Haverty Furniture Companies Inc (HVT) Q2 2021 Earnings Call Transcript

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Haverty Furniture Companies Inc (HVT -2.24%)
Q2 2021 Earnings Call
Jul 28, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the HVT Second Quarter 2021 Financial Results Conference Call. At this time, I would like to turn the conference over to Richard Hare, Chief Financial Officer. Please go ahead.

Richard B. Hare -- Executive Vice President & 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 of 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 Chairman and CEO, Clarence Smith will now give you an update on our results. And then, our President, Steve Burdette will provide additional commentary about our business.

Clarence H. Smith -- Chairman & Chief Executive Officer

Thank you for joining our 2021 Second Quarter Conference Call. We're very pleased with the record results for the second quarter with sales of $250 million. We've done a good job in our expense controls across the board, and combined with pricing disciplines from the merchandising teams and stores, we achieved solid gross margins and 11.7% pre-tax operating profits. Our ongoing objectives are to grow market share in our existing distribution footprint and maintain double-digit operating margins. We believe that the increased importance of home that was jump-started with the impact of COVID last spring is a longer-term trend. While we don't expect the rush that impacted our industry to be at the elevated levels we experienced in recent quarters, we do believe that home is a priority and a sustainable trend for the near future.

The strong desire for homeownership, combined with Havertys strong positioning in Florida, Texas and the Southeast, puts us in an ideal position for today and for the future. Our supply merchandising and distribution teams are working with our factories and shippers to bring in product to fill orders and reduce our record backlog. The shipping challenges that home-related industries are experiencing have caused major delays for furniture, which we believe will be problems until the spring of 2022. We are working to increase our inventories as the production and product flow improves. We're investing in our distribution capacity to support growth over $1 billion over our regions. We just completed additional racking to our mothership, the Eastern Distribution Center in Braselton, Georgia, which adds 20% more storage capacity. We will evaluate potential expansions to our network to better serve our planned growth.

Our current focus is on building market share in our key markets with store positioning and target marketing to our core customer and new homeowners. Examples of this were the opening of Myrtle Beach earlier this year, the opening of a third store in Austin, in the fast-growing Pflugerville, Round Rock markets and a store opening tomorrow in the villages in Central Florida. We're in a deep dive reviewing potential locations in our best markets, which will reach the fastest-growing areas and leverage our existing infrastructure. We expect to announce several new fill-in locations for the 2022 openings. We're very excited about the rollout of the WE FURNISH HAPPINESS marketing campaign, which we believe more clearly separates Havertys from our competitors and continues to raise the bar on service, quality, furniture and design. We continue to be focused on our front door, havertys.com.

We've committed to significant investments in IT and state-of-the-art systems to better reach and appeal to our customers. We have a major ongoing investment in reworking our website for better presentation and ease of use. We've contracted with Adobe to bring on a collection of applications and services that will lay the foundation for unmatched customer experience. The new foundation will improve functionality, help us create content easier and faster, provide better personalizations using AI-driven automation and enhance our analytics and reporting. Our goal is to have the best-in-class website experience. I now will turn the call over to Steve Burdett, President.

Steven G. Burdette -- President

Thank you, Clarence. I'm very excited with our results for the second quarter. This performance was due to the commitment, passion and determination of the store, distribution, home delivery, service and home office teams, whom I want to congratulate personally for their efforts. Our supply chain network has been able to increase the flow of products into our warehouses over the second quarter even with all the headwinds. Container capacity continues to be under pressure with the continued increase in demand across all of retail. We expect this to continue to be an issue for the remainder of the year, even if there is a softening in demand. Also, container prices on the spot market continue to increase with prices varying between $12,000 and $22,000 a container. We have been able to balance our shipping mix, so that no more than 20% to 30% is on the water at one-time at these increased rates.

As I stated last quarter, we finalized our contracts on May 1, which are significantly below the spot market rates. Foam continues to be an issue for some of our domestic vendors, however, their production has increased during the second quarter, but still not at 100%. Our import vendors are not having any foam issues. The recent closures in Vietnam due to the increased spread of the Delta variant are not expected to have an impact on our customers, if the closures remain at the projected two weeks. They are expected to open back up beginning the week of 8/2. However, if the closures are prolonged four to six weeks then there may be an impact to our customers, who already bought and future customer lead times. Also, we are seeing port congestion in Vietnam and China, along with continued issues at the LA port and railyards. Our merchandising and supply chain teams are monitoring the situation very closely with our vendors.

Our pool is now approximately 2 times larger than last year, with the average pool age stretching to approximately eight weeks from six weeks over the last 90 days. Our special order lead times have increased to 12 weeks to 20 weeks, depending on the vendor, causing some softening in our special order business. Our distribution, home delivery service network delivered a record quarter. Over 90% of our markets are delivering within a week to the customer's home once we have the product in our warehouses. Staffing continues to be our #1 concern in both distribution and home delivery. The extra unemployment moneys that have stopped in most of the states we operate our warehouses, but there is still not enough people looking for work to fill the jobs available. However, we remain optimistic that we will see this improve during the third quarter. Again, I want to thank the entire Haverty team for all their efforts during the second quarter. Now, I'll turn the call over to Richard.

