Haverty Furniture Companies Inc. (HVT) Q4 2019 Earnings Call Transcript

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Haverty Furniture Companies Inc. (HVT -1.63%)
Q4 2019 Earnings Call
Feb 19, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to Haverty's fourth-quarter and 2019 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard B. Hare.

Please go ahead.

Richard Hare -- Chief Financial Officer and Executive Vice President

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 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 on our results and provide commentary about our business.

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

Good morning. Thank you for joining our 2019 fourth-quarter and full-year conference call. Fourth-quarter sales were $213.8 million, a 2.3% increase over last year, with comp store sales up 1.4%. We're encouraged with the first positive quarterly sales increase for the year, and we have a good backlog of undelivered goods that was carried into 2020.

For Q4, we had a positive closing rate and positive customer traffic. Net earnings for the quarter were $0.31 per diluted share versus $0.45 per diluted share in Q4 2018. Earnings were negatively affected by a noncash impairment loss of $2.4 million or a net $0.09 per diluted share. For the full-year 2019, our average sale increased 6.4% to $2,323, our 21st consecutive quarterly increase in average ticket.

The average ticket for our H Design was twice the store average sale. Our average sales were helped by a mid-single-digit increase in custom upholstery. In 2019, we moved a significant amount of our products to Vietnam factories from China. At year-end 2019, approximately 15% to 20% of our total furniture purchases were produced in China.

We are in a better position with our in-stock products as we start this year compared to the tariff-impacted situation in the first half of 2019. We built up our inventory of much of our best-selling goods prior to this year's Chinese New Year, which has helped the stocking position. Our merchandising and supply chain teams are closely watching the impact of the delayed opening of Chinese factories due to the coronavirus. The ability of Chinese workers to return to work in Vietnamese factories and delays in critical parts will likely affect product delivery dates.

We expect to have some product shipment delays, which could affect stock availability in the second quarter. We're in constant contact with all of our key suppliers and factories to make sure that we have our best-selling goods only. Our key sourcing team members are traveling later this week to our Vietnamese factories. We expect our retail sales square footage to be flat in 2020.

With significant relocation and positioning of stores over the past five years, we've stayed level at approximately 4.4 million square feet. Average sales per square foot for 2019 was $183. We feel very good about our store positioning in our markets, and we stay focused on evaluating store opportunities in potential markets within our distribution footprint. Our team member count of 3,425 is level with last year.

Unlike most furniture operations, we have a dedicated warehouse, delivery and service team of over 1,000 Haverty employees, who are dedicated to making sure that the last-mile, in-home contact with our customers is a positive experience. Our customers track their truck online with text, along with photos and names of Haverty team members who will be in their home for the delivery and full setup of furniture. This is a significant commitment to building the Haverty's brand in each of our customers -- with each of our customers, and we believe a major differentiator from our competitors. In January, we engaged EP+Co, a Greenville, South Carolina agency, along with its media partner, Trilia, which is our creative and media agency of record.

EP+Co will work with our internal marketing teams on media, creative and digital planning efforts. This was a several-month project led by Helen Bautista, vice president of marketing, who joined us in the third quarter last year. We're dedicated to making sure that our creative message and our media placement reaches our target customers with our strong statement to help our customers' vision of their home come to life. This year, we're kicking off our celebration of 135 years of history.

We began rolling out this message to our full team chainwide this week, emphasizing Haverty's growth and the ongoing changes to understand, reach and serve our customers the way she wants. Our message to our customers is that we have 135 years of wisdom in every piece of furniture. Our team members are energized to make 2020 a breakthrough year in delivering premium service and market share gains. I'll turn it back over to Richard now.

Richard Hare -- Chief Financial Officer and Executive Vice President

Thank you, Clarence, and good morning. In the fourth quarter of 2019, sales were $213.8 million, a 2.3% increase over the prior-year quarter. Our comparable store sales were up 1.4%. Our gross profit margin decreased 60 basis points from 54.8% to 54.2% due to merchandising, pricing and mix and slightly more aggressive promotions during the quarter.

In addition, tariffs and increased product costs generated a higher LIFO reserve. Selling, general and administrative expenses increased $6.7 million to $108.6 million. This increase was largely driven by a $2.4 million noncash impairment charge related to one of our properties, as well as increased selling, marketing and advertising expenses. We recorded net interest income of $308,000 in the fourth quarter of 2019.

