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Haverty Furniture Companies, Inc.  (NYSE:HVT)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to Havertys' Fourth Quarter and Year End 2018 Financial Results Conference Call.

Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Hare. Please go ahead, sir.

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Thank you, operator. 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 detailed in the company's reports filed with the Securities and Exchange Commission.

Our President, CEO and Chairman, Clarence Smith, will now give you an update on our results and provide commentary about our business.

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Good morning. Thank you for joining our 2018 fourth quarter and full year conference call. The fourth quarter sales were of 2.8% with comparable store sales decline of 1.6%. Following a solid third quarter, we saw fall-off in sales early in the fourth quarter and did not gain momentum later in the year. The full-year average ticket increased 4.4% to $2,184, closing rate was up 3.5% with overall traffic down 7.9%. We finished the year with a 0.3% sales decrease, however, with the help from the five store closings we ended the year with a positive annual comp of 0.3% comparative store sales, which we did not have in 2017.

For 2018, because of the lower tax rate and reduced shares outstanding, we produced a record EPS year of $1.42 beating the 2013 previous record. 2018 was a year focused on comp store sales, right-sizing our stores by closing weaker performing locations and finalizing the strengthening of our distribution network with the expansion of our Western Distribution Center.

Over the past two years we completed two years we completed two major distribution expansions, which now allows us to grow and improve our service and strengthen our regional product selection in our regions. The three main distribution centers of the 808,000 square foot facility in Braselton, Georgia, 394,000 square feet in Coppell, Texas and 335,000 feet in Lakeland, Florida, serve our 16-state footprint with fast professional service and delivery for the 1,100 professional Havertys teammates.

The regional state-of-the-art expansions in Florida, Texas, allow us to bring in more regional products faster. We've reduced inter-company transfer trucks by approximately one-third and of speeded customer delivery terms by two to three days, because we're now bringing product closer to our customers and reduced transfers, we expect to see reductions of inventory and handling costs at our Eastern Distribution Center in Braselton.

Following the five store closings in 2018, the weaker performance stores we expect in 2019 with 123 stores, a net increase of three. This includes one new store in Newnan, Georgia, South of Atlanta, two new markets and one relocation. Our Hdesign program of 120 designers in our stores has been critical in helping us have 17 consecutive quarters that our average ticket has increased over the prior comparative period. This performance still demonstrates the impact and importance of executing on our vision of helping customers bring the vision of their home to life. Special order upholstery continues to lead our merchandise growth. The Hdesign average sale was over 2 times the average store sale and helps drive the improvement in overall closing rate.

This team of professional decorators demonstrates that our customer-centered focus of engaging every customer and customizing every experiences effective. Our improved omni-channel experience is significantly smoother and provides a seamless process for our customers to interact and transact with Havertys whether online or in the store.

We have several impressive higher quality collections now hitting the floors, which we feel will appear to the more fashion oriented customer we are attracting. These introductions feature lighter finishes, more contemporary styles and region specific merchandise that has been very well received. We continue to strengthen our quality control teams, both domestically and in Asia. Our QC team is a significant factor that separates Havertys quality from the competition and is particularly is important as we relocate to factories in different countries to assure constant product quality.

We are in a deep dive to better understand our customer and the best reach with our marketing. We're analyzing, developing more detail about what she wants in merchandise and how she wants it presented. We are adjusting our product and marketing mix to better serve our target customer. We are working closely with our store managers for proper sales staffing and maximizing the digital tools out there to serve our customer better. We've implemented more directed incentives for our store and leadership teams to focus on sales growth. We are highly motivated to increase comparable store sales, which will move us back to achieving our operating profit goals.

We feel that our product and store presentations are well positioned to grow in 2019 and 2020. We're taking advantage of every opportunity to separate Havertys as the source for the best home furnishings values and services anywhere, whether online or in the store.

I'll now turn the call back over to Richard Hare.

