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Haverty Furniture Companies Inc. (NYSE:HVT)
Q1 2020 Earnings Call
May 21, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Haverty's first-quarter 2020 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 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 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 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 Smith -- President, Chief Executive Officer, and Chairman

Good morning. Thank you for joining our call. We have experienced a lifetime of changes since our earnings call in February. We've just reported Q4 2019, which was the first positive quarterly sales increase for the year.

And in 2019, we moved a significant amount of products to Vietnam factories from China because of the tariffs. At year-end 2019, only 17% of our total furniture purchases were produced in China, down from over 35%. We have just begun to be in stock on best-sellers as we started the year compared to the tariff-impacted situation of 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.

We were scrambling to get product to complete our double-digit sales increases. Our sourcing team members were on the way to visit our Vietnamese factories to speed up deliveries. Our merchandising and supply teams were closely watching the impact of the delayed opening of the Chinese factories due to the coronavirus. We were concerned with the ability of Chinese workers to return to work in the Vietnamese factories and in China, and the delays in critical parts would affect product delivery days.

We expected to have some product shipment delays, which could affect stock's availability in the second quarter. For the first two months of 2020, we were up 12% with solid profits and strong closing rates, along with increases in H Design sales and average sale and then COVID-19 changed the world. We started the year with team member counts of 3,425 level with 2018. We watched what other retailers were doing and heard what the government said about closing nonessential businesses.

And on March '19, we closed all our stores and shut down distributions two days later, leading our industry for what we'd hope would be two weeks, and we paid our team members during this time. Even though we closed the last two weeks of March, our strong start to the quarter allowed us to produce profits of $0.09 versus $0.17 last year. At the first of April, we made the painful decision to furlough over 3,000 team members. We canceled orders for the first time in many years to try to handle the incoming orders without overwhelming us.

During the closure, our executive team, regional managers, general managers and the distribution centers made extensive preparations and, ultimately, the difficult decision to have a reduction in force of 1,200 team members. We set the opening plans for May 1, where the states allowed, again, leading most of the industry. We made the decision to pull down our revolver even with over 60 million in cash. We suspended the stock buyback program and reduced capex to $5 million.

In early April, we worked with our largest -- on our largest financial transaction in our history with a $70 million sale leaseback on our three owned distribution centers, two of which we had recently expanded. We moved with record speed to close that transaction this past Monday. The expected gain will help offset the anticipated losses in the second quarter. With most of our stores now open, I believe that we are one of the strongest public furniture retailers in the industry and well positioned to come through this pandemic and financial crisis.

You have seen the recent retail bankruptcies. Unfortunately, I believe there will be more closings in the furniture industry. We were very pleased to be able to open many of our stores on May 1. We began with 103 stores out of 120, operating with about 25% of our sales staff on limited hours.

We are pleased with the opening results and now have 116 stores open for the Memorial Day weekend. This past weekend, we added back much of our furloughed sales staff, which brings us back to about 50% of our former sales staffing. The expansion of chat has been an important program for maintaining our relationship with our customers. During the six weeks that we were closed, we added store managers and general managers to our chat team.

We expanded hours to 7 AM to 12 AM and added chat agents of store managers, corporate buyers and office supervisors. Chats have increased 65%. We also created a new process for virtual design so that we can still provide design services with higher average tickets when customers prefer to work from home on their projects. Internet sales are now close to 6%, triple the rate last year.

We will continue to work toward making our website easier to use. We will significantly increased our spend in digital and social marketing to reach our target customers. We've just begun our broadcast and connected TV advertising and our teams are energized to be back with our best producers on the floor. We are seeing strong upholstery sales as families are motivated to have their family rooms comfortable.

Our new campaign of Better Together started last weekend, building for Memorial Day weekend, and we come back with take comfort in June, which I think should resonate with our customers. We now expect our retail sales square footage to be down 1.7% in 2020 with the planned closings and delaying of openings. I feel it is somewhat ironic and prophetic that we just began our celebration of 135 years of history. We've emphasized our long history and our ability to survive 22 recessions.

Our entire team is now being severely tested, unlike ever before. Our customer has changed very quickly, and we are changing with her. As we said during the celebration that began late last year, Havertys has always gained the most in tough times. And these are the toughest times we've ever seen in our history.

I'm immensely proud of our team, which has stepped up very quickly and reacted to these changes. We are listening and responding to the challenges. Havertys is moving fast and learning to understand, reach and serve our customers the way she wants. Our team is energized to make the second half of 2020 a comeback, an opportunity to strengthen Havertys' position in delivering outstanding value and service and gain profitable market share.

I'll now turn the call back over to Rich.

