Haverty Furniture Companies Inc Q4 FY2020 Earnings Call

Good day, everyone, and thank you for standing by. Welcome to today's Haverty Furniture Companies, Inc. Fourth Quarter and Full Year 2020 Financial Results. Today's conference is being recorded. And at this time, I'd like to turn the floor over to Richard Hare, CFO.

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 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.

Good morning, and thank you for joining our 2020 fourth quarter and full year conference call. 2020 was a disruptive and wild year for Havertys, our industry and our communities. After closing our stores in mid-March and reopening most of them May 1, we came back exceptionally strong and fought to complete deliveries and reduce our record backlog of undelivered sales. For the second half, we were very lucky and especially blessed to be part of the homebody economy, where the entire country focused on making their homes safer and more comfortable to ride through the pandemic. We broke Q4 records with sales of $241.3 million, up 12.9%; and earnings per share of $1.37 versus $0.31 in 2019. Several trends come to the forefront: higher gross margins due to better pricing discipline, fewer promotions, lower markdowns and more special orders, an overall trend that we expect to continue; lower SG&A of 44.3% of sales compared to 50.8% last year with shorter store hours and reduced staff. Our largest markets produced at record levels and were major profit contributors. Internet sales were our highest producing store at 4.3% of sales since reopening; buy online, pick up in store is running at 16%, up triple over past years, which, along with significant chat, increases or new growth and service factors. Written sales continued to grow faster than our delivered sales with double-digit gains. Undelivered sales backlogs are at record levels due to suppliers experiencing across-the-board shortages of materials, labor and import containers. We're very excited about next week's opening of our first store in Myrtle Beach, South Carolina, a market that we have served from surrounding locations but did not have a physical presence. We're opening a store in Central Florida in The Villages midyear and are planning an additional store in an existing market in the fourth quarter. We expect to have one store closing and end the year with 122 stores. We are studying all our major markets closely to make sure that we are well positioned for growth in the future. With our strong store position and brand recognition throughout our regions and over half our stores in Florida, Texas and Georgia, we are well located in the fastest-growing markets in the country. 2021 should be the year to finally reach and exceed our long-term productivity goal of sales over $200 per square foot.

Thank you, Clarence, and good morning. In the fourth quarter of 2020, delivered sales were $241.3 million, a 12.9% increase over the prior year quarter. Comparable store sales were up 13.7%. Total written sales for the fourth quarter of 2020 were up 16.7%, and written comparable store sales were up 17.5% over the prior year period. Our gross profit margin increased 280 basis points from 54.2% to 57% due to better merchandising mix and less promotional activity. Selling, general and administrative expenses decreased $1.6 million or 1.5% to $107 million and fell to 44.3% of sales from 50.8%. This was due to reduced advertising and occupancy costs, which were partially offset by increased selling and incentive expenses.

It looks like first up, from Sidoti & Company, we have Anthony Lebiedzinski.

I would like to revisit the fourth quarter and get an overview of how your same-store sales performed during that time. Was there a steady decline throughout the quarter, or did any specific month experience significantly higher sales growth compared to the others? I'm interested in understanding the progression of those sales.

Sure, Anthony. This is Richard. So just in terms of the cadence in the fourth quarter in terms of delivered sales, we were up in the plus 20% range in October. We were actually down mid-single digits in November and then up in the plus 20% range in December. So that was kind of the cadence of the delivered sales in the quarter.

Got it. Okay. And then in terms of the traffic versus ticket and then just curious also about the customer order penetration, where you guys are now?

Well, our average ticket continues to go up. We're doing a little more special order and more custom and I think that will continue to be a big driver as we are able to get more decorators in people's homes. And also, I think we're just selling a more custom product and just doing a better job of better quality. Traffic has been up, which is something, as you know, over the last several years has been a challenge. So we're very pleased to see that. And our closing rate has been up consistently all during this pandemic because I think anybody coming into the store is more focused on buying and not shopping or they've already done the pre-shopping.

Okay, great. That's good to hear. Yes. In terms of the supply chain constraints, you mentioned mattress sales in the release, but overall, Clarence, could you go over which product categories are experiencing the most issues with inventory availability?

We are facing challenges in domestic upholstery mostly due to labor and supply issues. Additionally, the import situation, particularly with containers, remains a significant concern. However, I believe we are in a better position now with our best-selling products. We have been able to maintain a steady flow of these items, even at a premium cost. Currently, our inventory levels for top-selling products are in the best shape since last summer, and I expect this to improve in the months ahead. With Chinese New Year upon us, we have a good number of containers on the way, but we are also dealing with the highest backlog we've ever experienced. Despite these challenges, I feel we are managing well, and we maintain strong relationships with our vendors and suppliers. We are willing to pay extra to ensure we can meet our customers' needs.

