HVT
#Thank you and good morning, everyone.
During this first-quarter (sic) conference call, we will 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, in 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 progress.
<UNK>.
Good morning.
Thanks for joining us on our second-quarter conference call.
As previously reported, net sales and comparable-store sales rose 3.8% for the quarter.
Written total and comparable-store sales both rose 6%.
Our average ticket increased by 2.2%.
Traffic was slightly lower, but we were encouraged by our improved closing rate for the quarter and year to date.
Earnings for the second quarter were $0.24, compared to $0.21 for the same period last year.
For the first half, earnings per share were $0.45, compared to $0.48 last year.
We did see our SG&A increase as a percent of sales to 49.6%, compared to 49.4% last year.
These increases were largely due to higher administrative costs related to increased health care costs, selling expense, and occupancy related to new stores that have opened in the last year.
Both written and delivered sales for Q3 to date are up 3.8%, with comparable-store delivered sales up 3.9% and written comp sales up 3.6%.
This year, we have made heavy investments in the systems and the infrastructure to help provide a better experience for our customers.
The major hardware computer additions that our CIO, Ed Clary, and his dedicated team installed this spring with upgrades to the leading-edge IBM POWER8 has helped to cut the screen speed when placing orders in our stores by over half.
The purpose of these upgrades is to help serve all of our customers in every phase of the shopping cycle, including the processing and handling of the product through delivery.
We have added new state-of-the-art scanners for all of our drivers and service technicians to provide a paperless system and to speed up every stage of handling merchandise through completion of our Top Drawer Delivery process.
We recently had over 100 of our vendors and freight carriers into Atlanta for a supply-chain partner summit to bring all of our partners up to speed on the installation of our new GT Nexus system and their expected commitment to our mutual success.
This program ties all of our partners involved in the manufacture and movement of import merchandise from preproduction, manufacturing, Havertys dedicated quality teams, ocean transport shipping lines, and domestic freight lines all on one single platform.
Every partner will have the necessary visibility throughout the entire process so that our supply-chain team will have a much tighter timetable for product arrival and guaranteeing the delivery time for our customers.
We have developed with our VP of Supply Chain, Abir Thakurta, and his team what is recognized to be one of the finest supply-chain organizations in our industry.
We continue to invest in the systems to make sure that we can provide the top service that our customers expect and to outperform and outservice our competition.
In early July, we celebrated the grand opening of our 110,000-square-foot expansion of our Lakeland, Florida, distribution center.
This high-racked addition will add 85% more storage capacity for the facility, which will alter and improve how we serve our Florida stores and customers.
We will be bringing in containers from Asia directly into the Lakeland facility from the port of Jacksonville and Tampa, greatly reducing the inbound freight compared to moving containers today from Savannah to north Georgia, then shipping them back to Lakeland.
Another advantage, a major advantage, is reducing the handling of the furniture, which can cause damage and delay deliveries.
We will be able to react quicker to delivery issues and eliminate days to deliver to the customer.
This expansion is the major capital investment for the Company this year, along with the large information technology upgrades.
In the next few months, we plan to open in two important markets within our distribution footprint and complementary to existing stores.
We opened in a new Texas market, College Station, which will be a sister store to Waco, and both are important college-town markets.
These two cities are in a common media market, which will help us make an efficient advertising impact in both markets.
Early in the fourth quarter, we will open in Charlottesville, Virginia, a new city for Havertys.
It will be a branch store of our two-store Richmond, Virginia, operation.
These cities are also operating in the same MSA media market, which will add to our impact in the region.
The Charlottesville store will serve another important college town in our footprint.
We have historically done well in these markets and expect these two new stores to have a short development cycle.
We are in the final stage of closing a store in southeast Florida, which overlaps with our new Fort Lauderdale and Coconut Creek stores recently opened.
This is a higher-rent location, which we expect, once closed, will help us add to the market's profitability.
