Greetings and welcome to Haverty’s Fourth Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Richard Hare, Chief Financial Officer. 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 SEC. Our Chairman and CEO, Clarence Smith, will now give you an update on our results and our President, Steve Burdette, will provide additional commentary about our business.

Good morning. Thank you for joining our 2023 fourth quarter and full-year conference call. Our fourth quarter sales were $210.7 million, down 24.9%. Total written sales were down 13.1% and written comp-store sales declined 14.3% for the quarter. Total sales for the year were $862 million and $132 million, down 17.7% from 2022. Our current sales performance returned to the pre-COVID sales trends we experienced in 2019 and 2018. In the fourth quarter, our teams did a solid job in expense control, higher gross margins, and excellent inventory management. Improvement in average ticket designer sales and maintaining high-quality service helped produce pre-tax margins of 8.7% and $18.5 million. For the full year, we produced $72.7 million pre-tax earnings versus $119.5 million in 2022. Following record sales and profit years post-COVID, the furniture industry was first hit by consumer spending on travel and entertainment and by most recently, the higher mortgage and interest rates, which significantly impacted housing sales. For Haverty's, home sales in the South have historically been highly correlated to our furniture sales. Currently, home sales have been at historic lows and have clearly impacted our customers' interest in buying furniture. These trends are reflected in our recent performances. We're encouraged that we believe that home sales seem to have bottomed out after dramatic declines. It is evident now that we've experienced a two-year pull forward of furniture and accessory sales due to COVID and now have experienced a two-year falloff in sales. Our teams have done a fine job in reducing our costs in reaction to weakening sales trends and adjusting across all areas of our business. Our headcount compared to 2019 pre-COVID is down from approximately 3,500 to 2,500 team members making similar sales volume. We're continuing to evaluate all areas of our business for opportunities to consolidate and add productivity. We focused on serving our customers better with improved in-store and online technology, strengthening of our design service, adding customization in special order products, and upgrading our product lines. All these areas will continue to separate us from the more promotional players in our markets. The acquisition of four former Bed Bath & Beyond locations are on track for converting to Haverty stores in the first half of 2024. All these stores are in adjacent markets to current Haverty stores, and we're leveraging existing management. We're currently training staff in nearby stores to prepare for the spring, early summer openings. We're very pleased with the three important Florida stores and one store outside Memphis in South Haven, Mississippi. We're in due diligence on several additional opportunities, including other former Bed Bath & Beyond locations in our regions and expect to meet our goal of five new stores per year in 2024 and 2025. Our plans are to add stores in adjacent and existing markets within our distribution footprint. This could expand to several states from our soon-to-be-17th state. We have several sites and locations we're evaluating and expect to see additional store opportunities soon from retailers struggling with sliding sales and refinancing debt. Haverty's financial strength with zero funded debt and over $100 million in cash, allows us to continue to invest in new stores and upgrading stores and systems to better serve our customers. We continue to focus on helping our customers' vision of their home come to life. We have a long history of gaining market share and building on our strengths in difficult times. We believe that we are especially well positioned to grow our business in many of the fastest-growing markets in the country in the near term and into the future.

Thank you, Clarence, and good morning. Our fourth quarter and 2023 yearly results were certainly below our expectations, but we are proud of all our team members for providing what turned out to be our third-best year for the company in sales and operating profits. Store traffic continues to be a struggle in all markets as we battle the headwinds of high interest rates along with the worst housing market in 30 years. However, we continue to see our design business and product assortment driving our overall average ticket as it increased low-single digits for the quarter and year. Also, our closing rates remained strong but were down low-single digits for Q4 in the year. Our supply chain network has not built any impact yet that would affect our business from the geopolitical issues in the Middle East. We have seen some extended lead times due to the shipping lanes being adjusted due to the inability to use the Suez Canal, but the impact on our customers and inventories is minimal. Our inventories are in excellent condition and were down at year-end by approximately 20%, with backlogs remaining consistent. Our special order business continues to remain strong with an increase of over 31% in Q4 and over 40% for the year. Our design business continues to be a big driver of our business as it continued to grow to over 31% of our total business in the quarter and approximately 29% of our business for the year. Designer average ticket continues to grow at high-single digits, and we are encouraged that we've been able to grow the number of customers that are engaging with our designers by 15% in Q4 and by 8% for the year. There is still tremendous opportunity for us in our design business as we see the chance to grow double digits by increasing the percentage of engaged customers and their average tickets. We have enhanced our marketing campaign, 'We furnish happiness,' to include a regret-free experience. This messaging circles around four pillars that we feel are key to our customers' happiness and experience: choices, quality, design, and service. We have built our company's success over the last 138 years by instilling a culture of not selling a customer one time but selling a customer for a lifetime. We believe in our products, our team members, our systems, and our execution. At the same time, we are continuing to right-size our staffing to match our current business conditions through attrition in all areas of the business. Extended financing continues to play an important part in our holiday events each quarter as we manage these costs.