Got it. Okay. And then I have a couple of last questions. You mentioned that you're paying a premium to have those products delivered. Do you believe you will be able to recover that cost with higher retail prices? And finally, could you provide some details about the backlog?

We are increasing prices as we need to recover costs. We believe freight costs will decrease later in the year. As Richard mentioned, we are anticipating slightly lower margins this quarter and into the second quarter due to these costs. However, we expect the situation to improve in the latter part of the year, possibly sooner. We will make efforts to implement those price increases, although there are some products for which we may not be able to do so. It is essential for us to recover those costs for our investors.

Got it. Okay. And then as far as the backlog, is there a way you guys could quantify? Maybe I missed that if you say. I know it's a record high, but did you give a dollar amount for the backlog?

It's a record high. We have not given that number out, but it's several multiples higher than last year.

And next question will come from Brad Thomas with KeyBanc Capital Markets.

Congrats on strong execution in a challenging year and all the momentum in the business right now. I wanted to ask a little bit more about working through the strong backlog. And how long do you think at this point it might take for the supply chain to catch up with the demand that you've been seeing? Is this something that we should expect to continue through 2Q as well?

Well, it will go through the summer. I mean we are already placing orders that we know that we won't get till summer. And Chinese New Year, we still have product over there that we didn't get out and that's going to be a challenge, as you've seen for the rest of the industry. I think that by the fall, this should be settling down. But I know the industry has a huge backlog, and I think we've got a relationship. And as I mentioned, we're willing to pay to get the product where it's necessary. But it's going to carry over through the summer, I would think.

Yes. I understand that you're not providing sales guidance. However, looking at the last two quarters, you've achieved over $200 million in sales, with more than $240 million in the most recent quarter. Considering the backlog you currently have, can we reasonably expect you to work through that backlog and potentially generate over $200 million in sales over the next couple of quarters if the demand remains strong?

But I know you're not asking about sales.

Exactly.

I would just say that we have a strong backlog, which is promising for 2021. We are dealing with supply chain issues like everyone else, but I believe we are in a favorable position in managing our supply chain compared to some of our peers.

Okay. Fair enough. And as we think about some of the gross margin puts and takes, and I appreciate the guidance. You did guide that. You commented about some issues like freight. Can you help us think about the magnitude of maybe how much headwind and basis points you may be looking at as you consider freight and perhaps promotions at some time returning to normal?

Yes. We finished the year with a total of 56%. In the fourth quarter, margins reached 57%. We are facing freight challenges as we move into 2021, and it's clear from various reports how much more expensive freight has become. Although we have contracted freight rates, the volume has necessitated additional shipments, and those rates are much higher than our contracted rates. This is taken into account in our guidance of 55.3% to 55.8% for 2021. Alongside these freight challenges impacting margins, we also need to consider LIFO. For reference, in 2019, we experienced price pressure on costs from tariffs, and our LIFO reserve changed by $1.8 million, while it was about one-third of that in 2020. Therefore, we must consider potential LIFO impacts on margins for 2021. As the year progresses, I hope to refine that guidance, but for now, this is the best forecast we can offer.

Okay. Great. And then just circling back on some of your comments on the mattress category. It sounds like you dealt with some inventory challenges there. What categories is that in specifically? And what line of sight do you have on that area improving for you?

Well, our mattress business has been challenged with just capacity and supplies. It has improved recently, and we commented on that. The steel was an issue. I think there's still a drag there, but it's improved over what it was last quarter. So we feel better about it. It's improving. But it is still a challenge to get the product in the right mix at the right time.

If I could squeeze one more in just with the topic dominating the news here of the weather. Really unusual times. Can you give us any comments on if kind of that presents much of a risk around that President's Day weekend and around deliveries?

Yes. It hit us pretty hard. We were down about 1/3 of our stores or 30% of our stores for at least 4 days and they're still down. And the same thing goes with our deliveries. Our deliveries, we weren't able to get out about 30%. Very heavily impacted, as you know, in Texas and still are. We probably can't get open in many of those stores this weekend. And it did hit over the most important event of the quarter, which is President's weekend. So that has impacted us. It still impacts us. We're struggling with a lot of our own stores. But we're concerned about our associates, our team members, their houses. They don't have water. They don't have heat. The same thing applies to our customers. And this next storm is coming through now and will hit us in the east, in the Virginia, D.C. area. So we are impacted now. It's wintertime, it happens. It's rare that it happens like this over a holiday weekend. But we mentioned in our comments that our written business is up double digit and that includes where we are today. So there's a drag. There's an impact. We're concerned. But we feel pretty good about where our business is.

And ladies and gentlemen, with no further questions remaining in the queue, I'd like to turn the floor back to Mr. Richard Hare for any additional or closing remarks.

Well, thank you for your participation in today's call. We look forward to talking to you in the future when we release our first quarter results.

All right. Ladies and gentlemen, that will conclude our call for today. We do appreciate you joining us. You may now disconnect.