Aug 5, 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 Laura Champine – Morgan, Keegan & Company, Inc.
Operator
Welcome to the Haverty Furniture Company, Inc.’ s second quarter 2008 earnings release conference call.
(Operator Instructions) I would now like to turn the conference over to Dennis Fink, EVP and CFO.
Dennis L. Fink
During this conference we’ll 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 made in such statements, which speak only as of the date they are made, and which we undertake no obligation to publicly update or revise.
Factors that could cause Haverty’s actual results to differ materially from 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
Thanks for joining our second quarter conference call. As we released earlier, we had a very tough second quarter.
Total sales were $168.4 million, down 10% with comparative store sales down 12.7%. The weak top line produced a $2.3 million loss compared to last year’s second quarter of $1.4 million loss.
Gross margins remained strong which reflects our commitment to our quality brand and maintaining balance and clean inventories. The strong gross margins are also related to our decision to move our longer term customer financing to third-party credit resources.
Gross margins were up 263 basis points over last year’s second quarter. Because of the very difficult conditions, we’re firmly focused on controlling costs and preserving cash.
We realize that protecting our balance sheet is paramount to assure that we’ll be able to be in a strong position as our industry pulls out of this downturn. As of today, our current cash position is good, and we’re presently not drawing on our bank revolver.
We have under contract a $7 million sale lease [pack] agreement involving one of our newer store locations. This is still in the due diligence phase, but we expect to close early next quarter.
We believe that we can maintain the current level of inventory through the remainder of the year at approximately $105 million to $110 million, a level that we believe allows us to properly serve our customers. We have curtailed our capital expenditures to be approximately $13 million for 2008 with a similar number likely for 2009.
We did not buy any stock back in the second quarter. All of our management team has been involved in a deep dive into our operating budgets for the remainder of the year and for 2009.
We’ve adjusted any programs and projects that are not critical to our operations and customer service. We’ve looked at each of our departments to adjust staff to the current conditions and the prolonged sales downturn that we expect to see for the year ahead.
I will touch on a few initiatives underway to cut costs. We’re using the latest technology of IP web conferencing to cut significantly travel and training costs and have had excellent response to the new programs.
We have further analyzed and adjusted our distribution and delivery schedule, as well as our staffing, to maximize loads and efficiencies. We’ve revised our outsource credit programs to move to more cost-efficient promotions, which we think will continue to drive sales.
We further adjusted our advertising to fit our individual markets and to reach our customer base better, and our real estate team is evaluating every lease and reviewing opportunities for possible reductions in several markets. This month we will re-open our fully remodeled store at our Avenues location in Jacksonville, Florida.
We will also open a new store in Murphysboro, Tennessee, south of Nashville, relocating from an older site in that city. In the fourth quarter we will relocate our Mobile, Alabama store, leaving an expiring leased location.
We will also open a new store in the rapidly growing area of Northeast Raleigh, North Carolina, our second location in that city. We expect store square footage growth to be flat to slightly down in 2008 and flat in2009.
At the end of the first quarter we began selling over our integrated website. Our experience has been very positive with few problems and returns equal to or less than in store experiences.
Our customer research from active users is highly positive. The number of visitor sessions has increased steadily and the use of our room planner introduced in the second quarter has been ahead of projections.
The room planner has enhanced our cross-channel selling by customers working with their sales associates both in store and on the web. Haverty’s.com sales are growing and are generating volumes approximately equal to our average store sales.
We are strongly committed to enhancing our web presence. We believe it has become a primary means for our customer to research and evaluate our merchandise both in store and online purchasing.
Our merchants report that our factories are exerting pressure to raise prices of some goods due to the increases in commodities, fuel, taxes, and labor. We’ve worked very closely with our suppliers to minimize price increases, including moving products in production to other facilities and postponing increases to after planned promotional periods.
However, we will see increases in some of our collections by year end. The deflationary times in our industry are effectively over for now; however, with the increased capacity coming online in Asia, we expect these inflationary pressures to ease later this year.
We are pleased with our new merchandising programs. Many of our newest collections have moved to the top of our best sellers and we expect the latest in coming products to be good sellers for the upcoming fall selling season.
We’re adding a Haverty’s premium upholstery program with a wider custom choice selection which is hitting the floors now. We believe that it will be a strong enhancement to reach our customers.
Tough times require tough decisions and strong positioning. Our management team is making the tough decisions to assure that we will have the strongest, well-trained team using the industry best retail tools.
We’re building our Haverty’s brand in all of our marketing and in our stores presentations. Our merchants are working with the best suppliers to develop and source quality products and top values and as our top priority, we’re committed to have the strongest financial foundation to build on our positioning in the years ahead.
Now I’d like to turn the call over to Dennis Fink, CFO.
Dennis L. Fink
The gross profit for the second quarter of 2008 was 51.2%, an increase of 263 basis points compared to the prior years second quarter. Better inventory management reduced the levels of damaged and closeout merchandise during the second quarter compared to last year.