Thank you, Steve. In the fourth quarter of 2023, we reported net sales of $210.7 million, a 24.9% decrease over the prior year quarter. Comparable store sales were down 25.5% over the prior year period. Our gross profit margin increased 540 basis points to 62.4% from 57% due to reductions in freight, a positive LIFO inventory adjustment, and pricing discipline. SG&A expenses decreased $13.8 million or 10.7% to $114.7 million. As a percentage of sales, these costs approximated 54.4% of sales, up from 45.8% in the prior year quarter. We experienced decreased selling costs, advertising, distribution, and transportation expenses during the quarter. Other income and expense in the fourth quarter of 2024 was negligible, and interest income was approximately $1.8 million during the fourth quarter as we earned more on our cash deposits due to higher interest rates. Income before income taxes decreased $14 million to $18.5 million. Our tax expense was $3.5 million during the fourth quarter of 2023, which resulted in an annual effective tax rate of 22.5%. The primary difference in the effective rate and the statutory rate is due to state income taxes and the additional tax benefit from the impact of the vesting of stock awards during the year. Net income for the fourth quarter of 2023 was $15 million or $0.90 per diluted share on our common stock compared to net income of $23.7 million or $1.42 per share in the comparable quarter last year. Now turning to our balance sheet, at the end of the fourth quarter, our inventories were $93.9 million, which was down $24.4 million from December 31, 2022, and down $8.4 million versus Q3 2023. At the end of the fourth quarter, our customer deposits were $35.8 million, which was down $12.1 million from December 31, 2022, and down $10.5 million versus the Q3 2023 balance. We ended the quarter with $120.6 million of cash and cash equivalents, and we have no funded debt on our balance sheet at the end of the year. Looking at some of our uses of cash flow, capital expenditures were $53.1 million for the calendar year of 2023. As a reminder, we repurchased our Florida distribution facility in the second quarter for $28.2 million. In addition, during 2023, we paid $19.1 million in quarterly dividends and $16.1 million in special dividends. During the fourth quarter, we purchased 122,850 shares of common stock under our existing stock buyback program for $3.7 million. We have approximately $13.1 million of existing authorization in our buyback program. Our earnings release lists out several additional forward-looking statements, including our future expectations on certain financial metrics. I'll highlight a few, but please refer to our press release for additional commentary. We expect our gross margins for 2024 to be between 59.5% and 60%. We anticipate gross profit margins will be impacted by our current estimates of product and freight costs and changes in our LIFO reserve. Our fixed and discretionary type SG&A expenses for 2024 are expected to be in the $295 million to $297 million range. The variable-type costs within SG&A for 2024 are expected to be in the range of 19.9% to 20.2% with the increases over 2023 primarily being inflation-driven. Our planned CapEx for 2024 is $32 million. Anticipated new or replacement stores, remodels, and expansions account for $27 million. Investments in our distribution network are expected to be $2.5 million, and investments in our information technology are expected to be approximately $2.5 million. Our anticipated effective tax rate for 2024 is expected to be 26.5%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes my commentary on the fourth quarter financial results. Operator, we would like to open up the call for questions at this time.

Thank you. Our first question comes from Anthony Lebiedzinski with Sidoti. Please proceed.

Good morning gentlemen and thank you for taking the questions.

Good morning.

So first, yes, can you talk, please, about the cadence of your written sales as the quarter progressed? And just wondering if you saw any notable changes in terms of different geographies or different regions?

