May 8, 2010
Executives
Dennis Fink – Executive Vice President and CFO Clarence Smith – President and CEO
Analysts
Todd Schwartzman – Sidoti & Company Budd Bugatch – Raymond James
Operator
Ladies and gentlemen, thank you for standing by. And welcome to Haverty's Q1 2010 financial results conference call on the May 6, 2010.
Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions.
(Operator Instructions) I will now hand the conference over to Mr. Dennis Fink.
Please go ahead, sir.
Dennis Fink
Thank you, and good morning, everyone. During this conference, we’ll make forward-looking statements which are subject to risk 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. 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 President and CEO, Clarence Smith, will now give you his update.
Clarence Smith
Thank you. Good morning.
Thank you for joining our first quarter conference call. As we previously reported, our sales increased 8.2% to $156 million, compared to $144 million for the quarter.
Comparative store sales for Q1 were 10.1%, which was exciting for our team to finally see a double-digit positive performance. We’re pleased to report that we produced a profit of $2.4 million versus a loss for last year of $7.3 million.
Written sales for the second quarter to date are up 8.8% and for the first time in several years our recent store traffic is positive, up in the mid single digits. Our website traffic is up 13% for the first quarter, which also correlates to a 13% increase in page views.
We had 1.7 million unique visitors to havertys.com in the quarter. According to our year end brand tracking report 75% of our customers go to the web before they purchase demonstrating the importance of our fully interactive site.
While our Internet sales are not a significant part of our total business, havertys.com's high use demonstrates our customer’s attraction to the site and the strength of our interactive marketing program. Our bedding, upholstery and casual dining business is stronger this year with an encouraging recent trend of increasing bedroom business.
While our promotional efforts have worked very well, we are seeing signs of strength in the better goods. We’ve several new better end groups and collections which will be on our floors by mid-summer.
We’re having discussions of price increases with some of our companies but we’ve been successful in keeping our costs under control due to our long-standing commitments to our core vendors. Pricing has caused and will cause some shifts in our merchandise line up.
We remain dedicated to providing a superior value in our niche. Along with our strong relationships with traditional manufacturers, we believe that our combination of our direct sourcing model alongside working relationships with agents and sourcing companies helps to provide great values for our customers while producing good gross margins.
We did not experience some of the shipping problems with containers that many of our competitors did in the first quarter due to our strong contracts with shipping lines and our communications and logistics systems. We have several ocean carriers available to use from all our major Asian ports which helps ensure that our merchandise will get on a ship when requested.
This allows for different transit times from these major ports to even out the arrival of merchandise into our distribution centers. Many of the factories in China did have fewer workers return from Chinese New Year than they expected and they experienced a tougher time getting ramped up back up for production.
These issues seem to have improved slightly with most of our suppliers now increasing production and shipping sooner than originally planned. We have had a few supply interruptions due to factory closures but for the most part we are in the larger and stronger facilities in Asia and have worked through most problems.
Our merchandising team is frequently in Asia working with these suppliers and several of our executive team will be visiting throughout the next few months. We are adjusting to the realities of relying on Asian production for the majority of our goods.
We are adapting our ordering patterns by factory and group to the changing environment in Asia to minimize stock outs. By analyzing each factory's performance and individual criteria such as quantity minimums and lead times we can adapt our ordering patterns accordingly.
We focus on leveraging the better performing shorter lead time merchandise which helps us be in stock and to better serve our customers. I wanted to review some of the merchandising trends from the recent market.
There continues to be a shift to having more function in furniture. One example is built-in storage and wooden case goods.
The storage is hidden in many places in the furniture pieces giving the customer as much spatial functionality as possible. Other examples of higher function are in the home office where features include tilt desks that gave the customer the option of setting customized comfort positions for working at home.
And the most obvious example of function in furniture is the reclining motion built into upholstery. In many cases the product has been designed to hide its ability to recline.
All of this function has been put into the furniture in addition to be an exciting accomplishes one major thing. It gives the customer ownership of how to use the furniture.
She is in charge. Upholstery has started to migrate to lighter, softer colors.
They are more neutral, a few shades lighter than what we have seen in the past. We’re seeing more light gray based colors now as opposed to the browns that we’ve seen for so many years.
