Good day, and welcome to the Haverty's Second Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Hare. Please go ahead, sir.

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 Securities and Exchange Commission. Our President, CEO and Chairman, Clarence Smith, will now give you an update on our results and provide commentary about our business.

Good morning. Thank you for joining our Q2 conference call. As we previously released, our stores and distribution teams were closed the entire month of April due to COVID-19 to comply with government and CDC requirements, to protect our team members and customers. Sales for the quarter were $110 million compared to $191 million in Q2 2019. We were pleased to open most of our stores May 1, operating with a limited staff. Our distribution and delivery teams began delivering later that week. We quickly realized a much stronger demand than we expected. May and June written sales were up 13.9%, with comparable store written sales up 7.5%. Our delivered sales were down 13.4% for that same period, because we were scrambling to build back our delivery and distribution staff and bring in oversold products from vendors who had closed also during the quarter. We now have a very strong backlog of orders. This dramatic reversal of direction was unprecedented for Haverty's and the entire industry. We found ourselves in the interesting position of not only playing defense but now playing aggressive offense. And we've been doing a lot over the last several months. Clearly, the importance of home is a major trend. A recent article from McKinsey used the term, the homebody economy. We are in a sweet spot for now. We're working very closely with our vendors to prioritize shipments, while we're having to pay increased wages for our distribution and delivery team members to handle the product. Ramping up our delivery and receiving to match our written business is a difficult challenge, but we feel that we'll be able to service and supply our customers better than most of our competitors in the coming months. Most of our current key statistics look very good. We're seeing traffic, written average ticket, sales per square foot, closing rates, and gross margins at record levels. This is creating record sales with a significantly reduced staff and reduced store hours. Because of COVID-19, we have a challenge with our designers with home visits while we're doing more virtual and 3D room planning and getting excellent responses and feedback. This double-digit sales pace continues if the customer stays focused on making their home a top priority and if we operate at higher performance levels. We know that there will be change. And because of the problems with getting product, there will be some cancellation issues. But we are in an energizing time, with the possibility that we could see long-term prioritizing of home over other areas. These times have required us to change in many areas, and most of that is a good long-term adjustment. The changes we're making will be good for our future business. What we do not know is what COVID-19 will do and whether we'll have to adjust or close in the months ahead. If that happens, we will be in a much better prepared position and less impacted than we were in March and April. Our cash management and exceptionally strong balance sheet will put us in a sound position to deal with the ongoing uncertainty from COVID-19 as we strive to deliver exceptional performance in our industry. We have a special opportunity that we've not seen in decades to make the kind of breakthrough that we have believed we should be producing. We are well positioned to make that breakthrough happen. We're extremely proud of our teams in all of our regions who have continued to focus on serving our customers and delivering a resilient performance these past months. We're very encouraged by the current business conditions and optimistic these trends will continue through 2020 and into 2021. I'll turn the call back over to Richard Hare.