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

Thank you, Steve, and good morning. In the second quarter of 2021, delivered sales were $250 million, a 127.3% increase over the prior year quarter. If you recall, our retail operations were closed due to the pandemic in the month of April in 2020. 103 stores reopened on May 1, 2020, and the remaining stores reopened by June 20th. Total written sales for the second quarter of 2021 were up 67.5% over the prior year period. Comparable store sales were up 46.9% over the prior year period. This only include stores that were open for a full month in both periods. Our gross profit margin increased 240 basis points from 54.2% to 56.6% due to better merchandising, pricing and mix and less promotional activity during the quarter. These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight and product cost. Selling, general and administrative expenses increased $39.8 million or 54.7% to $112.4 million, primarily due to increased sales activity.

However, as a percentage of sales, these costs declined over 2,000 basis points to 45% from 66.1%. As demonstrated in the past three quarters, our financial model has substantial operating leverage at these sales levels. Other income in the second quarter of 2020 was $31.8 million, which included the gain on the sale-leaseback transaction of three distribution facilities in 2020. If you recall, the gross proceeds from the sale was approximately $70 million. Income before income taxes increased $10.5 million to $29.2 million. Our tax expense was $6.3 million during the second quarter of 2021, which resulted in an effective tax rate of 21.6%. The primary difference in the effective rate and statutory rate is due to the state income taxes and the tax benefit from vested stock awards. Net income for the second quarter of 2021 was $22.9 million or $1.21 per diluted share on our common stock compared to net income of $13.6 million or $0.72 per share in the comparable period last year.

Excluding the gain on the sale of our distribution assets in 2020, our adjusted earnings per share in the second quarter of last year was a $0.52 loss. Now, turning to our balance sheet. At the end of the second quarter, our inventories were $115 million, which was up $25 million from the December 31, 2020 balance, and up $10.2 million versus the second quarter of 2020. At the end of the second quarter, our customer deposits were $116.1 million, which was up $29.9 million from the December 31st balance and up $58.5 million versus Q2 of 2020. We ended the quarter with $235.3 million of cash, cash equivalents. We have no funded debt on our balance sheet at the end of the second quarter of 2021. Looking at some of our uses of cash flow, capital expenditures were $10.9 million for the first half of 2021, and we paid $8.6 million of regular dividends during the first half of 2021.

During the second quarter, we did not purchase any common shares in our buyback program, and we have $16.8 million remaining under current authorization for this buyback program. 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. We expect our gross margins for 2021 to be 56.5% to 56.8%. We anticipate gross profit margins will be impacted by our current estimates of product and freight cost and changes in our LIFO reserve. Our fixed and discretionary type SG&A expenses for 2021 are expected to be in the $275 million to $278 million range. This is an increase over our previous estimate, primarily due to rising warehouse compensation and benefit cost. The variable type costs within SG&A for 2021 are expected to be in the range of 17.3% to 17.5%, a slight decrease over our previous guidance.

Our planned capex for 2021 has increased from $23 million to $37 million. Anticipated new or replacement stores, remodels and expansions account for $18.7 million. Investments in our distribution network are expected to be $15.2 million, and investments in our information technology are expected to be approximately $3.1 million. The largest increase in our planned capex for 2021 is in our distribution network. In the third quarter of this year, we will be buying back our Virginia warehouse, which we sold and leased back last year. This is a key distribution asset that may be expanded in the upcoming years. Owning this asset gives us more flexibility as we evaluate our future growth plans. Our anticipated effective tax rate in 2021 is expected to be 24%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes our commentary on the second quarter financial results. We appreciate your participation in today's call, and now, I'd like to ask the operator to open up the call for questions.

Questions and Answers:

Operator

Our first question comes from Anthony Lebiedzinski with Sidoti.

Anthony Lebiedzinski -- Sidoti -- Analyst

Hey, good morning. Thank you for taking the questions. So you talked about the demand still being positive here in the third quarter, which is good to see. Can you talk about -- other than the fact that people are buying more in stock merchandise or customized, are you seeing any other changes as to what people are buying? I know, you touched on mattress sales also being up in the quarter. But maybe just, if you could just talk about like as far if you're seeing any sort of differences as to what the people are buying, that would be helpful.

Clarence H. Smith -- Chairman & Chief Executive Officer

I think, over the last months, we've seen our case goods business improve a little bit more than some of the other categories. Upholstery, while up, is a little less up, because of the customization that we just -- we're having delays on products. So in some cases, we've had to suspend a few categories, a few vendors on customization and special orders. So the main thing is we're seeing growth across all categories. I think, case goods, because we were able to get the product and bringing it in have been a little stronger and better in the dining room.