Upholstery continues to move to cleaner lines, more transitional styles and this is being achieved without losing the warm inviting feel that our customer is wanting. There is a new move to what one supplier called outside-in furniture.
This is different from simply achieving a distressed look. The product is designed and manufactured to obtain a beat up weathered look.
The wood has gone through a bleaching and a staining process to make it lighter in appearance. It achieves a more relaxed comfortable feel that is very inviting and it takes casual to another level.
But more importantly, it does add an exciting new dimension to furniture. We’re enthusiastic and excited about the upcoming new trends and the new designs that we’ve planned to arrive in our stores in the coming months.
An important focus of our team this year is to enhance our store presentation with stronger graphics and a more open, brighter presentation. We engaged a design firm who has helped us develop our new look.
After initial testing we’ve begun to roll out new displays to eight additional stores with our restructured store display team this spring and summer. We will set plans to continue to move the new store program to other stores as we confirm the positive feedback from our customers, our associates in the sales results.
We believe that the new presentation is more consistent with our look and our advertising and on our website and helps us to strengthen our brand. A significant part of our capital spending this year and for 2011 is to invest further in MIS enhancements.
We will be significantly upgrading our operating system platform which will allow us to consolidate havertys.com infrastructure with a more versatile computing environment. We will be refreshing our equipment in our stores, as well as our scanning equipment in the distribution centers to maintain payment card industry compliance.
We recognize that staying at the forefront of operating systems and the latest technology is critical in the retail furniture business. This is especially true when we are developing and moving product from Asia while selling both on the web and delivering to individual homes in 75 markets throughout 17 states.
Our experienced IS team is an important strength of our company and we will continue to invest in strengthening the team and the infrastructure behind our associates. We have ramped up our research efforts to better target our messages and to strengthen our relationship with our customers.
Our primary customer is a woman over 35 with household income over $50,000 with the real sweet spot of $75 to $150,000. 80% are homeowners.
They have lived in their homes for over three years and are likely to have children. We were able to track our customers because we deliver to their homes and we listen closely to her suggestions through thousands of customer reviews on our website and through customer intercepts and follow-up phone questionnaires.
We believe that we are connecting better and more efficiently with our core customer. Recent research shows that we lead in top of mind awareness in most of our markets.
We will continue to invest in listening and researching our customers to help us provide her with the furniture and service values she wants. Our objective is to provide excellent values in the better part of the furniture market, appealing to our long-term core customer while gaining share, market share, from the broader market on either sides of that core customer.
We want to be known as the better furniture store providing better quality, exciting and exclusive merchandise with the best service levels in the industry. I’ll now turn the call over to Dennis Fink.
Dennis Fink
Thank you, Clarence. I'll first make a few comments on the P&L.
The gross profit for the first quarter of 2010 was 52.1%, compared to 51.1% in the prior year period. This expansion was a result of improvements in product mix and pricing discipline and a reduction in the volume of damage from closeout merchandise.
We plan to remain competitive with our pricing structure as we strive to maintain our gross profit margins at or near our 2008 full-year level, which was 51.7%. We anticipate increasing freight rates and material and labor costs for our suppliers to generate potential pressure on our product costs.
While it may be difficult to initially recover these increases through our retail pricing, future product costs increases will have a relatively immediate impact on our LIFO reserve. Our first quarter 2010 sales were up 8.2% and through rigorous cost reductions.
We were able to decrease total SG&A by $2 million, compared to last year's first quarter. Selling expenses generally vary with sales volume.
However for the first quarter of 2010, they decreased 55 basis points, compared to the prior year period due in part to lower third-party finance costs. Customers used less of the private label card programs we offer this year at 38% of sales versus 43% of sales for last year's first quarter.
Occupancy expenses decreased $900,000 for the quarter with depreciation expense within that approximately $700,000 less than last year and utility costs also running lower. Delivery and warehouse expenses included in SG&A in the first quarter of 2010 were relatively flat in total dollars as compared to the prior year even with the higher sales volume and increased fuel costs, although last year we adjusted our routes in many of our markets and reduced total headcount, equipment and related delivery expenses.
As a percent of sales, first quarter delivery and warehouse expenses were down 61 basis points, compared to the prior year period due to the cost controls and improved efficiencies that resulted. Our advertising and marketing expenses were 6.8% of sales and 7.7% for the first quarter of 2010 and 2009, respectively.