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Thank you, Clarence, and good morning. In the fourth quarter of 2018 sales were $209 million, a 2.8% decrease over the prior year quarter. Our comparable store sales were down 1.6% for the quarter. Our gross profit margin increased 73 basis points to 54.8%. Merchandise pricing and mix contributed to the increase in gross profit margin.

Selling, general and administrative expenses decreased $1.7 million to $101.9 million. This was largely driven by reduced selling costs due to lower sales volumes, as well as reduced occupancy cost. We reported $12,000 of other income in the fourth quarter of 2018, which was a fraction of last year's fourth quarter amount of $1.9 million. In the prior year quarter we recorded insurance proceeds associated with Hurricane Irma as well as

a flood claim associated with our Wichita, Kansas location.

Net interest expense was down $230,000 to $239,000 in the fourth quarter. This decrease is primarily the result of increased interest income on our cash and cash equivalents. Income before income taxes decreased 12.8% to $12.3 million in the fourth quarter of 2018 versus $14.1 million in the same quarter last year. Our tax expense was $2.9 million during the fourth quarter of 2018, which resulted in an effective tax rate of 23.6%, and in the prior-year period tax expense included $5.9 million for the enactment of the Tax Cut and Jobs Act of 2017, which became effective in the fourth quarter and significantly reduced the company's federal tax rate from 35% to 21%.

During the 2018 calendar year, we recorded tax expense of $10.1 million, which resulted in an effective tax rate of 25%. Net income for the fourth quarter of 2018 was $9.4 million or $0.45 per diluted share on our common stock, compared to net income of $2.9 million or $0.13 per diluted share in the comparable quarter last year. Our diluted earnings per share in 2017 for the fourth quarter and year decreased $0.27 per share as a result of the enactment of the Tax Cut and Jobs Act of 2017.

Now turning to our balance sheet. At the end of the fourth quarter, our inventories were $105.8 million, which was up $2.4 million over the same period last year and down $2.5 billion over the third quarter of 2018. We ended the quarter with $71.5 million of cash and cash equivalents and our $60 million revolving credit facility remains untapped. As a reminder, we have no funded debt on our balance sheet.

Looking at some of the uses of cash flow. Capital expenditures were $21.5 million for the year. For the year ended December 31, 2018, the company paid a total of $35.5 million of cash dividends to the holders of its common stock and Class A common stock. We paid $50 million in regular quarterly dividends representing $0.18 per common share each quarter. We also paid out an additional $20.5 million to our shareholders as our Board of Directors authorized a special cash dividend of $1 per common share in November. We purchased an additional $4.3 million of common stock during the quarter, approximating 202,663 shares. During 2018 we purchased $18.7 million or 890,000 shares of common stock and we have $16.3 million remaining under our current authorization. In total, during 2018, we returned $54.2 million to our shareholders through regular and special dividend payments and our stock buyback program.

Our earnings release, list out several additional forward-looking statements, including our future expectations of financial metrics. I will highlight a few but please refer to our press release for additional commentary. In 2019, we expect our gross profit margin for the full year to be approximately 54.6% flat with 2018's annual profit -- gross profit margin. Fixed and discretionary type expenses within SG&A are expected to be in the $260 million to $262 million range for 2019. Variable SG&A costs for 2019, are expected to be 18.2% as a percent of sales.

Our planned CapEx for 2019 is approximately $19 million, which includes opening four locations. Two are new markets, one is in the Atlanta market and one is a relocation in an existing market. We expect our overall effective tax rate in 2019 to be 25% excluding any impact from the vesting of stock based compensation awards. Our federal tax rate is expected to be 21% and state and local taxes make up the remaining difference.

As previously disclosed, the US has recently enacted tariffs on furniture, accessories and components used in the manufacturing of furniture imported into the US from China. The tariff is currently 10% and may increase to 25% in March of 2019. We continue to believe that we can manage the 10% tariff level without a material impact to our business. If the tariff has increased in March, we will continue to work with our vendors and partners to minimize its impact on our company and on our customers.