The level of sales financed internally using long term no interest credit promotions also affects our gross profit. During the second quarter of 2008, more of these promotions were handled by a third party finance company so there was less of the charge to gross profit than last year’s period.
These improvements in gross profit were partially offset as our second quarter LIFO provision increased $500,000 or 31 basis points compared to last year’s second quarter. These changes, along with improvements, generated by our new merchandise groups, improved product mix, and better pricing discipline, affected our gross profit year to date.
It was 49.3% for the six months last year versus 51.7% for the six months this year, an increase of 239 basis points. Many of our suppliers have experienced cost increases and we are working diligently with them on our product cost and our LIFO provision will be higher in the remainder of 2008 than it was in the second quarter.
That is the main reason we currently expect our second half 2008 gross profit margin to be lower than the 51.7% we recorded for the first half this year, but we do expect the gross profit margin will be above last year’s second half of the 50.1%. Most of our competitors use FIFO as in inventory valuation method.
Our LIFO accounting recognizes increasing product costs more rapidly by charging a non-cash provision to the P&L and putting a reserve on the balance sheet that reduces total inventory value. We will be able to closely estimate the LIFO impact for 2008 at the end of the third quarter and we will disclose the amount to you when we release our earnings three months from now.
Our SG&A expenses total cost s were approximately $3.5 million lower in the second quarter and that was the same amount for the six months. The cost of the promotional credit programs offered to the third party finance company as we mentioned is included in selling expenses.
The cost for those programs increased $800,000 and $3.6 million for the second quarter and first six months respectively over the prior year’s periods. The credit program costs were in line with those in the third and fourth quarter of 2007 when many longer-term free interest offers were also emphasized, so we’ve now anniversaried the time when we started being a little more aggressive with credit and also using the third party more than we had used our internal programs.
Delivery and certain warehousing expenses were up slightly in the second quarter as compared to the prior year. In response to the lower sales levels, we adjusted our routes in many of our markets, reducing total head count related to delivery expenses.
These decrease were offset by increased outbound fuel costs which were $800,000 higher than the year ago period. Our advertising and marketing expenses decreased by $2.3 million and $3.5 million for the quarter and six months ended June 30, 2008 compared to the prior year periods.
We adjusted our advertising spending in 2008 using more targeted methodologies that are designed to specifically reach our target customer. We’re in process of completing additional reductions in our administrative and other SG&A operational costs.
The benefit of these actions will have positive impact on the third quarter and should be more fully realized in the fourth quarter results. These reductions will come in both fixed and variable type expenses.
We believe that our second half total SG&A costs will be down approximately $2.3 million as compared to the first half total SG&A costs if the sales dollars for the first half and the second half were equal. That’s a benchmark to help you understand that we have made some cuts.
Obviously if sales are higher than the first half there would be additional costs that would be just variable expenses to support that higher sales level, but the absolute dollar amount of cuts on a first half/second half level sales basis, as I said, was $2.3 million or are anticipated to be $2.3 million. Our administrative costs were down slightly in the second quarter and first six months of 2008 compared to 2007.
This decrease is largely due to a reduction in management non-equity incentive compensation as well as insurance costs. Allows for doubtful counts is at $1.8 million at the end of the second quarter and is 4% of the total accounts receivable balance.
A year ago the allowance was also $1.8 million. At that time it was 2.2% of the total accounts receivable balance.
The increase in the percentage is because there has also been an increase in delinquency and problem category percentages. Total gross accounts receivable is now $45 million and when you add the short and long term portions and that was $81.9 million 12 months ago.
That’s a $36.8 million or 45% decrease. It’s been a big source of cash for us over that time and I think more importantly we’ve got a lower risk profile in a difficult consumer credit market, which we’re glad to mention.
Our book value is approximately $13 a share. As we said, our inventory is valued on LIFO and the difference between LIFO and FIFO inventory valuation is reserve is about $17 million.
So if we were on FIFO, our book value on a pre-tax basis would be $17 million higher. We also have no goodwill recorded in our books so the book value figure is all tangible and we believe conservative.
We’ve announced in our earnings press release that we’re no longer going to be releasing monthly sales results. A little background on that.
As most of you know, we are on an internal accounting calendar month rather than the retail calendar which is 4 and 5 week periods, 52 week years, that are made for better and more comparable monthly comparisons with the same number of weekend days, in our case, also the same number of delivery days. With the leap year this year, the calendar is two days different than last year’s in terms of the same date being two days different day of the week, so there’s a lot of fluctuations month to month in this year’s calendar.
In fact, the first two months of the second, third, and fourth quarter are benefited somewhat by the calendar and then in each case, the third month is hurt because of fewer weekend days or fewer delivery days. We also have the difficulty in our monthly releases of talking about written sales versus delivered sales.