Our spending decreased by $400,000 for the first quarter of 2010 compared to the prior year. We expect to continue our advertising and marketing strategies as our campaigns have resulted in high brand awareness relative to our spend.
Our administrative costs were down $1.4 million for the quarter, as compared to the prior year period due in part to reductions in headcount and compensation. The tax expense generated by our income during the first quarter of 2010 was approximately $969,000 and was offset by an $891,000 decrease in our deferred tax valuation allowance.
For last year's first quarter, the tax benefit resulting from our loss was mostly offset by an increase in our deferred tax valuation allowance. The net tax expense reported for the first quarters of both years is for the Texas state taxes which are based on gross profit and not pre-tax income or loss.
I refer you to the end of our press release for a table which shows year-to-year comparative income tax component amounts. Our balance sheet as of March 31, 2010 remains in very good shape with cash increasing by $8 million during the first quarter and up by $43 million, compared to a year ago.
Our planned capital expenditures for 2010 are $15.2 million. This includes $10.5 million for new stores and store improvements, and $4.4 million for information technology.
Operator, at this time we will take questions from the audience.
Operator
Thank you, sir. (Operator Instructions) First question come from Todd Schwartzman.
Please state your company name followed by your question. Thank you.
Todd Schwartzman – Sidoti & Company
Yeah. Sidoti & Company.
Thanks. Good morning, guys.
Clarence Smith
Good morning, Todd.
Todd Schwartzman – Sidoti & Company
First off on the credit promotions, if you can just give us a sense of what was hot for the quarter, what was most popular?
Clarence Smith
The most popular was the 18-month which is a no interest program that requires a 1% monthly payment and then the whole thing has to be paid off before the end of the 18 months.
Todd Schwartzman – Sidoti & Company
Okay. And Dennis, on the tax rate going forward for the balance of the year, how should we think about that?
Dennis Fink
It is going to depend on the exact circumstances each quarter end and where deferred tax assets are projected to be for the current year, which arise from temporary differences in book and tax income. But it would be likely that the deferred -- that the similar situation occurs in the second and third quarter as it did in the first quarter with some increases in the deferred tax or, excuse me, in the income tax expense category that are offset by decreases in the deferred tax allowance.
At some point there is a release of the deferred tax allowance that comes after cumulative three-year book profitability and we’re not sure when that will happen but that would be out there in some future quarter we would hope.
Todd Schwartzman – Sidoti & Company
Got it. And any comments would you care to make any on share gains and that you maybe are benefiting from in this first quarter who the -- who the offsetting losers might be?
Clarence Smith
Well, I still think that the independents will continue to suffer and fall out of the marketplace just because they can't get the overall support. We’re seeing some of that in a number of our markets.
Some of the fact that I think we have had some market share gain is just in the fact that we had a 10% comp and we’re not hearing that from other places. So as you know, there are very few people that do release in our industry.
But I think it is going to continue to be on the independent side of the market those who are not matched up with major players and who don't have the resource to do that.
Todd Schwartzman – Sidoti & Company
Principally imports?
Clarence Smith
Well, that is a big part of it. They’re going to have to go through middle-men, they’re going to have to pay higher margins, higher costs.
They are not going to have goods that are exclusive to them that they can support higher margins and they’re not going to be able to get the product. I think that is going to be a real challenge as business starts to get better is who gets the product from the major factories in Asia.
And that is why we’re spending a lot of energy building those relationships, staying on top of them, giving them larger cutting, paying our bills on time, all of the things that we think are important to maintain those relationships.
Todd Schwartzman – Sidoti & Company
And Clarence, on the customer deposits both sequentially and year-over-year, it looks like you had between 25% and 30% close to $4 million increase there. Does that speak to the mix shift, can you give us some more color, you had alluded to maybe customers going somewhat more upstream?
Can you talk about what is going on with the customer deposits as well as your own mix?
Clarence Smith
I don't think it’s related directly to the mix. I think it has other things.
I’ll let Dennis comment on some of that.
Dennis Fink
Yeah. The backlog was a little higher at March 30, than it was a year ago or at year end, which is normal when you have an increase in business.