We recorded net interest expense of $239,000 in the fourth quarter of 2018, resulting in a variance of $546,000 over the prior-year period. This variance is the result of the adoption of the new lease accounting standard we adopted in the first quarter of 2019. Income before income taxes decreased $4.7 million to $7.6 million in the fourth quarter of 2019 versus $12.3 million in the same quarter last year. Our tax expense was $1.5 million during the fourth quarter of 2019, which resulted in an effective tax rate of 19.7%.

And our effective tax rate for the year was approximately 23.8%. Net income for the fourth quarter of 2019 was $6.1 million or $0.31 per diluted share on our common stock, compared to net income of $9.4 million or $0.45 per share in the comparable quarter last year. Excluding the impact of the noncash impairment charge recorded during the fourth quarter of 2019, adjusted earnings per share was $0.40. Now turning to our balance sheet.

At the end of the fourth quarter, our inventories were $104.8 million, which was up $4.9 million over the third quarter of 2019 and down $1 million over the fourth quarter of 2018. We ended the quarter with $75.7 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 $4.4 million for the fourth quarter of 2019 and $16.8 million for the year in 2019. We also paid $3.9 million in regular quarterly dividends, representing $0.20 per common share. And for the year, we paid $15.1 million of regular dividends. We purchased $10.4 million of common stock, which equates to 516,762 shares during the fourth quarter of this year.

And for the year, we bought back $29.8 million of shares, which equates to 1,605,336 shares. We have $6.5 million remaining under our current authorization in our buyback program. As previously disclosed, on January 1, 2019, we adopted the new lease accounting standard that requires companies to capitalize their lease obligations on their balance sheet, along with additional qualitative and quantitative disclosures. Further details regarding our implementation of the standard are included in the notes in the financial statements in our Q4 2019 earnings press release.

In addition, our earnings release list out several additional forward-looking statements indicating our future expectations of certain financial metrics. I will highlight a few, but please refer to our press release for additional commentary. In 2020, we continue to expect our gross profit margin for the full year to be approximately 54.6%. Fixed and discretionary-type expenses within SG&A are expected to be in the $265 million to $267 million range for 2020.

Variable SG&A cost for 2020 are expected to be 18.4% to 18.6% as a percentage of sales. Our planned capex for 2020 is $17 million, which includes opening three locations: one in the Dallas/Ft. Worth market; one in Myrtle Beach, a new market for us; and another store in a market that will be announced in the future. We expect our overall effective tax rate in 2020 to be 25%, excluding any impact from divesting of stock-based compensation awards.

This completes our commentary on the fourth-quarter financial results and our 2020 expectations. We appreciate your participation in today's call. Operator, we would like to open up the call for any questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll take our first question from Anthony Lebiedzinski.

Anthony Lebiedzinski -- Analyst

Yes. Good morning, gentlemen, and thank you for taking the questions. So certainly, you've had a very impressive track record of delivering, as you said, Clarence, of 21 consecutive quarters of increases in the average ticket. How optimistic do you feel as far as being able to sustain that momentum?

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

I think it will continue to grow. It may not grow at the rate that it had. But we're building in that whole area of design. We're doing more custom, more special order.

I think we're starting to get more credit for the fact that we offer this service, and we want to make sure that the market understands that. And it's one of the charges that we've given the agency is to make sure we get credit for our design service, our delivery expertise, all of the things we think we do better than our competition.

Anthony Lebiedzinski -- Analyst

Got it, OK. Well, thanks for that. And as far as your same-store sales, obviously, they were up in the fourth quarter overall. Can you give us a sense as to how you're doing so far in Q1 of this year, including Presidents Day holiday?

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

We're not going to give those numbers out. You knew a couple of quarters ago, we announced that we're only going to give out our sales when we release our earnings. I did say that we were in good position. Our inventory is in better position.

We feel we have a backlog that we're now able to deliver a little better. So we had, as you know, last year, a very difficult quarter because of the tariff and the impact of that. So we feel pretty good about that.

Anthony Lebiedzinski -- Analyst

Got it, OK. That's helpful. And lastly, as far as the coronavirus impact, so it sounds like -- just to reiterate, it sounds like you guys feel comfortable through the end of the first quarter that you should be in good inventory position. But if things don't get better there in China, then perhaps it could be a 2Q issue?

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

I think it could be. And we did build up our inventories pretty good in our best-sellers prior to Chinese New Year. And the factories are starting back up. But we're already seeing some of the supplies that they need and have been getting from China are going to be delayed, which will slow down shipment of product.

