HVT
#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 SEC.
Our President, CEO and Chairman, <UNK> <UNK>, will now give you an update on our results and provide commentary about our business.
Good morning.
Thank you for joining our 2017 second quarter conference call.
We\
Thank you, <UNK>, and good morning everyone.
In the second quarter, sales were $196.8 million, a 1.1% increase from last year.
Our comparable store sales were down 0.2% for the quarter.
After adjusting for the holiday shift for Easter, with the holiday occurring in April of this year versus March of last year, our total written sales for the quarter were up 0.6% and written comparable store sales were down 0.7%.
Our gross profit margin increased 90 basis points to 54.4%.
During the quarter, we continue to see lower inbound freight on imported products versus last year, a favorable pricing and product mix as well as a reduction in product markdowns.
Selling, general and administrative expensive were $96.8 million or 49.2% of the sales, which reflect a 40 basis point improvement over the prior year quarter.
Our advertising cost and group medical expense reductions were partially offset by increased depreciation and other occupancy costs associated with the new stores and renovations.
There was no significant other income recorded in the second quarter of 2017.
In the prior year quarter, we recognized a gain upon the receipt of an insurance claim related to storm damage at our Lubbock, Texas location.
Our interest expense was essentially flat at $600,000, and pretax income increased 10.6% to $9.7 million during the quarter.
Our effective tax rate declined 250 basis points to 36.2% in the second quarter of 2017.
The year-over-year change in our effective rate was driven largely by a $200,000 benefit from a new FASB stock compensation accounting standard that we adopted at the beginning of the year.
For the year, we expect our effective tax rate to be approximately 38.4% before the Q2 benefit from vested stock awards.
Our net income and our earnings per share increased 15.1% and 20.8%, respectively.
Our net income of $6.2 million and earnings per share of $0.29 were record second-quarter levels for Havertys.
Now turning to the balance sheet at the end of the quarter, our inventories were [$1.8] million, which was slightly up from our balance at end of the 2016 calendar year.
Our inventory turns improved slightly to 3.5x on a trailing 12-month basis.
We ended the quarter with $65.9 million of cash and cash equivalents, and a $60 million revolving credit facility remains untapped.
And as reminder, we have no funded debt.
Looking at some of our uses of cash flow, capital expenditures were $10.5 million for the first half of this year.
We anticipate spending a total of approximately $28 million of capital expenditures for the calendar year ending December 2017.
Also during the first 6 months of this year, the company paid a total of $5 million of cash dividends to the holders of common stock and Class A common stock.
In terms of our store count, we ended the quarter with 124 locations, which included the opening of our Greensboro, North Carolina showroom.
We also plan on opening a replacement store in Columbia, South Carolina in October for the one closed in March.
At the beginning of the third quarter, we temporarily closed our Wichita, Kansas location due to flooding caused by a rupture of a water pipe.
We expect to reopen that location by mid-November.
Our earnings release lists out several additional forward-looking statements, indicating our future expectations of certain financial metrics.
I'll highlight a few, but please refer to our press release for additional commentary.
We expect our gross profit margins for the full year 2017 will approximate 54.2%, which is an increase from the 53.9% prior guidance.
We continue to forecast second half 2017 gross margins to be approximately 20 to 30 basis points lower than the full year average.
Our estimate for fixed and discretionary type SG&A expenses for 2017 remains at approximately $259 million, which is weighted more heavily in the second half of this year, and the variable type expenses within SG&A were expected to be approximately 18.3%.
So to wrap up the commentary on the second quarter financial results, we're very pleased with our improvement in our gross margins and the reductions in SG&A expenses.
This helped us generate record level net income and earnings per share in the second quarter.
So we thank you for your participation in today's call.
And operator, we'll now open up the call for questions.
Operator.
We feel pretty good about our margins.
We were expecting some hit ---+ a larger hit from inbound freight and that has not hit us like that so we feel pretty good about that.
Our markdowns are less, and I think that will continue.
So ---+ and I think we're getting a better mix of our product and getting better margins in scenarios where we were having some difficulties in the past, so we feel pretty good about that.
