May 3, 2013
Executives
Dennis Fink – EVP and CFO Clarence Smith – Chairman, President and CEO
Analysts
TJ McConville – Raymond James Todd Schwartzman – Sidoti
Operator
Ladies and gentlemen, welcome to Haverty’s First Quarter 2013 Results Conference Call held on the May 2, 2013. Throughout today’s conference, all participants are in a listen-only mode.
After the conference, there will be an opportunity to ask questions. (Operator Instructions) I would now like to hand the conference over to your host, Dennis Fink.
Please go ahead, sir.
Dennis Fink
Thank you, operator. Good morning everybody.
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.
Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties as detailed in the company’s reports filed with the SEC. Our President, CEO, and Chairman, Clarence Smith, will now give you an update.
Clarence Smith
Thank you, Dennis. Good morning and thank you for joining our first quarter conference call.
We are pleased to report our 2013 first quarter earnings per share of $0.36 versus $0.11 for the same period last year. This year’s first quarter did have an out of period of positive adjustment of $0.02 per share.
As we released earlier, net sales increased 13.8% and comparable store sales were up 11.5%, our sixth consecutive quarter of positive same-store sales. We continue to have good momentum for the second quarter to-date.
Our average ticket is up 12.3% for Q1, a major drop of our increase, and as we have seen in the past several quarters. While we did have an increase on our average price per SKU, we are seeing a trend for more items per ticket.
I believe that our improved store presentation and coordinated merchandizing and accessory program has helped us in this regard. We developed a more fashioned orientation, which has a stronger attraction for our target customer, and she is reacting with more higher price items per ticket, and more special order upholstery to complete her unique look.
All departments are focused on helping execute this coordinated program more efficiently and with less effort for the customer and the sales associates. We have automated much of the special order process and given the customer a great deal of control over the final delivery of our products.
In April, we launched the coordinated upholstery collection featuring Sunbrella fabrics. These upholstery covers are for interior use and have the Sunbrella characteristics of stain and fade resistance.
This offering is an expansion of our customer program, which allows our customers to create family-friendly space with a variety of fabric options. I believe that our recent sales trends validate our multi-year remodeling and upgrading of our stores and demonstrate that we are doing a better job of appealing and serving our core customer.
We are building the Haverty’s brand and reaching a customer who is more willing to spend on fashions for her home. This year, we have closed the store in Mississippi and one in Central Florida which were at the end of lease terms and we are in the final stages of closing out a smaller store in Virginia.
We expect to have a number of store relocation projects underway this year, but with these first half closings, we believe our sales square footage will be down 1% to 2% at year end. We are in the process of three major store remodeling and expansion projects and will complete 18 other store upgrades to our Bright Inspirations look.
This three-year program has significantly improved the presentation and flow in our stores. Combined with better quality products and enhanced point-of-sale signage, the overall program has been the significant factor in our positive sales trends.
We look better. We are easier to shop.
Our marketing is enticing. We have more of the right on-trend product and we are providing a significantly enhanced service level through state-of-the-art systems assisting our top floor delivery teams.
It is encouraging that the heavy investments we have made in all of these areas are beginning to payoff in higher sales and profits. The positive housing trends have had a real impact on our improved sales.
The recent stats such as the Case-Shiller year-over-year increases show that show that home prices in our six largest markets were up 9.5% over the same period last year. These trends have made our customers more comfortable with buying for their home and relocating.
We believe that we are very well positioned to continue to see positive sales momentum in the remaining quarters of 2013 as housing continues to improve. I’m particularly proud of our associates in our stores, our distribution teams and then our home office, who have worked so hard over these past six years to improve all that we do to better serve and reach our goals.
Their dedication has been personally very inspiring and it’s gratifying to see that we as a team are beginning to get credit for that all in attitude that our associates have given since the beginning of the major housing downturn in 2007. And then I’d like to turn this over to Dennis Fink.
Dennis Fink
Thank you, Clarence. I’d like to mention to everybody that we put in our press release that was sent out last night what we think are the salient details of the quarter and also the expectation section we try to put notable points to be considered and as you look forward into the rest of the year in preparing your earnings models.
So, please do read that carefully I’m not going to rehash that on this call but just we want to remind you to look at that carefully. In the SG&A area we had good results with a little lower variable SG&A type costs, somewhat helped along by the higher average ticket since the driver of those – some of those expenses or units rather than dollars.
Also in the non-variable or discretionary/fixed type expenses we did have a more efficient ad spend and came in a little under in total cost compared to our original expectations. Make note that the capital expenditures for the first quarter similar to last year’s level and also similar – expected to similar in total for the year of $20 million to what the capital – or what the depreciation expense is expected to be.