Of course, many of you remember 10 years ago we had an earnings recognition method of a build basis which was somewhere in between the two versions and we changed to the delivered basis which is more conservative, more correct, back in 2000. So having to talk about two different measures of sales volume, and to talk about it on a calendar month versus the retail month, has become too confusing and is also leading to a little more volatility in the monthly announcements that require interpretation.
We think people want to see one number and have that represent how the sales were year to year and unfortunately we just can’t give you that so we think the better thing to do is to just announce our sales on a delivered basis and comp store sales at the end of every quarter as soon as we have that information available. I’ll remind you that would be within a few days after the quarter ends, just like we have been doing, and then our typical earnings release is about 4 weeks later, a little more in the case of year end.
Therefore, we’ll be having 8 times a year where there will be extensive financial releases about our results. Having monthly sales there was actually 12 releases or 12 times during the year when we announced how we were doing, so we’re only cutting it back fro 12 to 8.
The reason there were 12 instead of 16 is that the four earnings releases were timed to be very close to the sales releases for the first month of the quarter, so when you put all this together, we hope that we’re not reducing the information too much and that we are still going to be able to give you a picture of how we’re performing and more frequently than just quarterly, and in fact, hope that you’re able to I guess understand our performance a little better without the confusing numbers that have to be explained every month. We’ll take questions from the audience now and would like to give everyone an opportunity, so I’d like our participants to limit themselves to two questions and if you have a follow up, we’d appreciate it if you’d re-enter the queue.
Operator
(Operator Instructions) Your first question comes from Rex Henderson with Raymond James.
Rexford Henderson – Raymond James
I had a couple questions on the cost s and your efforts to reduce the cost structure. First of all, if you’d kind of quantify how much of those cost cutting efforts we’ve seen reflected in the results just announced, and how much more of them there are to go in the second half of the year.
Secondly, it’s helpful I think to look at this, with a reduced cost structure, what the sales run rate would be required to reach break even and if you could address those I’d appreciate that.
Dennis L. Fink
It becomes difficult to call out the actual decreases because of cost cutting. The first half numbers and the second quarter numbers compared to last year speak to the reduction, the $3.5 million, and it’s net of several increases and several decreases.
We noted that the two big increases were fuel costs and the cost of having outsourced credit promotions that were a little more aggressive, actually, quite a bit more aggressive than a year ago, so those are the two major items and we’ve made several other cuts. I think what we’re trying to do is to give you a second half guidance that tells you what’s still to come and so we’re trying to benchmark ourselves versus the first half and the comment was $2.3 million lower expenses in the second half than in the first, except that you have to take whatever sales you want to model and put some kind of variable costs in there for those.
In terms of a break even, we’re running in the little over $61 million to $62 million a month so it’s probably in the range of $183 million to $185 million on a quarterly basis. That is going to be a little bit higher with the heavy LIFO expense we’re expected to incur in the second half and if inflation starts leveling out, or I should say prices start leveling out next year, the break even would be a lower figure.
Does that help you?
Operator
Your next question comes from Laura Champine with Morgan Keegan.
Laura Champine – Morgan, Keegan & Company, Inc.
Your comments about the SG&A being lower than sales or even is a little frightening to me given that sales are historically much higher in the back half of the year. Did you mean to imply that sales might be flat in the back half compared to the first half of the year?
Dennis L. Fink
No, not at all. We just wanted to give kind of an apples and apples comparison that we could let you know how much cost we believe we’ve chased out and that’s all that’s an indication of.
We could have said it a variety of ways and it just seemed like people would be most interested in what we have done to reduce costs and sales are higher, which we hope they are, then you’d just have to plug in some variable costs for sales dollars higher than the first half.
Laura Champine – Morgan, Keegan & Company, Inc.
Okay, and then on your inventory, your comment that it’s in line with where you want it and need it to be, but it is outpacing your revenues on a year-over-year basis and it looks like if it stays at that $105 million or $110 million level that trend is likely to continue. Can you comment on what’s happening there and what you need in terms of service levels?
My concern is obviously that you might have to be more promotional to clear some of this. If you can give us some comfort around that, that’d be great.
Clarence H. Smith
Laura, I think our inventories are in as good a shape as we’ve ever had them. Actually, last year at this time, for the second quarter, we had some markdowns which we did not have to take this year because we’re in good shape.
You might recall that at the end of last year, we were too low and said that in our call, and we felt like it hurt our sales late in the year because we weren’t able to fill orders, so we think the level that we’re at is well-balanced and in pretty good line. I gave us a little bit of leeway when I said up to maybe $110 million and you also need to know that about half of that is on our floors, so we had to beef up a little bit here because of the Olympics and we have some goods coming in, on the way, already here, that we had to order ahead of time because of the disruption that we knew would happen around some of the factories that are affiliated with the Olympics, so we think it’s a good level.
I wish we had that level at the end of last year. I think it would have helped our sales, so we feel good about our inventory levels.
Operator
We have no further questions.
Clarence H. Smith
We really appreciate your joining us on the call and thank you for your interest in Haverty’s.