Richard Hare -- Executive Vice President and Chief Financial Officer

Thank you, Clarence, and good morning. In response to the COVID-19 pandemic, we closed all of our retail locations on March 19 and halted deliveries on March 21 in the first quarter, which had a significant impact on our financial statements. In the first quarter of 2020, sales were 179.4 million, a 4.2% decrease over the prior year quarter. Our comparable store sales metrics are not meaningful since our stores were closed for a period of time during the first quarter of 2020.

Our gross profit margin increased 40 basis points from 55.1% to 55.5% due to merchandising mix and less markdowns of inventory. Selling, general and administrative expenses decreased 1.3 million to $97.5 million. This decrease included reduced marketing and advertising expenses as we temporarily shut down our operations during a portion of March. We recorded net interest income of $214,000 in the first quarter of 2020, and income before income taxes decreased $2.4 million to $2.3 million.

Our tax expense was $481,000 during the first quarter of 2020, which resulted in an effective tax rate of 20.9%. Net income for the first quarter of 2020 was $1.8 million or $0.09 per diluted share on our common stock compared to net income of 3.6 million or $0.17 per share in the comparable quarter last year. Now, turning to our balance sheet. At the end of the first quarter, our inventories were $110.5 million, which was up $1.2 million over the first quarter of 2019 and up $5.7 million over the fourth quarter of 2019.

We ended the quarter with $84.6 million of cash and cash equivalents, and we've drawn down $43.8 million on our revolving credit facility. Looking at some of the uses of cash flow, capex was $2.5 million for the first quarter of 2020. We also paid $3.8 million and regularly scheduled quarterly dividends, representing $0.20 per common share. We purchased $6.8 million of common stock, which equates to 419,111 shares during the first quarter of this year.

We have $29.7 million remaining under current authorization in our buyback program. Our earnings release list out several additional forward-looking statements and certain financial metrics. I'm going to highlight a few, but please refer to our press release for additional commentary. Due to the uncertainty of the pandemic, we are no longer providing guidance on our gross margin or SG&A expense expectations.

Our planned capex for 2020 has been reduced to approximately $5 million, which includes opening one location in the Dallas-Fort Worth area. We closed the store in the Atlanta market, and we do expect to close another location in the Dallas-Fort Worth area, so our square footage will be slightly lower at the end of the year. Earlier this week, our board of directors declared a cash dividend of $0.15 per share on common stock and $0.14 per share on Class A shares that will be paid on June 19, 2020, for shareholders of record at the close of business on June 4, 2020. In addition, we are pleased with the recently announced closing on a sales leaseback transaction on three of our warehouse distribution facilities.

This transaction generated sales proceeds of approximately $70 million and further solidifies our company's liquidity and positions us well for the future. I would like to personally thank our team in Havertys, as well as the team at SunTrust Equity Funding from Truist Financial Corp. for the successful completion of this transaction. These remarks conclude our commentary on the first-quarter financial results.

We appreciate your participation in today's call. And I'd like to ask the operator to open the lineup for questions at this time.

Questions & Answers:


Operator

[Operator instructions] And we will take our first question from Anthony Lebiedzinski with Sidoti & Company. Please go ahead, sir.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Good morning, gentlemen. Thank you for taking the questions. So, Clarence, you mentioned that you've seen strong upholstery sales. Just wondering if you can comment about the rest of the business that you've seen so far since you guys reopened stores?

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

Well, when we opened May 1 in around 100 stores, we had limited hours, and we were keeping limited hours and we had about 25% of our sales staff. We did see, what I think, was probably pent-up demand initially. And I think some of that was brought about by our chat and our virtual design efforts and just people wanting to get going again on projects. Last week, we brought back most of our furloughed sales staff, and now we're operating at about 50%.

I'll say that month to date, meaning May, we are up slightly in written business compared to last year, which is more than we expected. We have good closing rates and good average ticket. I don't really expect that trend to continue necessarily through the Memorial Day events because we don't have the same amount of staff but we're very encouraged by the reception. We do have a very strong backlog, up double-digit from last year.

We're working to complete that. It is interesting that it's areas where people are living all the time now. Like I mentioned the family room, we are doing well in the home office area, people that want to have their office at home. And I think people are concerned that they may be in their home with their children for a very long time.

And so, I do think there's a -- in our world, I do think there's a return to the home, and that's who we serve. So, we're hoping that's a positive trend. The economics are not great, obviously, with the low -- the high unemployment, but we're encouraged.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. OK. So, just wondering, so what is your expectation overall for promotions for the balance of the year? I know you talked about the Memorial Day event that you are doing. So, the Better Together event, but just overall, I mean, obviously, your competitors have been closed for a while, some are still closed.

So, just wondering as to what your expectation is as far as the level of promotions that you would foresee? That would be great.

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

We've been pretty aggressive with credit because -- well, the promotional players have been. And so, we're pretty aggressive with that, and we'll continue with that probably longer than we would have because credit may be important and probably more important than it was last year. We've got promotions on individual categories and products, but I don't see heavy discounting. That's certainly not where we're going to go.