Thank you, Clarence. In response to the COVID-19 pandemic, we closed all of our retail locations on March 19 and halted deliveries on March 21 in the first quarter. Our stores began to reopen on May 1, with deliveries ramping back up beginning on May 5 with reduced capacity. The closures and subsequent reopening and delivery activities had a significant impact on our financial statements during the quarter. In the second quarter of 2020, sales were $110 million versus $42.7 million, with a 42.7% decrease over the prior year quarter. Our comparable store sales metrics are not meaningful since our stores were closed for a period of time during the second quarter of 2020. Our gross profit margins increased 20 basis points from 54.0% to 54.2% due to merchandise pricing and mix and fewer markdowns. Selling, general, and administrative expenses decreased $23.1 million, or 24.2%, to $72.6 million. This decrease reflects the measures taken as a part of our business continuity plan. In general, we had less selling expenses as our stores were closed in April, reduced salary and benefit expenses, and decreased marketing and advertising costs. We furloughed over 3,000 team members on April 1 and covered the health care premiums for these individuals, which totaled $2.1 million. Effective April 30, we instituted an approximate 35% headcount reduction and incurred $1.7 million of severance costs. During the quarter, we reduced marketing and advertising expenses by $3.5 million over the prior year quarter as our operations were temporarily shut down in April. During the second quarter of 2020, we recorded a $31.6 million gain on our previously announced sales leaseback transaction on three of our warehouse distribution facilities. This transaction generated gross sales proceeds of $70 million and further solidifies our company's liquidity and positions us very well for the future. We recorded net interest expense of $200,000 in the second quarter of 2020 versus interest income of $339,000 in the second quarter of last year. During the second quarter of this year, we incurred interest costs associated with drawing down on our revolving credit facility. Income before income taxes increased $10.4 million to $18.6 million. Our tax expense was $5 million during the second quarter of 2020, which resulted in an effective tax rate of 26.8%. Net income for the second quarter of 2020 was $13.6 million or $0.72 per diluted share on our common stock compared to net income of $6 million or $0.29 per share in the comparable quarter last year. Excluding the gain on the sale of our properties, our adjusted earnings per share was a $0.52 loss. Now turning to our balance sheet. At the end of the second quarter, our inventories were $104.8 million, which was flat with our December 31, 2019 balance and down $4.4 million versus the second quarter of last year's balance. We ended the quarter with $151.1 million of cash and cash equivalents. During the quarter, we paid off the $43.8 million previously drawn on our revolving credit facility. Accordingly, we have no funded debt on our balance sheet at the end of Q2 of 2020. Looking at some of our uses of cash flow. CapEx was $1.8 million for the second quarter of 2020 and $4.3 million for the first half of this year. We also paid $2.8 million in the second quarter of 2020 and $6.6 million in the first half of 2020 on regular quarterly dividends. As stated in our earnings release, our Board of Directors authorized and declared the company's third quarter dividend will be increased back to $0.20 per share on the common stock. This represents a 33% increase over the reduced $0.15 per share that was paid out last quarter. If you recall, our Board of Directors reduced the second quarter dividend by 25%, from $0.20 to $0.15 as a part of our business continuity plan. In addition, the Board approved the resumption of the company's stock repurchase plan that was suspended in March, also as a part of our business continuity plan. We purchased $6.8 million of common stock during the first quarter of this year, and we had no buyback activity in the second quarter. We have $29.7 million remaining under current authorization in our buyback program. Due to the uncertainty of the pandemic, we are no longer providing guidance on our gross margin or SG&A expense expectations. Our planned CapEx for 2020 has been increased to $9.6 million. Our original CapEx budget was $17 million, and we dropped it to $5 million at the end of the first quarter of 2020. This revised budget includes additional repairs and maintenance expenses, IT upgrades focused on stores and distribution facilities. We will open one new location in the Dallas Fort Worth area in 2020. We closed an outlet store in the Atlanta market in the first quarter and closed another location in the Dallas Fort Worth area in July as a part of our original store planning. So our square footage is going to be slightly lower at the end of this year. We expect our overall tax rate in 2020 to be approximately 25%, excluding any impact from the vesting of stock-based compensation awards or other discrete items. Our federal tax rate is expected to be 21%, and state and local taxes make up the remaining difference. This completes our commentary on the second quarter financial results. We appreciate your participation in today's call. And operator, I'd like to ask you to open up the call for questions.

Thank you. Our first question will come from Brad Thomas with KeyBanc Capital Markets.

Hey good morning Clarence and Richard. This is Andrew on for Brad.

Good morning.

I appreciate the detail you all gave on May and June. But I guess given the changing environment, could you give us any more color around what written trends have looked like in recent weeks and maybe in July?

The trends are consistent with what we released about Q2. The trends are continuing.

Okay, understood. And assuming the workforce-related supply constraints continue, I would expect there might be less promotional activity in the coming months and maybe higher gross margins as a result. Is that the right way to think about it? If inventory…

Well, we're not constrained. We're not going to give any margin estimates, as Richard said. But I will say that with the demand we have, we won't be more aggressive. We still promote, and we want to be strong in the market, particularly around Labor Day, which we always are, the most important holiday of the year. But we don't see the need to be more aggressive than what our historic plans have been. And I would say that's a philosophy we'll probably carry through for the rest of the year.

Okay, understood. And in regards to these workforce challenges, I just wanted to clarify. This is mostly – or if not all, on the supply chain level and the production level and not in – not within the stores?

I’m sorry, you’re saying this is mostly a supply chain issue. Is that the question?

Yes. So I'm just wondering if the workforce-related challenges is also extended at the store level with employees.

