on what happened in this most recent April?
Clarence H. Smith
April was disappointing. We haven’t released the final number but it is definitely disappointing.
Last year did have Easter in it, which is one of the toughest times in our industry, so we should have done better than that. I would say that it was a soft month most of the month.
It got a little better at the end. But certainly disappointing, particularly compared with the decrease we had last year.
So, it is very tough out there, still. And we’re still seeing softness, as we mentioned in our press release, in our Florida markets, as well as others.
So it is still a very difficult environment.
Analyst for John Baugh – Stifel Nicolaus & Company, Inc.
As far as inventory levels, do you expect those to trend down for the balance of the year?
Clarence H. Smith
I think they will be flat. We went up and I think we’re about where we want to be right now and I think they will probably remain flat through the rest of the year.
Operator
Your last question comes from Carlos Ryerson - Luxor Capital.
Carlos Ryerson – Luxor Capital Group
The raw materials that have increased, specifically steel and resin-based materials, did that flow through this quarter or is there a lag effect for those increases?
Clarence H. Smith
That did not flow through in the first quarter.
Carlos Ryerson – Luxor Capital Group
The gross margin was really impressive and I’m just curious the way I have to think about you are trying to hold prices steady but your vendors are seeing a ton of price increases so I’m trying to figure out where that’s going to flow through.
Clarence H. Smith
Most of that pressure frankly came right after the furniture market, which was in the middle of April. So it’s on top of us right now and in the whole industry.
Carlos Ryerson – Luxor Capital Group
So maybe we will expect to see a little bit of gross margin declines going forward.
Clarence H. Smith
Well, it’s going to be a challenge.
Carlos Ryerson – Luxor Capital Group
I know you have scaled back your financing. Has the third-party financing become more difficult for your customers to obtain, just with the general credit situation?
Dennis L. Fink
We haven’t seen that yet. I think what’s happened is those who can’t afford furniture, don’t feel like the can afford it, are not out buying it.
The approval rates have held up pretty well.
Operator
We have no further questions.
Clarence H. Smith
I would just like to thank you for joining us on our first quarter and we greatly appreciate your interest in Havertys.