Haverty Furniture Companies, Inc. Q1 FY2024 earnings call

• Q1 sales were down 18.1% to $184 million, with comparable store sales down 18.5%, but gross margin was 60.3% and pretax profit was $3.2 million. - The Board approved a 6.7% increase in the quarterly dividend, marking the 12th year of consistent dividend increases. - Well-prepared for the Memorial Day event with energized marketing plans, new products, balanced inventories, and new in-store signage. - Boasts a strong balance sheet with over $100 million in cash. - Investing in store growth, aiming to open 5 new stores in 2024 and 5 in 2025; recently opened stores in South Haven, Mississippi, and has plans for Florida and Houston markets. - Design business saw over 10% growth in total dollars for the quarter, with average design ticket up over 3% and number of customers engaging with the design program up over 19%. - Supply chain network operating without significant disruptions, with new freight rates negotiated for 2024. - Changed media planning and buying partner to Carmichael Lynch Media effective April 1 to improve targeting and efficiency. - Rightsizing staffing through attrition to align with current business conditions.

In the first quarter of 2024, Haverty's net sales were $184 million, a 18.1% decrease compared to the prior year quarter. Comparable store sales dropped by 18.5%. The gross profit margin increased to 60.3% from 59.1% primarily due to product selection and merchandising mix. Pretax profit was $3.2 million, down from $15.4 million in the prior year's first quarter. Inventories at the end of the first quarter were $92.1 million, down from year-end and the prior year's first quarter. Cash and cash equivalents stood at $111.8 million with no funded debt on the balance sheet.

• Expected gross margins for 2024 to be between 60% and 60.5%. - Fixed and discretionary SG&A expenses for 2024 are projected to be in the $290 million to $292 million range. - Variable-type costs within SG&A for 2024 are expected to be in the range of 19.9% to 20.2%. - Planned CapEx for 2024 remains at $32 million, with $27 million allocated for new replacement stores, remodels, and expansions, $2.5 million for the distribution network, and $2.5 million for information technology. - Anticipated effective tax rate in 2024 is 26.5%, excluding the impact of stock awards vesting and new tax legislation.

• The furniture industry has been impacted by a falloff in demand following the COVID-related sales surge, with many players struggling to survive. - Housing market conditions and interest rates significantly affect Haverty's business as home sales in the South are closely correlated to its operations. - Major debt positions combined with higher interest rates pose a risk of bankruptcy for competitors and potentially the company if not managed properly. - Potential supply chain disruptions from issues like port turmoil or Red Sea conflicts, though currently not significantly impacting Haverty's.

Q: Into the decision to enter the Houston market again. Maybe can you elaborate on why you chose Houston and the opportunity you see there?

A: Clarence Smith stated that Houston is the largest market in Haverty's distribution footprint. They have a good lease on a former Bed Bath & Beyond store in the Woodlands area and another in Baybrook Village, with plans to expand over the next several years to serve growth areas in Houston.

Q: And then as a follow-up, maybe if you could just comment on the competition and promotion you're seeing out there in the industry how promotional are some of your competitors getting in this market environment? And then maybe a quick comment on just any price increases you've been able to put in place.

A: Steve Burdette said they haven't noticed a change in competitors' promotion and pricing cadence, credit promotions are being tightened, and they changed media partner to Carmichael Lynch Media to drive traffic with individualized market plans.

Q: Nice to see the balance sheet strength here and the dividend increase as well. So I know you touched on it a little bit, but just wanted to see if you guys can quantify as far as the trends in the written business. You mentioned that February and March was better than January because of the weather. So if you could just maybe go over the numbers if you could. And also, I don't know if this is significant to you guys or not, but Easter fell earlier this year than last year, did that have any notable impact on the business?

A: Richard Hare said written business was down almost 20% in January, down about 8% in February, and down about 5% in March; Steve Burdette noted the Easter effect was offset by the leap year effect, with combined decline of a little less than 7%.

Q: I know these are challenging times for the industry as you noted, Clarence, and you talked about expecting to see more disruption and we've seen enough of it already. Are you seeing any of that with your suppliers? I know -- Steve, you mentioned you got 4 to 7 weeks and good supply pattern with your suppliers, but I'm just curious to see if you can give us any more color that you may be seeing.

A: Steven Burdette said he hasn't seen anything disrupting direct suppliers' flow of product, though concerned about Liggett release, but no issues with main suppliers.

Q: I wanted to ask about the industry or revenue assumptions behind the guidance? And maybe Clarence, you can touch on, it seems like the order trends were -- got a little bit better, less and worse as the quarter progressed, but at the same time, you talked about the challenges in the industry in some business, some companies going out of business. So do you think we should expect similar trends as we saw in the first quarter or we're getting closer to that point where there could be an inflection in demand at some point this year?

A: Clarence Smith said they thought things would be better in the second half, but there's no visibility on an immediate positive inflection, with the industry still facing difficulties across the board.

Q: I wanted to ask about the merchandising. So last call, there was some talk about how lower and the introduction and expansion of that category. Any comments on the early reads, how that's doing? Or any other merchandising initiatives we can track for the rest of the year?

A: Clarence Smith said the outdoor category is in about half of the stores with early positive results, upholstery is performing well, special order business is up 13.5%, bedroom and dining room have been softer, bedding is stable, and new product is coming in.