Anthony Lebiedzinski -- Sidoti -- Analyst

Got it. Okay. That's very helpful and so you guys have done a nice job over the last few years improving your gross margins even with some headwinds. So just overall, how should we think about the potential for gross margins going forward in future years?

Steven G. Burdette -- President

Anthony, this is Steve. I would say, we're committed. You saw the guidance that Richard has provided you, and we don't certainly provide guidance on that going forward, but we still feel confident with what Richard put out there, the 56.5% to 56.8% for the remainder of the year.

Anthony Lebiedzinski -- Sidoti -- Analyst

Okay. Got it and then as far as the -- just usage of cash, so obviously, you guys have a balance sheet. So as you continue to build up cash, I mean, would your -- to perhaps purchase additional stores or distribution facilities or dividends or buybacks? I mean, how should we think about the priorities or preferences for usages of your excess cash flow?

Clarence H. Smith -- Chairman & Chief Executive Officer

Well, Anthony, we've got a Board meeting next week. We meet and discuss this in every Board meeting. Yes, we're generating a good deal of cash and also points out the opportunity we had to buyback our distribution center, which I think is a real plus. We may have to invest in that, which could be significant. We look at buybacks, we look at dividends. And if we don't need the cash, we do like to return to shareholders, as we've done historically but we'll review that and look at it every quarter.

Anthony Lebiedzinski -- Sidoti -- Analyst

Got it. Okay. Thanks and best of luck.

Steven G. Burdette -- President

[Makes sense]. Thank you Anthony.

Operator

We'll take our next question from Bradley Thomas with KeyBanc Capital Markets.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

Hi, good morning Clarence, Steve and Richard, this is Andrew on for Brad. I wanted to start by talking about your written sales trends. It was encouraging to see the positive written sales growth quarter-to-date even against the tough comparison last year in 3Q '20. But as we look to the rest of the quarter, could you remind us what the comparison for written sales growth looks like for August and September when you compare it to July? In other words, does the comparison for written sales growth get more difficult or easier as we progress through the third quarter?

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

Yes, Andrew, this is Richard. I think it's -- first of all, appreciate the question. We typically don't get into that level of detail on months, but just generally speaking, the back half of the year for Q3 and Q4 on written and delivery are both obviously more challenging. So we were very pleased to report the positive sales trends in both of those categories month-to-date for the third quarter, and we're certainly optimistic about the rest of the year.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

Understood and in your commentary, you noted that there was a moderation in pandemic patients among consumers and that's led to a shift in product mix away from custom merchandise. Could you talk about how this shift is impacting margins? And do you expect this shift to grow in intensity over the next few months?

Clarence H. Smith -- Chairman & Chief Executive Officer

I don't think it's going to impact margins. I don't see that.

Steven G. Burdette -- President

Yes. I don't see -- this is Steve. I don't see any impact. I did say we have seen, because of the delays and the extension of the lead times with our vendors, our domestic vendors, we have seen some delay in the custom orders, but I'm seeing that already bounced back in the early part of July from where it was in the second quarter, not back to the levels where we were, but it's moving back up. So -- but I definitely don't see any impact to the margins, because of the reduction in the special order and we're optimistic that would pick up as we -- as vendors get more online and get back things flowing as we move through the third quarter into fourth quarter.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

Great. And could you talk a little bit more about the magnitude of the changes in product and freight costs that you are seeing? And do you expect to eventually offset these changes with your own price adjustments?

Steven G. Burdette -- President

We have already -- we're addressing that as it happens. We don't -- as soon as we are aware of that, our merchandising and supply chain teams are immediately addressing that and passing those along. So those have been -- those are passed on as we are finding them out from our vendors.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

Got it and given the resurgences of COVID-19, particularly in some of the Southern states, have you seen any changes in consumer behavior as a result of this resurgence?

Clarence H. Smith -- Chairman & Chief Executive Officer

We haven't seen anything recently. Traffic is pretty balanced across the regions. No, we haven't seen anything. It could come to be more significant, but we haven't seen anything to-date.

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

Got it. Okay. I think thats all for me. Thank you.

Steven G. Burdette -- President

Thank you.

Clarence H. Smith -- Chairman & Chief Executive Officer

Thank you, Andrew.

Operator

This concludes today's question-and-answer session. I will now turn it back to Richard Hare for closing remarks.

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

Well, we appreciate your participation in today's call, and we look forward to talking to you in the future when we release our third quarter results. Thanks again.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

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

Clarence H. Smith -- Chairman & Chief Executive Officer

Steven G. Burdette -- President

Anthony Lebiedzinski -- Sidoti -- Analyst

Andrew Efimoff -- KeyBanc Capital Markets -- Analyst

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