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 SE<UNK>
Our President, CEO and Chairman, <UNK> <UNK>, will now give you an update on our results and some insights about our direction.
<UNK>.
Thanks, <UNK>.
Thank you for joining our 2017 first quarter conference call.
We\
Thank you, <UNK>.
I'm going to recap and expand on some of the financial highlights mentioned in last night's earnings press release and then we'll take your questions.
Total SG&A dollars increased $4 million or 4.2% for the 3 months ended March 31, '17, compared to Q1 last year.
Our selling cost increased $0.8 million in 2017 in step with higher sales except for additional staffing in our new stores and increased [bank card] usage cost.
Occupancy expenses rose $0.8 million, primarily due to increases in depreciation for new, relocated and renovated stores.
Our warehouse and delivery expense rose $0.5 million in the first 3 months of '17 compared to the prior year due to partly ---+ partly due to higher personnel costs and warehouse material costs.
Advertising and marketing costs, as planned, were up $0.8 million in the first quarter of '17.
Administrative costs rose $1.1 million or 5.1% over 2016 due to higher compensation costs and increased insurance costs for workers' comp, partly offset by lower group medical costs.
Other income includes a $1.2 million gain from insurance recovery upon rebuilding our Lubbock, Texas location.
We aren't expecting any further such gains for the rest of the year.
Looking forward, our expectation for annual gross profit margins for the full year of 2017, is approximately 53.9%.
The cost for inbound ocean freight decreased in the second half of 2016, but those costs are anticipated to increase in the second half of 2017, tempering the recently higher gross margins.
Last year, there was a change in the LIFO reserve that generated a 35 basis point positive impact in the second half.
But this year, we expect a negative impact of around 25 basis points in the third and fourth quarters of 2017.
Considering those swings, second-half gross margins this year is expected to be approximately 40 basis points to 50 basis points lower than the 53.9% full year average.
Our estimate for fixed and discretionary type SG&A expenditures for 2017 are now $259.0 million, that's a $1 million reduction of our previous estimate and it compares to a $250 million spend for those same costs last year.
The increase is largely due to depreciation and occupancy costs for new and relocated stores, overall compensation including staffing increases and inflation.
The fixed and discretionary expenses were $63.9 million for the first 3 months of 2017 versus $61.1 million last year.
The increases in these costs for the rest of the year will fluctuate with store expansion and with marketing activity, which is expected to be at its highest level in the third quarter.
Variable type costs within SG&A for the first 3 months of 2017 were 18.2% of sales compared to 18.1% for the same period last year.
For the full year of 2017, we anticipate those costs to be 18.1% compared to 18.2% for the full year of 2016.
Operator, at this time, we'll take questions from the audience.
I think it's more structural.
I believe we really addressed this.
We beefed up our quality control teams here in our distribution centers, really focused on handling the product properly, making sure that it was manufactured right, to begin with.
We, last year, began putting our folks into every plant in Asia, not only the ones that we're directly working with, but the third-party vendors also, working with them on first cuttings, making sure the products package right, handled right; and then when we handle it, that we're not having damages that we're creating.
So our return percentages are lower.
We're having fewer markdowns and I also think we're probably doing a little better job of flowing product and not overreacting before we know rate of sales, so that we don't have to have a larger markdown.
So it's operationally across everything we're doing, I think, has helped us reduce those markdowns.
Well, we don't give guidance on sales.
But we feel pretty good about our position.
Certainly, a key to this quarter is what happens in the next 3 or 4 weeks around Memorial Day, that is the big event.
And then the summer holidays, I mentioned 4th of July is important, Labor Day.
We're prepared for all of that.
I like our marketing.
I think we've got a better in-stock position on our bestsellers.
But it all depends on what happens in the next several weeks.
We feel, based on where we are right now, pretty good about it.
Well, we're reworking our line right now, some of which was necessary by the vendors, Sealy and Tempur.
We're adding some new product to our mix.
We're adding some private label branding for the first time that we're excited about.
We put a great deal of effort in making sure we have the right mix on our force.
So we're going to rely on the key brands.
We're a big player with Tempur, Sealy, you know that, but also with the Simmons folks.
And then that's going to be enhanced with some of our own private label marketing.
So it's some of the biggest efforts that we've ever put into the bedding category that's being rolled out right now.
So we feel pretty good about it.
I think in several markets ---+ Matt Firm has hundreds of stores in our markets.