Okay. It is a supply chain issue, but also getting the deliveries out is a challenge. We've hired back to certain levels, but we cannot get enough drivers right now to keep up with the sales we have. So we've increased that. We feel good about the position. We're still hiring. It is a challenge to get people to come back with some of the federal incentives out there, but we're working on that. We feel that we have a good plan. But I don't think that we'll catch up to what our written delivered businesses are, not only because of the tough time in hiring enough drivers but in getting the product. So right now, it becomes a product issue. We're working very closely with our vendors. We've got over $100 million in orders out there. We feel good about our relationships with our vendors, but catching up is going to be a challenge over the next couple of months.

Okay, understood. Thanks for the detail. That’s all from me. Thank you.

Thank you, Andrew.

Thank you. Our next question will come from Anthony Lebiedzinski with Sidoti & Company.

Good morning and thank you for taking the questions. So as far as your delivery times to the customer, what are those on average? And how are you guys positioned versus your competition?

I think we're in a better position than most of our competition, frankly, as far as getting the product. We started very early with our ordering back right at May 1. We realized quickly that the demand was stronger than we anticipated. We've got extremely strong vendor partnerships. We have terrific partners, particularly domestically that are dedicated a great deal to us. The Mississippi suppliers have had issues with some labor for the same reasons I just talked about our drivers. But I think we're getting strong shipments. We feel good about our position in comparison to most of the industry. We've had long-term partnerships, and I think that we'll get the shipments as promised, but it will take us a little while to work through that. We're also having to place orders now for Chinese New Year and actually for orders beyond Chinese New Year, and those are in production or in placement now. And I think that we'll be able to get the shipments as well or better than most of our competition.

Got it, okay. And then in terms of the delivery times, I mean what are your typical customers expect?

Yes. We have historically wanted to be able to deliver within a couple of weeks. We've realized that people are willing to wait. They have to wait. And we're currently out a month. In some cases, we want to get back to a point where we can deliver within two weeks, but that's going to be into the fall before we get there. I mean we've got Labor Day coming up. We're backlog now. But we have not seen from our customers a feeling of cancellation. They understand better than we expected. They know that there are issues in getting product, and they're willing to wait. So we feel pretty good about that. And I hope that we can continue to feel good about that through the fall.

Right. So you mentioned as far as the stimulus programs and the labor constraints. But as far as the government stimulus programs, do you think that has had much of an impact on the demand that you have seen? Or is your custom not really with the new stimulus money?

Yes, it has had an impact on us. It's definitely had an impact on our suppliers domestically, particularly, as I said in Mississippi, we hear it all the time that they're having trouble getting people to come back because the pay they're receiving from the government, in many cases, is better than they would have before. So we're working through that. We're having to pay more in our warehouse and delivery to get the workers back. It is definitely a challenge, and I think it's going to continue to be a challenge, particularly as the government continues to pay out those cash payments.

Yes right. But as far as the end consumer demand, what do you think has been the impact of the stimulus money as people are getting that?

Yes. I think the stimulus has helped. And people are sitting at home, watching what’s going on in their own homes, and they want to spend it there, and they're probably not being able to spend it elsewhere. So I think the cash stimulus has definitely helped, and I think it will be a factor. Our customers are a little different than the ones who are living only on unemployment, but it's definitely been a factor. I mean there's a lot of cash out there.

Yes. And we've seen a slight decline in the use of credit, not much, but slight. So I'm not sure if that's a trend or not, but it seems to be a healthy consumer demand at the moment.

Got it, okay. Understood, okay, all right. And then just curious as far as which products or product categories have you seen the most uptick in demand? And you also talked about the possible inventory situations that you may have. So just curious as which – where are you seeing the most demand?

Upholstery has been the strongest category. People are in their family room, they want to have that upgraded and updated. And I think that's the strongest area. We've had some supply issues in some of the mattress category because some of those materials are PPE-related materials, and they're restricted. So some of our mattress and bedding suppliers have had issues getting production to us on a timely manner. But we've had a pretty good increase. Richard?

Yes, and if you look at the Note G in the 10-Q, you can see that the occasional category, the percent of sales has gone from last year for the quarter was 7.6% up to 10.2%. That's a lot of the office furniture, and it's going in the opposite direction. Mattresses have come down from 11.5% of sales down to 9.4%. Accessories have decreased slightly in that same category. So the occasional category really has jumped up in the quarter. And then obviously, bedroom furniture, too, to a lesser degree.

Got it. All right well thank you and best of luck.

Great, thank you Anthony.

Thank you. I am not showing any further questions in the queue at this time. I would now like to hand the call back over to Richard Hare for any closing remarks.

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