Feb 25, 2014
Executives
Dennis L. Fink - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Clarence H.
Smith - Chairman, Chief Executive Officer, President and Member of Executive Committee
Analysts
Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division Todd A.
Schwartzman - Sidoti & Company, LLC Robert Griffin Kristine M. Koerber - DISCERN Investment Analytics, Inc
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Havertys' Q4 and Year-End 2013 Results Conference Call.
[Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the presentation over to Dennis Fink, Executive Vice President and Chief Financial Officer.
Please go ahead, sir.
Dennis L. Fink
Thank you, John. Good morning, everybody.
During this conference, 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 detailed in the company's reports filed with the SEC. Our President, CEO and Chairman, Clarence Smith, will now give you an update.
Clarence H. Smith
Thank you for joining our fourth quarter and full year 2013 conference call. We're pleased to report strong earnings for the fourth quarter of $0.42 compared to $0.30 for the same period last year.
For the full year 2013, we had an all-time high record profit of $1.41 per share compared to $0.67 for 2012. The fourth quarter of 2013 was the ninth consecutive quarter of same-store sales increases.
We ended the full year with comp-store sales up 11% and an increase in average ticket of 7.8%. Third and fourth quarters of 2013 produced pretax earnings of 8% of net sales.
For the full year, we had pretax earnings of 7%. Our gross margins were strong at 54% for Q4 2013 and 53.8% for the year.
The trends of a higher percentage in custom-ordered merchandise, upgraded exclusive products in the upper middle price points, lower inbound ocean freight and our improved supply chain and buying functions, which have reduced markdowns, all contributed to a higher gross margin. We believe that our gross margins will be 53.8% again for 2014.
Our same-store written sales for the first quarter to date, 2014, are 3.6% over the low teens percent increase last year. There had been some new headwinds to business this year, but we believe much of those sales impediments should subside in the upcoming weeks as we move towards spring.
Our initiatives for expanding our in-home design service this past year has been a success and helped us reach and serve a more fashion-oriented customer. We now have 60 full-time designers in our key markets to assist our sales associates by helping to pull together our products that fit our customer style and desires.
For purchases with an in-home designer involved, the average ticket is approximately 2.5x the overall average ticket in those stores. We branded our design program H Desire [ph], with the tagline Inspire, Dream, Desire.
We expect to expand the program, increasing the number of designers by 40% and offering the free service in up to 100 of our stores by the end of 2014. We believe this will help Havertys to get credit for the fine service levels we provide in addition to increasing our average ticket.
This is the same attention that the customers need that we used to create top door delivery and service programs this past year. We have only Havertys' associates staffing our in-home delivery and our service departments, and they take great pride in providing the best service levels in the industry.
This is why we branded the teams, along with the trucks and the uniforms with the logo Top Drawer Delivery prominently displayed. The branding sets higher expectations for our service levels and a real sense of pride for our associates.
This is one more way that we're separating ourselves from the competition. Upholstery is our largest category and has been the main driver of our sales volume.
The special order and custom choice upholstery programs sales were up 20% last year and a key to the increases to our total upholstery business. We're continuing to work closely with our top special order suppliers to further shorten ship times so that we can provide delivery to the customer faster.
We believe that quicker ship times on customer orders is a competitive advantage and our higher price point merchandise and important to earning the trust and business of our customers. Our store plans for the past several years have been dedicated to upgrading and refreshing our entire store base of stores under the Bright Inspirations program.
We're now in the final stages of that 6-year program and expect to finish that by next year. This past year, we remodeled 18 stores, with several of them major projects and 3 expansions.
For 2014, we expect to remodel 17 stores and a dozen more in 2015. This has been an important reinvestment in upgrading our presentation to our customers and to strengthen our brand.
In 2014, we're beginning a growth in repositioning program of our stores to continue to reach our customer better and serve her better. This year, we have current plans to open 6 stores; 3 of those are relocations and 3 of those are stores in our largest markets.
We are also closing 2 stores at the end of the lease term. This will result in approximately 1.8% growth in retail square footage in 2014.
Our planned CapEx spend for this year is expected to be $35 million. We're reviewing projects for 5 new stores that we would plan to open in 2015, all of which are in new markets that we currently do not serve, but could reach with our existing distribution network.
This year, we'll also be adding major enhancements to our in-store and website digital tools to assist in the special order process. Late this year, we'll have a new 3D room planner, as well as a fabric mapping program, both online and on the iPad for our associates and our customers.