I think that we've used the free delivery some and that's important because the marketplace is talking a lot about that. But I don't see it as a lot more aggressive than last year. I will say that when we opened in May, we were pretty aggressive with the credit and delivery because that's what we felt like we needed to do and that's what we're continuing through Memorial Day.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. OK. And, so a couple of other questions, if I may. So, I know you guys are not providing specific guidance for gross margin and expenses.

But I know, obviously, you did a major restructuring of the workforce, so that helps that you guys quantify that. But are there any other puts and takes that we should think about whether -- when it comes to gross margins or expenses that you can just give us a high level kind of view of that as to how we should think about it?

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

Well, let me comment on one area, we're doing a lot to catch up on our distribution and our backlog. And our cost there, we've reduced the headcount a good deal. We're trying to get back to the level that's necessary to get the deliveries out. And there's going to be pressure than there was last year for distribution cost as far as personnel, and that probably will continue.

Richard Hare -- Executive Vice President and Chief Financial Officer

And let me just add a couple of things. So, on the gross margin front, Clarence just gave you his commentary on his expectations for promotions for the balance of the year, so you can kind of bake that into your assumption. And then on the G&A side, we quantified the reduction in workforce numbers in the press release. So, you have those there.

Most of that was -- is going to be on the variable as opposed to the fixed side of G&A, but I think if you look at those things. And then on the sales leaseback, we've included the sales leaseback numbers in terms of rent numbers in here, I think they're around four-plus million. Don't forget the offset of depreciation coming the other way. So, the net impact of the sales leaseback is going to be less than $2 million a year impact on our P&L.

So, those are things to think about as you model the business.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. That's very helpful. And lastly, as far as the -- Clarence, you talked about the canceling of orders, I think, for the first time, if I heard that correctly, but just wondering if you could just quantify as far as that level of cancellations of orders?

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

Well, it was pretty heavy. But what we frankly did, Anthony, was orders that were not made. We canceled and now we're reissuing with what we expect that we will need. So, a lot of that product we'll be bringing back, but the projections that we have in the initial orders based on when we were up double digit in sales are just different.

So, instead of letting the order sit out there, we canceled and now we're reissuing the quantities that we think are more appropriate. And we're working very closely with our factories. We've got a great relationship. We want to continue those strong relationships because as business comes back, getting the product in here is going to be a factor in the fall.

We're in strong inventory position now, higher than our normal levels, obviously, because of -- we weren't selling any -- we weren't delivering anything, but we feel good about the spring and summer, just depending on how sales come back, the fall, getting the orders would be -- could be a factor.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. Well, thank you, and best of luck.

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

Thank you, Anthony.

Operator

Our next and final question will come from Bradley Thomas with KeyBanc Capital Markets.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

Hey, good morning. This is Andrew on for Brad. I just had a question regarding the sale leaseback transaction. I was wondering if you could comment on what kind of increase in rent or opex on an annual basis you expect to incur as a result of the transaction.

Richard Hare -- Executive Vice President and Chief Financial Officer

Yeah. Thanks for the question, Andrew. We were -- as we just mentioned earlier, on the sales leaseback, the net impact on our P&L is going to be around $2 million. You've got -- you're picking up the new rent of four-plus million, but you're -- it's offset by the depreciation that we no longer have since we sold the asset.

So, we brought in proceeds of $70 million. And then our G&A cost will go up about 1, 1.8, $2 million a year.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

OK. Understood. And then following this transaction, we know historically, you've owned a number of assets. Could you remind us what distribution facilities and the number of stores you own currently?

Richard Hare -- Executive Vice President and Chief Financial Officer

Yeah. So, we still own about a third of our properties, about 39 are owned. And we -- as we disclosed in our 10-K at the end of the year, the book value for those assets is approximately $70 million. The rest of our properties are in essence leased.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

OK. Understood. And I guess my last question is, you gave a lot of good detail on how customers are changing their spend on furniture, but what about -- and I know average selling price, you mentioned, is being somewhat strong. How is that comparing to last year? And I guess, what -- are you seeing any changes in any other segments of the business, including particularly the mattress segment?

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

OK. I'd say the average ticket has stayed about the same. And that's at a time when we really aren't using our decorators as much other than virtually. So, we feel good about that.

The mattress business has been OK since we opened. It's not the leader, but it's been OK. So, I think that will continue to strengthen. It's been a strength of our business over the last year, and I think it will be going forward.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

Great. Well, that's all for me. Thanks again.

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

Thank you, Andrew.

Richard Hare -- Executive Vice President and Chief Financial Officer

Well, thank you. We appreciate -- I believe that was the lastquestion from the operator. So, we appreciate your participation in today'scall, and we look forward to talking with you in the future when we release oursecond-quarter results. Thanks again.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Richard Hare -- Executive Vice President and Chief Financial Officer

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

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

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