We have a few weeks between point-of-sale and purchase at point of sale and the actual delivery when we recognize income. The other part about it is we mentioned that there is less volume under our private-label programs and so people are paying more cash, more Visa and MasterCard, and therefore the deposits would be higher because we are not financing as much.
Todd Schwartzman – Sidoti & Company
And what was the mix of the third-party financing for the quarter?
Dennis Fink
The third-party was down, I had mentioned there is like a 6% decrease in the usage as a percent of sales and all of that was in the third-party programs.
Todd Schwartzman – Sidoti & Company
6 percentage point decline?
Dennis Fink
6 percentage points of sales, the total volume we did of total sales was down. The difference in the number was 6%.
Todd Schwartzman – Sidoti & Company
Got it. Can you just remind me was there any restructuring in the downturn with respect to the compensation mix for your sales force?
Clarence Smith
Nothing significant. We had a few adjustments but, do you have a comment on that?
Dennis Fink
No. Just the number of people also obviously with lower volume.
Clarence Smith
We tried to make sure that our best sales people we took care of but we didn't really have any major adjustments with their individual compensation plans.
Todd Schwartzman – Sidoti & Company
Okay. Thank you very much.
Dennis Fink
Thank you.
Clarence Smith
Thanks Todd.
Operator
Next question come from Budd Bugatch. Please state your company name followed by your question.
Budd Bugatch – Raymond James
Good morning, Clarence. Good morning, Dennis.
Budd Bugatch, Raymond James.
Clarence Smith
Good morning, Budd.
Budd Bugatch – Raymond James
Historically when you go back and you look second quarter has a little bit of seasonality to the first quarter down, but some years it was relatively flat to the first quarter. And with the backlog up as nicely as it was, what are you thinking about the normal seasonality or the abnormal seasonality?
Dennis Fink
I think it will be more normal, Budd, than abnormal and it is pretty unusual to see anything other than a decrease in the second quarter…
Budd Bugatch – Raymond James
Okay.
Dennis Fink
… from the first quarter.
Budd Bugatch – Raymond James
From the first quarter?
Dennis Fink
Yeah.
Budd Bugatch – Raymond James
Okay. And then that’s what we should expect the second quarter is usually the weakest quarter of the year, is that right?
Dennis Fink
Absolutely, it is.
Budd Bugatch – Raymond James
Okay. When you look at your gross margin, you’ve done very nicely with essentially about 100 basis points improvement year-over-year.
And with the pricing increase you had kind of warned us, did I catch you properly to say that you think margin could be under a little bit of pressure in the near-term and then returning as you take the pricing actions you need to take?
Dennis Fink
Budd, I think that’s a fair way to say it. We are on LIFO and so we get a quick impact of cost increases and we would like to pass those along with the normal margin, but it’s still a competitive marketplace, so we’ll have to see.
Budd Bugatch – Raymond James
Okay. Looking at the balance sheet, you have historically until about a year or two ago paid a quarterly regular dividend.
And you paid a special dividend last year I think to keep your record intact of consecutive years? And now with the world looking like we’re no longer coming to the biz?
What are your – what’s your thought process on that? How does the board think about it?
I realize it is a board decision, but I suspect you discuss it at every board meeting?
Clarence Smith
It is a board decision, Budd. I’m sure it will be discussed.
The only thing I would say as management is that I would like to keep that record intact.
Budd Bugatch – Raymond James
Okay. And would you like that record to include a regular dividend again as opposed to a special one?
Clarence Smith
Well, I don't think that’s something I determine. I just want to make sure we earn that record and keep it going.
Budd Bugatch – Raymond James
Okay. All right.
Thank you.
Clarence Smith
Okay. Thanks.
Budd Bugatch – Raymond James
Congratulations. Nice to see the turn and nice to hear about case goods coming back a little bit.
Clarence Smith
Yeah. We hope that is a continuing increasing trend.
Thank you, Budd.
Budd Bugatch – Raymond James
Thank you, sir.
Operator
(Operator Instructions) There appears to be no further questions, sir. Please continue.
Clarence Smith
I want to thank you for joining us on our Q1 call. We appreciate your interest in Havertys.
Thank you.
Operator
This concludes today's conference call. Thank you for participating.
You may now disconnect.