This completes our commentary on the fourth quarter financial results. Thank you for your participation in today's call. Operator, now, we would like to open up the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question will come from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Good morning, gentlemen. So first, I noticed in your release that you did not have any specific commentary about the current trends to date in the quarter which is the departure from your previous policy. I don't know if its intentional or not but -- maybe you can start off with that?

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Sure. Anthony, this is Clarence. Anthony, after 134 years Havertys managers for the long-term success and we've seen that this inter-period information can have a lot of volatility due to the calendar shifts, and what we're doing here is changing to be in line with most all retailers and certainly all of the industry. We were out there pretty on our own, before when we released these inter-quarter sales. So we're going to release sales when our earnings are released.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay, all right. Understood. Certainly. So Clarence, you also touched on the fact that these five store closings that you had, helped your same-store sales for the year. Can you perhaps quantify what the impact was of the reverse cannibalization?

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Well. Several of these stores were some of our weaker performers. But two of them overlapped with some of our better stores in Dallas. We opened up our new store in Alliance couple of years back. That overlapped significantly with the Northwestern Hill stores. So we kept at a few years and that area had declined, and that was planned -- all of these were planned. The Raleigh (ph) store overlapped with one of our best stores in the company and we've been able to pick some of that up. Colombia was a relocation and planned all along and the other two were just weaker performers in smaller markets and actually as we've upgraded our product mix and appealing more to some decorator type business, the smaller markets and the smaller stores are less productive for us. So these were all planned, and they were our weaker performers, so that in and of itself helped us with our comps.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. All right. And then as far as new stores, you did mention that you will open a couple of stores in new markets. Should I assume these are still in your 16 state store base area?

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Absolutely. We're going to grow within this footprint. We've invested a lot in it. We know it's very expensive to move outside the footprint. And these are within existing -- markets that we're not in now, but our adjacent to where we are, and they will be within this footprint. Yes.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Thanks for that. And lastly, can you give us a sense as to what your exposure was to China in 2018,? Previously you communicated that in 2017 about a $100 million worth of your inventory was from China. So can you give us a sense for the 2018 and also on a go-forward basis, are you actively looking to lessen your dependence on China? How should we think about that?

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Yes. We have over a $100 million as we pointed out earlier in 2017. It looks like we'll be down to about $75 million, and we're moving that as rapidly as we can. I would think that we could get it to maybe $50 million, a lot of that's moving to Vietnam, and that's putting a lot of pressure on that country, as you well know, we're not the only ones doing this and we're not the only industry doing it. So getting workers is an issue. Getting the factories up, getting the quality back is an issue. We certainly would feel terrific, if this tariff went away on China, because the best -- some of our best product comes from there.

And moving that is disruptive as heck. We had disruption in the fourth quarter and certainly into this quarter in getting some product and due to these -- the disruption in the move, so we would hope that tariff goes away if it's a 10%, we can handle it, but we'll continue to move the product out of China and I think so will the suppliers.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. And so, just a follow-up, as far as the actual disruption in sourcing, is there any way that you can quantify perhaps the impact on your Q4 same-store sales?

Clarence H. Smith -- Chairman, President and Chief Executive Officer

I don't think we have a number for that. We -- part of the issue was even getting pricing for the product, because it hit right before market -- October market, and we were all struggling to -- how we're going to price this product, even placing the orders. So there was disruption in the fourth quarter, certainly in getting product in before and Chinese New Year. So...

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Let me add to that Clarence. Anthony, this is Richard, just looking at our inventory levels, a little lumpiness there. So you saw our inventory was down a little bit over last quarter and kind of went up some, we've pre-ordered some -- in advance of the tariff, we've pre-ordered some things, some of that stuff came in, some of that stuff has continued to come in. So you might see our inventory levels continue to fluctuate plus or minus $5 million over the next quarter or so.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. All right. Well thank you and best of luck.

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Thank you, Anthony.