And literally, in our big markets, they might have a hundred stores or do.
So when they don't sell that product right across the street from us, it does help us.
We do sell it and we do show it and we have salespeople that understand the product.
So I think it opens a great avenue for us.
I don't think we like to give those kind of percentages out.
It was up.
We felt good about it.
That's not something we usually give out, <UNK>.
The main lineup is going to be the hybrid.
And so it's going to be below what the hybrid product that's off ---+ the name brand vendors, but not a lot lower.
It's going to be great quality product.
We learned a long time ago in branding for our own brands in furniture that we don't want to go low.
We want to go to the heart of where our customer is.
So it's a better product and a higher quality product that we feel carries the price quite well.
It'll be under the branded players and lower price than the branded players.
No, it's not.
It's coming later this month.
Some of it.
We want to make sure that for the major holiday, we don't disrupt our floors too much.
We do have a change going on right now.
But for the major ---+ some of it won't be on the floors for Memorial Day, but some of it will.
We came up with a target of 25%, it's now 20%.
We came up with a target of about 25% when we started it.
I think that's a pretty good number.
We don't want it to get too high.
We pay a little bit more for it, as you know.
But it's going to be driven by not only how well we execute, but what our customers need.
And not everybody needs a designer.
We sell a lot of people who just want to buy a sectional sofa.
So it's going to be driven by how we do a good job and what the customers want.
I think 25% is a pretty good target, it may go higher than that.
It has helped us drive our average ticket.
I think it will continue to do that.
I'm going to let <UNK> get into this a little bit.
I think it's going to have more impact going forward than it has already.
And we have ---+ we've sold off more of the product that we would ---+ that's in our warehouses.
We've ---+ we added an outlet here in Atlanta, and in doing that, have had more exposure just to our executives and our management team.
The kinds of things that were ending up in a category to be closed out, and I think that the impact so far is that we are moving out more of what's in the warehouse and then we're finding out more and taking action and improving procedures that have helped our overall cost of merchandise that's basically wasted or that is ---+ has to be disposed of.
We're not looking for huge numbers there, but somewhere under 20 basis points probably.
But we've already realized some of it and it's an important thing, not just with cost, but with service to the customer and having the brand reputation where it needs to be without hassles.
Because that's one of the reasons you go to a full-line retailer is they take care of everything and it interrupts that good vibe and choice ---+ reinforcement of the choice and make if you have any delivery issues or merchandise issues.
So it's very important more so probably than just the P&L impact.
Well, case goods have been a challenge for the industry for a while now.
But we believe we're good players in that.
We understand the category, we've grown up in the category and we're improving it.
So we, coming back from this market, our team has been working for months on a number of new collections that we're excited about in bedroom and dining room that are coming in, in the next several months and that will be coming in into next year, that we think will enhance our growth there.
There are not a lot of players who understand case goods, particularly in the better end of the goods.
And we think that we've got an opening there.
So I would see bedroom and casual dining with growth opportunities, not only in dollars, but as percent of sales.
And it's a real focus of ours right now.
But the homes have changed.
And not many people have formal dining rooms anymore.
Not many people have entertainment centers anymore.
So we have to go to where the opportunities are there and we think that we've got several new collections and focuses that they are going to help us there.
It is.
Traffic has fallen off and we don't see much improvement there, we certainly would like to see it.
What has been driving our business is an improved close rate, but more importantly, is the average ticket.
And I do think that will continue to go up.
Okay.
Well, thank you.
Before we end the call, I want to recognize what the analysts have all mentioned, that after conducting these calls for the last 24 years, this may be <UNK>' last call as CFO.
We announced earlier that Richard Hare will be taking over as CFO later this week.
And he comes to us after 11 years as CFO for Carmike, which sold to AMC last year.
<UNK> will be retiring later this summer and will be here to help with Richard's transition.
<UNK> has been my wingman and partner these past decades and taught me more than I can say.
But he definitely taught me all I know about Wall Street and running a public company.
He's been a real strength for Havertys and has been ---+ made tremendous contributions in every part of our company.
But possibly, his largest contribution has been his insistence that we treat everyone associated with the company fairly.
This means full transparency with investors, team members, customers and suppliers.
He's taught us the real meaning of always play it straight.
So thanks, <UNK>, and good luck.
Thanks.
I appreciate it.
It's been a privilege.
Thank you.
So thank you for joining us on our conference call and for your interest in Havertys.