We do expect as you saw in the first quarter in the cash flow that for the year we will have some increases in working capital needs, but still expect to have strong cash flow from operating activities. The pension plan is being funded this year with the total of $6.6 million we’re on track to be fully funded for accounting disclosure purposes for the qualified plan by the end of 2013, $1.2 million was contributed in the first quarter and each of the next three quarters is expected to have $1.8 million contributing to the plan.
And that does show up as reduction of cash provided by operating activities. Operator, that’s all I have got for the moment, we would be glad to entertain questions.
Operator
Yes, of course sir. (Operator Instructions) Thank you.
And our first question comes from Budd Bugatch. Please go ahead.
TJ McConville – Raymond James
Good morning, Dennis. Good morning, Clarence.
It’s actually TJ McConville filling in for Budd. Congratulations on the quarter and thanks for taking my question.
Clarence Smith
Thank you, TJ.
TJ McConville – Raymond James
Okay. Just a couple here – first, tremendous gross margin performance in the quarter even after we back out the adjustment you noted in the release guys.
The question is – the expectations for a little bit more moderate gains in the back half. So, could you walk us through what the drivers were for the performance this quarter and then maybe what gives you the outlook for maybe a little bit more moderate gains in the back half?
Clarence Smith
Well, we had one unusual thing in the comparison. Last year we had significant close out of our accessory program.
We were basically getting out of our old program completely and then we put in this program over the last year or so. So, we had extremely low margins in those categories.
This year there were regular margins and that was a factor. We did have some quite which improved our margins, but in general we are selling a little better product and getting more credit for that with higher margins on our exclusive goods.
Dennis, any other comments?
Dennis Fink
Yeah, just the couple of comments on the volume side. We really don’t try to give guidance on the increase in sales, we instead give you frequent updates including whenever we have an earnings release how our sales have trended in the period since the end of the quarter or the year as it is.
But we do want to note that the second half comparisons to last year are much stronger, we had nice increases in both written and delivered sales in the second half of last year. I believe the comps for the third quarter last year were about 10% flat actually and the fourth quarter was 6% and on the written side, we are actually stronger than that.
So the other thing is that we added net stores last year so the footage is higher, the number of stores, the square footage of retail space is higher than year ago, but that with some older stores that were closing when some leases expired, two have already taken place and there is one more to go. Then those are closed we will have less square footage and the likelihood is, as we said in the release, the total sales increases in the second half will be less than the comps for those increases.
In other words, we had slight a decrease in the number of stores, decrease in the square footage of retail space. So, that was more to alert you that fact rather than indicate a trend business has been strong and obviously still remains so through the month of April.
TJ McConville – Raymond James
But those are fair points and very helpful, gentlemen. And I guess to that point, Dennis, the unadjusted written gain, should we just add – if we were to just take a guess at what that number was should we add back another day for the Easter shift that you got this year or are there some other calendar adjustments that we should be aware of?
Dennis Fink
No, not – it is simply we actually look at it as a weekend, unless you had that specific info the Easter weekend was in April last year, , we’re closed actually on Easter Sunday and the Saturday before Easter isn’t that strong because we don’t advertise much at all that week going into Easter. So the Saturday and Sunday fell in March this year and April last year.
So we just made an adjustment knowing the daily numbers to make the two periods comparable. And it would have been a higher number I mean it took down fairly with the number, but in the short periods, as you look at calendar shifts, they make a lot more difference than when you get to a quarterly or certainly on an annual basis.
The longer periods of times tend to even all that out.
TJ McConville – Raymond James
Yes, and I am sure you are glad to not be reporting the monthly sales in these kinds of – kind of environments, Dennis, and we can appreciate that. The last area that we were kind of hoping to take it look at, Clarence, you’re going to do 18 more Bright Inspirations this year.
Could you, one, remind us how far along does that leave us once those are done? How many stores have been touched and I mean, clearly we are seeing the sales performance very positive in these stores.
Is there any quantification you can offer as far as what you have seen in the first year of a Bright Inspirations store and maybe beyond that if you have any that old at this point?
Clarence Smith
Well, we did test the program several years ago when we started it. We had some in each region and we then focused on rolling it out to our biggest and best stores first.
And so, most of our larger markets, Washington, Atlanta, Dallas, have been completed and we are seeing nice increases there, it’s hard to know what’s driving that, but clearly our stores look better they are easier to shop and we are getting good feedback on it. As far as how far along we are, we are almost finished by the end of this year.
I’d say we have a handful or so next year that we will be finishing up. At the end we will probably have done about 100 and there are 10 to 15 that we probably won’t spend much money on because they are towards the end of their leases.
And we have a few that we won’t be – that will be closing. So, we will be almost completely done by the end of this year I’d say we’d have another six or eight months next year of doing a half dozen or so more.