Operator

Thank you. Our next question will come from Brad Thomas with KeyBanc Capital Markets.

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

Hi. Good morning, Clarence. Good morning Richard.

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Good morning Brad.

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

I wanted to first just check in as usual on just kind of the cadence of business, and how you're thinking about things with the year having ended. I mean, you guys put up a pretty strong 2Q and 3Q from a same-store sales perspective. Obviously, it seemed to slow a bit here in 4Q. I guess how are you feeling about things, as you look out at 2019, knowing that you don't give official guidance, but any color would be helpful?

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Well, I feel pretty good. We're not going to give a sales update. But I think we're really well positioned. I like a lot of the new product and it's being really well received. Some of our challenges now is just getting in the right product and getting a -- the deliveries out in a timely fashion, because of the disruption we just talked about. But I feel pretty good. I think that -- Richard, you want to comment on something here.

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Well. Obviously to say on our guidance for gross margins, we're saying they're going to be flat. There is -- with the tariff headwind, we just wanted to -- we feel that more confident just saying we're going to be kind of at the same level we're at now. In the past years, we've kind of predicted margin improvement, but with the headwind, we felt like we needed to go flat for next year.

Clarence H. Smith -- Chairman, President and Chief Executive Officer

So to answer your question, we feel pretty good about our position.

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

Good. Well Richard, just to follow-up on that comment about gross margin. I mean the company's done a great job over the last three years expanding gross margin, getting credit for the merchandise you're putting on the floor. I guess, besides tariffs, how do you think about some of the puts and takes on gross margin?

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Yes. I think we've seen a reduction in markdowns, which has been helpful over the last several years. I think the company is doing a great job with that. We've got some new merchandising on a look-forward and Clarence can speak more to that. We've seen a little bit of pressure on freight last year, so we'll have probably see a little bit of that again this year. The tariff has been a little bit disruptive in that area in terms of getting the ships over here that was a lot of demand for that, but a little bit of fluctuation here, but the rate and pace of the freight increases doesn't appear at this point to be like it was in the previous year. So a little bit transportation inflation, but we are seeing less markdowns. We're seeing new product that seems to be doing well. So all in all its a pretty good outlook on the margin side.

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Brad we're doing a little more direct sourcing and with exclusive product that we can get more credit for eliminating some of the middle-man opportunities there, and what I'm seeing is real success there, which is encouraging for us. And that will help us maintain that margin and give us some opportunity for growth there.

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

Great. And then as we think about the cadence of store openings and store growth here, what's the plan by quarter, if you can share to that degree?

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Sure. Most of the growth this year we're projecting these new stores open in the fourth quarter. Maybe one in early in the fourth but mostly in the late in the fourth quarter.

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

Got you. So we would still have store base slightly smaller in at least the first half of the year. And then you get the growth in 4Q?

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Yes.

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

Great. And then just as we think about the expenses over the course of the year. Richard, any color you'd want to share with us as we think about timing of some of the fixed expenditures you have. Any differences that we might have in 2019 versus 2018?

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Not as significant. We've kind of laid out in the press release some of the lumpiness in terms of the guidance for next year in terms of some of the G&A costs, but it should follow -- other than the new locations in the fourth quarter, it should be consistent with prior year trends.

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

Great. Thank you very much.

Clarence H. Smith -- Chairman, President and Chief Executive Officer

All right. Thanks Brad.

Operator

Thank you. (Operators Instructions) I'm showing, there are no further questions in the queue at this time.

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Well. We appreciate everyone's participation in today's call. We look forward to talking to you in the near future when we release our first quarter results. Thank you.

Operator

Thank you. Ladies and gentlemen this concludes today's teleconference. You may now disconnect.

Duration: 26 minutes

Call participants:

Richard B. Hare -- Executive Vice President and Chief Financial Officer

Clarence H. Smith -- Chairman, President and Chief Executive Officer

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Bradley Thomas -- KeyBanc Capital Markets Inc -- Analyst

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