We expect to end the year 2016 with 123 stores and 4.4 million square feet of retail space, our third consecutive year of slight increases in retail square footage.
Our ongoing goal is to improve our existing store sales to over the $200 per square foot number that we reached in 2006, prior to the deep recession.
We are closing in on that target and expect to reach it in the near future.
We were pleased to return to our stockholders over $25 million in dividend and share repurchases in the first half and expect to generate significant cash flow for the rest of the year and for 2017.
We continue to see a significant increase in the Internet written sales, which were up 40% in the second quarter and continue to run at an even higher rate in the third quarter.
We are investing in improving the sales process and integrating a true omnichannel process to make it easy for the customer to transact business with Havertys in any manner she chooses.
While close to 90% of our customers use our website at some point in the sales process, with mobile site use at 65% and increasing, less than 2% of our delivered sales are sold over the Internet.
Technology aside, our customers generally want to visit our stores and speak with our sales associates and design expertise, in addition to physically trying out the furniture.
We are increasing our efforts to make our digital 3D and online experience to be the best in the industry.
We are excited about many of the new collections that we have coming to our floors this quarter.
We are expanding our depth of selection in contemporary and clean line upholstery and adding multifunctional designs and technology to our motion upholstery category.
We're adding several major groups to the important leather category, with more transitional styles, colors, and sectional presentations, which we expect to be major new winners on our floors.
We have a large number of new wood collections in contemporary styles and reclaimed finishes, which are additions to some of our current best-selling groups.
We're also adding a number of lighter finishes to our presentations, which are so important to today's customer.
We believe that we will be in the best in-stock position for the important fall selling season that we've been in in several years.
We continue to see growth in our special order and custom order sales.
Our H Design organization has had a major impact on our sales team and in reaching and serving our customer in her home.
We are developing more products for the design part of our business to improve our service to the customer and expect to continue to see those sales drive our average ticket.
We are currently doing over 20% of our sales in the H Design category, up from 16% last year.
We are on track to reach our goal of a 25% H Design run rate by the end of the year.
We are pleased to see the positive trend of business after the slow start to the year in the first quarter.
We are very encouraged by the several significant initiatives that we've put in place to better serve our customer and to grow our business.
The recent positive news about home sales in our regions, along with our strong position in our markets, gives us real encouragement for a strong second half.
I will now turn the call back over to <UNK>.
Thank you, <UNK>.
I will just make a few comments about our financial highlights from last night's earnings press release, and then we will take your questions.
Within our SG&A, our fixed and discretionary type expenses were $61.4 million for the second quarter of 2016.
That's $2.8 million above the $58.6 million recorded last year.
As stated in the release, we estimate that the full-year total expense for this category will be approximately $252 million, which is about $1 million higher than our prior guidance.
We expect that will translate into increases over the prior year for Q3 and Q4 of approximately $2.4 million to $2.5 million each quarter in this fixed and discretionary SG&A category.
The increases are largely due to depreciation and occupancy costs for new and relocated and remodeled stores, for staffing increases and higher health and benefit expense, as well as inflation.
Second-half sales are normally higher than the first half, so profitability should be impacted less by the fixed and discretionary cost increases in Q3 and Q4 than they were in the first half.
In the health benefits area, although we do have more employees under coverage this year and newer prescription drugs are more expensive, the cost increases have mostly come from higher individual medical claims than in recent years.
The Company is self-insured, but we have stop-loss insurance coverage both on an individual and aggregate basis.
The variable-type costs within SG&A for the second quarter of 2016 were 18.2% of sales, the same as in last year's quarter, and full-year variable costs are also anticipated to run at the same rate as last year's 17.9%.
Our weighted average square-foot changes by quarter for 2016, in the first quarter, we had 1.1% higher average square footage; second quarter, 0.5% higher over last year; the third quarter, we actually have a decrease, slight decrease, in square footage of 0.3%; and the fourth quarter, it will be a 0.7% increase year over year.