So, it’s mostly done we’re doing in the Florida pretty heavily this year trying to get them done next summer, so that when it comes into season those would be ready too. So, it’s been an ongoing program and as you know we are spending a good deal of money on finishing that up now.
TJ McConville – Raymond James
Okay. Well, we will look forward to Florida this summer, we will go and take a look at some of those.
And those were my questions, guys. Thanks again for answering them and best of luck on the remainder of the year.
Clarence Smith
Thanks, TJ.
Operator
Thank you. (Operator Instructions) The last question comes from Todd Schwartzman from the company Sidoti.
Please go ahead.
Todd Schwartzman – Sidoti
Hi, good morning gentlemen.
Clarence Smith
Good morning, Todd.
Todd Schwartzman – Sidoti
First off, the average ticket you mentioned was up 12.3%, is that correct?
Clarence Smith
Right.
Todd Schwartzman – Sidoti
Okay two, how many dollars?
Clarence Smith
Well, it’s about $80, $90 or something like that in that range its less than 2000, it is a number that keeps going up and certainly our goal is to get it up to that kind of figure. And what we did give you information on this time Todd is that we’re realizing that a driver of that is adding items to the ticket, which is not something that I think was a major factor in the past.
Todd Schwartzman – Sidoti
And on that note, Clarence, maybe, if you could expound on it a little bit. Talk about whether it’s increased number of transactions that feature more a whole bedroom, dining room type purchases or how much does accessories, for example, factor into that mix and also what’s the percentage of…
Clarence Smith
I don’t really have the detail on that. We ran the numbers of number of items, I haven’t looked into exactly why that’s happening and that’s something we will dig into further as we’ve seen this trend come into (fruition).
So, I do believe we’re selling more accessories with our upholstery group, we’ve made it a lot of easier for our customers to do that, but I really don’t have the detail by class on that right now.
Todd Schwartzman – Sidoti
Has the accessories category yet hit double-digits on a total sales percentage basis?
Clarence Smith
No, it has not and I don’t expect it would, I mean we’re in the low-single digits and its growing, but we wouldn’t expect that to get double-digits for a good while, it’s really not our plan.
Dennis Fink
Todd, were you asking about the percentage of total sales or just the increase in sales?
Todd Schwartzman – Sidoti
Percentage of total sales represented by accessories.
Clarence Smith
It’s in the low single-digits I would hope to get it in the mid-single digits. It’s – we were basically out of that business or getting out of it a year ago and we have reestablished it and we got a good buying team and now we inventory most of that products in our distribution centers to deliver it with the deliveries and it’s growing and we’re a player but not a major – it’s not a major part of our business yet.
Todd Schwartzman – Sidoti
Based on your data based on your delivery addresses and such, any recent info on whether your – in terms of your consumer mix, whether she is a snowbird or otherwise owns a second home or vacation property versus just the owner of one primary residence?
Clarence Smith
Well, the only place we’d appeal to snowbirds would be in Florida. So Florida is doing a little better and I think that is helping us I don’t again that’s not data that I’ve analyzed to see whether buying it from, but anybody who’s in South Florida let’s say either Southwest or Southeast Florida probably has a home somewhere else, but I don’t have any better right now on that.
Todd Schwartzman – Sidoti
And from an advertising marketing perspective, any forward-looking commentary on the ad spend as a percentage of sales for the balance of the year vis-à-vis first quarter.
Clarence Smith
I think it will be a little lower as a percent of sales, I mean we have devoted more of our budget to television, as you know, and to interactive or Internet advertising and I think it has been more effective for us. We have gotten out of ROP.
But the dollars will be up, it looks like the percentage, I think it will be probably lower than this product level.
Todd Schwartzman – Sidoti
Depending on how well those sales.
Clarence Smith
We are pushing harder this year than we did certainly last year or any other year in this quarter and we hope the sales come through to support that.
Todd Schwartzman – Sidoti
And Memorial Day promotions, anything that you care to highlight coming up?
Clarence Smith
We’ll be aggressive and we’ve got a strong budget for that weekend, nothing outside of ordinary discounting heavily, but we do have some promotions going on and we will be pretty strong in most of our markets.
Todd Schwartzman – Sidoti
Okay, thank you gentlemen.
Clarence Smith
Okay, thanks.
Operator
Thank you. (Operator Instructions) There seem to be no further questions at the present time.
Please go ahead with any other topics you wish to raise.
Clarence Smith
We appreciate you joining us on our conference call and we thank you for your interest in Haverty’s.
Operator
Thank you. Ladies and gentlemen, this does conclude the conference call.
Thank you for your participation. You may now disconnect.