We recognize that we need to engage our customers early on in their creative plans and shopping process to serve them properly. We believe that when these programs are in place, we will have the most engaging and interactive website at home, on-the-go or in any of our stores, in our company and best in the industry.
We'll report more on these enhancements later. 2013 was an exciting year where we reached a number of our goals and produced an all-time record earnings performance.
Our teams are energized and focused on serving our target customer better than our competition. We know that we'll have to continue upgrading our professionalism, our service levels, our systems to earn her continued business and to gain market share.
We're excited about our plans to open new stores, reaching new customers, as well as expanding the Havertys' brand reach. Now I'll turn the call back over to Dennis.
Dennis L. Fink
Thank you, Clarence. The financial highlights were covered in our press release last night, so I won't repeat all of those points on this call.
But please do take note of the expectations section in the press release. For 2014, we're expecting our gross profit margin to increase modestly over the adjusted 2013 results.
At the beginning of the new year, it's hard to predict what the impact will be from using the LIFO inventory accounting method. We've had a small positive impact in 2013, but normally, we have a small annual charge and assume that will again be the case for 2014 in giving our 53.8% anticipated figure in the press release.
Fixed and discretionary type expenses within SG&A are expected to grow between 4.1% and 5% for 2014 versus last year. More of those increases will come in the third and fourth quarter when all of our replacement store and new store openings will take place.
During 2014, we expect to increase our retail square footage by 1.8%. Starting off the year and for most of the first half, we have 2 less stores opened than a year ago.
Based on our current rollout plans, the change in this year's weighted average retail square footage compared to last year for each quarter will be as follows: First quarter, we expect to be 1.3% below last year's weighted average square footage; second quarter and third quarter are both expected to be about 0.4% below; and finally, in the fourth quarter, we expect to have about 0.9% increase in the weighted average square footage. For the year, that will be about 0.3% less average square footage open in '14 versus '13, and this is all just because of the timing back-end loaded for the store increases compared to when the changes were made over the last couple of years in store square footage.
That's useful in modeling the revenue for the company, combine that with comp-store sales expectations and you can come up with a total sales increase that's pretty reflective of what will happen. We expect an effective income tax rate for 2014 of about 38.5%, which is similar to the 2013 rate.
Our ending inventory in 2013 was $5.5 million lower than a year ago. A few months ago, I had actually been anticipating a year-over-year inventory increase of a similar size in our financial models, so together with better earnings, that helped our cash provided by operating activities for 2013 to be higher than originally expected, and it came in at about $55.9 million.
Our ending non-restricted cash balance also grew $30 million for the year to finish at $83 million. We do expect to increase our inventory levels during 2014 and our $35 million CapEx plan will be about $14 million higher than the average of the CapEx we put in place over the last 3 years.
Operator, that's all I have at the moment, so we'll take questions from the audience.
Operator
[Operator Instructions] Your first question today will come from Brad Thomas with KeyBanc Capital Markets.
Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division
So wanted to -- first to start off, talking about the recent trends. Obviously, your press release references the written business being up 3.6% quarter-to-date on your balance sheet.
We can see that the customer deposits are down about 9.3% year-over-year. Just as we model the first quarter based on those trends, anything that you would want us to keep in mind as we make our forecast for the first quarter?
Clarence H. Smith
Well, Brad, we -- at this time, we usually give you the written sales. We do have some catch-up to do on deliveries, which we hope to be able to do.
We had some delays in getting some product in, as you would guess, and we also were closed a couple of days each month, both January and February. So we've got some catch-up on deliveries, and that's what we're working to do.
We -- it is an unusual situation in that regard, but we feel that we got a good opportunity to catch up to our written sales.
Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division
And then the Easter shift will benefit you at the end of the quarter, won't it?
Clarence H. Smith
It benefits the written business. It really doesn't have much impact on our delivered sales that -- when you recognize, Brad.
Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division
Great. And then just with respect to cash, you all continue to build this big cash balance, obviously increase the dividend this year.
But any new thinking on how you might want to allocate cash and capital going forward?
Clarence H. Smith
Well, we gave you our CapEx budget, and it is up over last year. We're looking at that.
And the board's looking at it closely. We, in the past, have done a special dividend that's possible.
We've done buybacks, and we certainly would be looking at both as opportunities for us. But we haven't made decisions on that.
Dennis L. Fink
Always our first choice would be expanding the business where we see good opportunities. So we're looking hard at that.
Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division
And then to that end, you are coming close to the end of the upgrade to the new Bright Inspirations format. I know you don't all rest on your laurels.