And, Rich, you want to talk about this.
I would just add to that as well.
So we don't anticipate the freight to have as much of an impact as we had in the past, so that's why the guidance was revised somewhat.
And this ---+ and that also floats through to our LIFO impact, so that was very helpful.
And then on the G&A side, our ---+ for the back half of the year, we remained at the fixed piece at $259 million.
We don't really anticipate our group medical costs to continue.
And we had a big reduction in the second quarter so we, kind of, see that going back to more normalized levels in Q3 and Q4.
And we also expect to continue to add a little bit more advertising and marketing spend in the back half of the year, which was already an original $259 million estimate.
And, Brad, I don't think there's going to be any real difference between the 2 quarters on the SG&A.
We're seeing that as ---+ for gross margin, we're seeing that as fairly steady for both quarters.
Right.
Yes.
Well, you see our sales.
We are a little disappointed with the end of the last month.
We feel pretty good about our position and the promotions we have lined up, particularly the merchandising we have lined up.
And I feel pretty good about it, but we haven't seen significant increases, as you've seen, with our results.
So we feel pretty good about it, we feel that we'll have a pretty good second half for all the reasons we just discussed.
Well, traffic is off.
We are making it up in the average ticket and the closing rate, as I mentioned.
Both of those up, and we feel good about that.
Our H Design program is super important to us, it's around 20% of our business.
We think that will continue to go up, I'm not sure how high, but I think it will continue to grow because we're getting better at it, our people are better at it and we're getting more credit for it.
So I think that will continue to grow and as our merchandise program aligns with that more and more, we're doing a better job.
So certainly, we want to do everything we can to get our traffic up, but people are going to the sites first and deciding from that where they want to shop.
And you've got to be in the top consideration to be ---+ to have them come in your stores or to have them buy from you.
So we want to be in that 1 or 2 in consideration step in our markets, and that's our objective to make sure that our website attracts some of the people ---+ know about us to go there.
So if overall business gets great, people start coming back to the stores and traffic increases, then we'll have some real upside, but that's not what we see happening right now.
So we're focusing on closing rate and making sure our average ticket keeps going up to reach the right people and appeal to them.
Yes.
Well, I think ---+ yes, there has been a lot of turmoil, certainly, with the Matt Firm issue and that's pretty well played out.
So we're seeing more people consider us for bedding.
I mentioned that we want to be known as a mattress experts.
Our stores are set up such that people see that when they come in our stores.
We're more consistent with our advertising, letting people know we're in the mattress business and it is a plus.
And I think it will continue to be a plus for us.
There is an opportunity because of what happened with Matt Firm, but also we've just improved our program and improved our lineup and making sure we get credit for it.
I'd say nothing significant.
Every year, we change our lineup slightly and some vendors get stronger and we emphasize them over others, but there are some areas that we've done a better job that significantly have improved the margins in those categories that ---+ an example would be our accessory ---+ our entire accessories program, which is complicated and extensive and now helping drive our H Design business and serve the customer better there.
We're getting a better lineup, we're flowing it better and getting more credit in that area, which was an area in the past that was difficult for us.
That's just one example of an improvement that has had some impact and we're doing the same thing with our whole merchandise lineup.
Making sure that we've got the right vendors; that the product's coming in, in good condition; that we don't have to mark it down; we don't have damages as much; all of those things are important across all of the categories.
We put a lot of emphasis on it, in the last year and we're finally getting some credit that's coming to the bottom line.
Yes, <UNK>, just a little increase in delivery and bank card fees were the 2 big areas in that, that caused us to go from 18.1% up to 18.3%.
I don't think there's really any significant changes.
I mean, we're spending more dollars on television and on the Internet, as we have been all year, but I think it's more a calendar fall of where particular promotions hit and we feel really good about the alignment now for the rest of the year, for our promotional efforts.
We have the different holidays hit in different times, not only Memorial Day, but Fourth of July, and that's now behind us.
So we feel good about how it's set up going forward.
We would like to thank you for joining our conference call and we greatly appreciate your interest in Havertys.