So for the full year, the weighted average square footage change will be about 0.5%.
The rest of the year, comp-store sales percent increase is likely to be very close to the total percent increase in sales, since the square-footage increase is fairly modest in the second half of the year.
Our balance sheet for the six months ended June 30 versus the year-end, we had an increase in prepaid expenses of $9.8 million.
That was due to higher payments for estimated income taxes this year and also maintenance agreements for new computer hardware.
The increase in property equipment net was $8.7 million and is due to higher CapEx this year and also one additional leased property recorded on our balance sheet.
Increase in customer deposits of $6.8 million as of 6/30, compared to 12/31, is based on the undelivered sales increase that is typically higher at June 30 than the annual low at 12/31.
We also had a decrease in accrued liabilities of $7.5 million, and that's typical due to payments made for year-end accruals and income tax liabilities.
Finally, the increase in lease obligation was $2.4 million.
As I mentioned, one additional leased store was recorded on the balance sheet.
The topic of our Lubbock store and the gain we had on the property that was destroyed ---+ severely damaged and destroyed, almost, in a blizzard that was on December 27, 2015, it was a better-than-average location for Havertys.
We have very good insurance coverage at replacement value and business interruption is also included in that coverage.
There was a $1.9 million gain recorded in the second quarter.
Year over year for the first half, comparing that operation performance, there was about a $1 million negative operating profit swing that is reflected in lower sales gross margin and continuing expenses.
So, we did have that in the regular part of the P&L, and the gain we had, again, was in other income.
Over the next three quarters, the other income gain is likely to be an additional $2 million.
Up to half of that is likely in the fourth quarter this year and the rest would be in early 2017.
Rebuilding the new store on the same site will cost us approximately $4.3 million and most of that amount is included in our 2016 capital expenditure projection, with the rest of the spend in the first quarter of 2017.
Operator, at this time we will take questions from the audience.
We haven't had any major changes in the last year that I can ---+ we started a lot of this process of upgrading our product and the H Design.
I think that's maturing.
I think some of our product selection is hitting more to the customer.
We are doing more special order and custom, which I think continues to grow.
As far as parts of our territory, Texas is still a drag, particularly the west Texas, the oil part of the state, is a drag.
Some of the other parts of the state are doing better, but overall, it is down.
So I would say that the main difference is that we just are continuing on this upgrading plan and adding the kind of product that our customers are trying to ---+ that we like to our mix, and it is being a little bit more successful.
We were up single digits, so it is not a major issue, but we are seeing some real positives that we are encouraged about.
We do ---+ it is coming down and we do need to move more of it out.
We have a plan to do that.
We are running most of it through our clearance centers and we will be a little bit more aggressive on that in the next several months, but I think our plan is solid and we will get it to the position we want by the end of the year.
It will take a while.
It will be a slow ramp-up.
We are moving product down there now that we couldn't before.
They will be our best sellers to begin with.
I think it will take a while for that to play out completely.
The main thing that will give us within the next quarter or so is a quicker service to the customers there, so hopefully help us just serve the customer and grow our business in Florida quicker.
I think the cost savings won't kick in for a while because it will take a while to offset those loads that we are bringing down from Braselton and the reduced freight, inbound freight, to come through the P&L.
It's pretty promotional out there.
You know that.
We are ---+ consistent with what we did last year, we will be aggressive in a few different areas that we weren't before, but I don't see any major changes.
I think it is all baked into what we are projecting here as far as the cost and the advertising mix that we have given in the past.
It is less than 2%, but it is growing rapidly, so that shows you that it was a minimal number.
It was like 1.5%.
We are getting closer to 2%.
So, it is growing; it will continue to grow.
We are spending more money on digital advertising and trying to reach that customer better, but still most ---+ the great majority of our customers want to see the product in the store, and we encourage that.
Thank you, Operator.
We appreciate the participation and look forward to a good second half.
Thank you for being in attendance.