What point may you start testing a next-generation format?
Clarence H. Smith
Well, actually, our store that we're opening here in Buckhead, which we're excited about is a smaller format, it's in the mid-20s. And we're coming up with some new designs specifically to reach the denser markets with a more custom focus, and you'll see that.
That will be done in the third quarter. And a lot of those elements we will be rolling into our new stores going forward.
So we're excited about some of the new plans and designs that are a little more focused on the fashion customer, a little more contemporary, more upholstery-focused because that is our growth area. But we are enhancing that, and I think you'll be able to see that in the third quarter.
Operator
Your next question will come from Todd Schwartzman with Sidoti.
Todd A. Schwartzman - Sidoti & Company, LLC
Wanted to just talk about the weather. I know that you've obviously not been affected as much as some other folks.
But could you maybe walk through any closures, if there were, by market? Maybe quantify what kind of downtime was taken.
Or if they were not closures, where -- traffic was dramatically reduced for a period of days or even weeks if it stretched that long?
Clarence H. Smith
Well, Todd, we were determined not to give a weather report. Most people understood the situation.
I mentioned just a minute ago, we were closed 2 days in January and 2 days in February in about 35 stores. And that certainly affected our business.
But one of the things that affected us also that was in the sense unexpected was just getting the products in. The ports were backed up, some of them were locked down.
And then there has just been a backlog of getting in some of the products that we need to make deliveries and fulfill our customers' needs. So that's being caught up.
We're receiving aggressively now, but it's taken a good while to correct that. And that was one thing that, frankly, is somewhat unexpected is the difficulty in getting the trucks in.
There was a time here in Georgia where the Governor said, "Don't bring trucks through Atlanta." I mean, that's a problem.
So I think that's behind us, and we feel pretty good about business right now.
Todd A. Schwartzman - Sidoti & Company, LLC
So product availability, back to normal, but from a store perspective, was there any meaningful damage to any of those 35 stores?
Clarence H. Smith
We didn't have any damage of any significance, just that we were down. We were closed.
But no damage and, frankly, and fortunately, not much damage or significant issues with employees.
Todd A. Schwartzman - Sidoti & Company, LLC
So with that in mind, Clarence, looking at the level of discounting for the first quarter and as a whole versus last year's Q1 promotional activity, how does that shape up?
Clarence H. Smith
No real difference. We haven't changed our plans and anything, as far as promotions or pricing.
And we stayed consistent with our program, and I don't see any changes there.
Todd A. Schwartzman - Sidoti & Company, LLC
Okay. Now I don't know if this is too granular a question to ask, but you mentioned that upholstery, again, really drove the growth.
Can you give us any color on stationary versus motion?
Clarence H. Smith
Well, motion's still a big driver of our business. And I think that continues to be.
We are growing more stationary, particularly in the custom order and the special order category, which we're growing in. So the higher-end customer prefers upholstery probably of stationary, but the real growth in our business for the several years has been in motion and sectionals and the family room furniture, and that continues.
Todd A. Schwartzman - Sidoti & Company, LLC
Got it. On the in-home design, you talked about the bump-up that you see typically in average ticket.
But what percentage of consumers are availing themselves of that service currently, and how does that compare with last year at this time?
Clarence H. Smith
I would say it's in the high teens. 15% to 20% of our customers are interested in that category, and that's what I think we'll appeal to.
And so that's new business for us. We weren't doing that in the past.
We were not getting into our customers' home to any significant degree. And we're hiring experts at that, we're hiring designers.
They're comfortable with it. Our people are getting more comfortable with it.
So it's an important driver of our business. I mentioned it was 20% of the overall category, but it's almost 50% for this custom special order.
It's up -- that percentage for the custom special order. So it's an important new focus, and we recognize that we have to upgrade the professionalism of the associates that are doing this work, and that's a big focus for us this year.
Todd A. Schwartzman - Sidoti & Company, LLC
And to get from 60 now to 100 designers, is that your plan by year-end '14, or is that a '15? I forgot what you said.
Clarence H. Smith
It's by '15.
Todd A. Schwartzman - Sidoti & Company, LLC
By the end of '15?
Clarence H. Smith
Yes. We should have 100 of our stores up by that time.
Todd A. Schwartzman - Sidoti & Company, LLC
Okay. And regarding the new markets that you're looking at in '14 possibly.
Are those -- I don't know how many you're referring to, but would those represent your initial entry into those? Or would you be returning to at least one market that you're not in now?