And then they're trying to replace some of that by repositioning it in Vietnam. I'm talking about mainly things like metal hardware, those type of things that have been coming out of China. So it's a continued evolution of product movement and manufacturing from China to other countries. And in wood, it's Vietnam for us and also actually in upholstery.

But we still do, as I said, 15% to 20% of product out of China and it's important to us. Much of it is a better quality in some areas. And we expect that to stay there unless something drastically changes. So if the tariff was reduced, that would be a big deal.

But we're not anticipating that.

Anthony Lebiedzinski -- Analyst

Sure. OK. And lastly, as far as your expense outlook, one of the items that you called out was increased advertising and marketing spending for 2020. Can you give us a sense as to the magnitude of the planned increase for advertising and marketing that you anticipate for 2020?

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

I don't see that we're anticipating much difference there. We have a new agency. We're looking at how we put the media out there. We did some real testing late last year in several markets, some additional marketing dollars.

But I don't see that the overall percent of advertising should go up.

Richard Hare -- Chief Financial Officer and Executive Vice President

Yeah. And we do include advertising in what we term as our fixed SG&A costs, Anthony. So we came in at $260 million for 2019, we're estimating $265 million to $267 million. A big part of that is we do anticipate increased advertising and marketing expenses.

But as a percent of revenue, it should be consistent with prior years or right in the same ballpark.

Anthony Lebiedzinski -- Analyst

OK. Thank you very much and best of luck.

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

Sure.

Richard Hare -- Chief Financial Officer and Executive Vice President

Thank you, Anthony.

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

Thank you, Anthony.

Operator

[Operator instructions] We'll take our next question from Bradley Thomas.

Andrew Efimoff -- Analyst

Hey, good morning. This is Andrew, on for Brad. I wanted to ask a question about how you all are thinking about your mattress segment in 2020, particularly now that Mattress Firm is carrying Tempur-Pedic. And I was wondering if you think the repartnership will have an effect on you going forward.

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

Well, the mattress business was really good for us in 2019, and we expect to be good in 2020. Yes, Matt Firm was not selling Tempur-Pedic, as you know, when they had their fallout and they do now. We built a really good reputation of being the place to go for that. They will get some business.

They will push it. And I think I'm not that worried about it. we've got several brands that are important to us, including Beautyrest and Stearns & Foster, other lines. But also, I don't see that we would have a decrease in that particular category.

But that's yet to be seen. We compete very aggressively with anybody selling mattresses against us. So we don't expect to lose share.

Andrew Efimoff -- Analyst

OK, great. That's good to hear. And my next question is what is your outlook for raw materials going into 2020? And how do you expect these trends to impact the margin outlook for the year?

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

Are you talking about price increases on the raw materials? Is that what you're referring to?

Andrew Efimoff -- Analyst

Correct.

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

I don't see any significant inflation here.

Richard Hare -- Chief Financial Officer and Executive Vice President

Yeah, the only thing I would say, this is Richard, we did bake in, in our gross profit margin guidance, we came in at 54.2% for 2019. In 2020, we think that's going to go back up to 54.6%. We have less tariff disruption. There's been some increase in freight, but that's kind of been factored in our pricing.

We do see that just if you look at our margins, we do see that improvement kind of coming in, in the second half of the year of 2020 because we had the margin erosion in the second half of 2019. But that's kind of where we see the margins going.

Andrew Efimoff -- Analyst

OK, understood. And I guess, my last question is wonder if you could give us any additional detail on how you're thinking about your overall promotional strategy for 2020.

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

I don't see any real change from what we have been doing. I think we probably will not have to be as aggressive in some areas as we were, which is one of the reasons I think our margins are going to be better. We have repositioned a number of the stores. We closed a major clearance center, which was here in Atlanta, which was a drag.

So that's behind us. We had some store closings behind us. So I don't see that as a big issue for this year.

Andrew Efimoff -- Analyst

OK, great. Thanks. That's all for me.

Operator

And we have no more questions in the queue at this time.

Richard Hare -- Chief Financial Officer and Executive Vice President

Well, we thank you for your participation in today's call. We look forward to talking with you in the future when we release our first-quarter results.

Operator

[Operator signoff]

Duration: 21 minutes

Call participants:

Richard Hare -- Chief Financial Officer and Executive Vice President

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

Anthony Lebiedzinski -- Analyst

Andrew Efimoff -- Analyst

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