Clarence H. Smith
Most of them are initial entries into adjacent market that we can reach.
Operator
Your next question will come from Budd Bugatch with Raymond James.
Robert Griffin
This is Bobby filling in for Budd. Just real quick.
I jumped in the call late from another call, but I don't know if you guys provided it. Can you provide any color on accessories mix for the quarter?
Where it's at, or kind of where maybe at a high level you see that going to?
Clarence H. Smith
We did not comment on that. The accessories continues to grow at a higher percent than the other categories but from a lower base.
We are seeing the in-home design program where we're getting in the customers' homes help drive that because the decorators are more comfortable with it and the customer understands that combining the package with accessories. So it's continuing to be a growth category.
We're focusing on it. We're continuing to refine it and to make sure that we're a real player in those categories.
Robert Griffin
Perfect. And then just to follow up again on kind of the written order for the year to date.
I know you guys don't want to get into too much granularity over the weather and whatnot. But at a high-level thought, can you give a little bit of color on maybe the performance of some of the areas that weren't as impacted compared to the 3.6% that was reported?
Clarence H. Smith
Well, Florida was not impacted, and Florida has been good. So I would say that when we didn't have the snow and ice, we did better.
And there's a reason that people move to Florida. It's nice weather there.
Operator
[Operator Instructions] And your next question will come from Kristine Koerber with DISCERN Securities.
Kristine M. Koerber - DISCERN Investment Analytics, Inc
A couple of questions. First, you mentioned you're working on shortening the lead times on upholstery furniture.
Can you just kind of refresh my memory what the current lead times are and where do you plan to go with those?
Clarence H. Smith
We have been quoting in some cases, particularly for the custom order, 8 to 10 or 8 to 12 weeks. We're trying to move that down to 4 to 6 weeks.
And we haven't been quoting that in the past, but we're moving to that because our vendors have been able to aggressively reduce those -- shorten those lead times. So ideally, we'd love to get that product in here and have it be able to be delivered in a month.
And the main vendors we're dealing with here are domestic. They're in North Carolina and in Mississippi, and they've done a really good job of shortening that lead time.
So we can, in many cases, get it in 3 weeks and I mean, for delivery in 3 weeks. We're working to try to get that down to a month, and I think now we quote 4 to 6 weeks.
Kristine M. Koerber - DISCERN Investment Analytics, Inc
Is that on all the custom? Or what percentage of custom is affected by that?
Clarence H. Smith
It's the majority of it.
Kristine M. Koerber - DISCERN Investment Analytics, Inc
Okay. Great.
And then you talked about the new store in Buckhead, the smaller square footage. Is there -- as far as that store layout, are the categories that you're downsizing, I mean, what's different in that store?
Clarence H. Smith
We haven't finalized that. Actually, our team's still working on that layout and display.
I will say that formal dining room will probably be less and probably be fewer bedrooms and more focused on the entire upholstery category, the accessory category and special order. It depends on the market, and it depends on -- in that particular case, that's where the direction is going.
But we haven't finalized it.
Kristine M. Koerber - DISCERN Investment Analytics, Inc
Okay. So basically, less than the case goods side the business at this point is what you're thinking.
Clarence H. Smith
Particularly on the formal case goods, yes. Well, I was just going to say that contemporary in that market will be important.
Kristine M. Koerber - DISCERN Investment Analytics, Inc
Got it. Okay.
And then you mentioned inventory, you planned inventory to be up this year. Can you quantify how much you're looking for inventory to be up?
Clarence H. Smith
It went down too much, frankly. And so, Dennis, do you want to -- do you have numbers on that?
Dennis L. Fink
Well, I would think $10 million to $15 million, depending on the rate of sale, second half of the year. But we would expect second half is normally stronger, much stronger than the first half, so we'd be ready for that.
Kristine M. Koerber - DISCERN Investment Analytics, Inc
Okay. And then lastly, sales per square foot, what was the number at year-end?
Clarence H. Smith
$176. I believe $176.
We have articulated a goal of getting back to $200 a foot, which is we were over $200 in 2006. And that's been a real focus of our company and why we put so much into remodeling our existing stores and getting those comp stores back up.
So it was a nice improvement, and we hope to get back to that level soon.
Operator
And we see there's no further questions at this time. I'll turn the call back over to Mr.
Fink for any closing comments.
Clarence H. Smith
We'd like to thank you for joining our call and for your interest in Havertys. Thank you.
Operator
Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation.
You may now disconnect your lines.