Sure, Anthony. No significant changes in geography or regions. But in October, our orders or our written business was down almost 21%. Then in November, it was down slightly over 9%. And then in December, it was down around 11% to 12%. So for the quarter, around 13.1%. Deliveries were pretty consistent. They were down in the mid-20s basically each month of the quarter.

So just wondering as far as the big change between October and the rest of the quarter, was this just more people buying stuff around the holidays? Or like anything you can share as far as what drove the 21% decrease in October than you were, I guess, less bad in the rest of the quarter?

I think it really returned to normal. A 21% decline was quite significant. It just evened out, to be honest.

And also, we're seeing the business, Anthony, around the holiday events certainly after Thanksgiving, Veterans Day, certainly, were more driving the factor and driving the number and then heading into the holidays of December. And some of the comparables in each month could have been different from year-over-year.

And one of your peers said yesterday during its conference call that they were hurt by severe weather in January, though they said their Presidents' Day sales were somewhat better. Can you share with us anything like directionally as far as how the current year has started for you?

Yes. We don't like to give input on the current quarter, but I will say, clearly, the weather was a factor. I mean, it hit us just like it hit anybody that was trying to operate. We had bad weather, particularly in the mid-South area, but it did affect us. We're not giving any numbers out yet on this quarter.

But just wondering if you also saw that impact as well. And then, Steve, you talked about rightsizing of staffing. Can you share with us as far as like what your employee count was whether at the end of the year or like where it is now? And how does that compare to the prior year? Obviously, four years ago, when you had the COVID pandemic initially hit, you guys did a big cut to your employee base then you rehired some people. So can you just share us like some perspective as to how you're structurally different than where you are now versus pre-pandemic levels as far as the employee count?

Yes, we're down, if you go back to pre-pandemic Anthony, we're down about 1,000 associates. And then from last year, we're down about 250 million is the number. And we're continuing to make sure we right-size it to the business where we are.

And then lastly for me before I pass it on to others. So Steve, you also mentioned that you're experimenting, I guess, with some new alternative financing programs. Can you expand on that, give us some additional color?

Yes. We made a decision to start utilizing 48 months instead of 60 months. We also adjusted some of our minimum purchases and down payment percentages in line with this change. We've managed that cost, and so far, we implemented some of this in the fourth quarter. We haven't seen any impact on the business from this move, and it’s more cost-effective for Haverty's.

Understood. Well thank you very much and best of luck.

Thanks, Anthony.

Our next question comes from the line of Michael Legg with The Benchmark Company. Please proceed.

Thanks. Good morning. Wanted to follow up a little bit on the financing question. What percent of your sales were financed? And then of the consumers who tried to finance, what did you see from the approval rate versus historic trends?

We haven't really seen, Michael, a change. This is Steve. And any of the approval rates is where it is. And our businesses continue to remain around one-third of our business is on credit. So we haven't seen a change there.

Okay. And then promotion in the industry, can you talk about what you're seeing from competitors in your area?

Yes. There are definitely some competitors becoming more aggressive in pricing and offering promotions, but we are focused on providing value to our customers with a quality product. Therefore, we are not chasing prices. We have worked hard to maintain our margins, which Richard has guided to be in the range of 59.5% to 60%. We remain confident that this will enable us to sustain our promotional cadence for consumers and offer consistent values to our customers. While we have noticed increased aggression at the lower end of the market, the overall usage and visibility of promotions have remained constant, with no significant changes.

Okay. And then we have the store growth that with the Bed Bath & Beyond leases that you took over previously, we had mentioned that you have been looking at some out of the auction on your own. What's your viewpoint now is still going after new stores that you don't have already?

We are planning to open five stores this year. Currently, we have four stores ready to go, and we'll be closing one store at the end of the first quarter as previously announced. We are confident we will reach five stores this year and aim for five more next year. There are opportunities available, and while we have several projects in progress, we are unable to share specific details at this time as we are still negotiating.

And one more question. Just on the design initiative, I know we have roughly one designer per store. There have been talk, I believe, about possibly increasing that despite the headcount reduction that's been planned. what's going on with the designer staffing?

Yes, we have about 15 stores with two designers, and we will maintain that setup for now. These stores are performing well and require two designers, so we will keep an eye on it as we evaluate the business and control costs. With the decline in traffic, one designer can manage the current workload, so we don't see an urgent need to expand this model across all stores. However, as we move forward and begin hiring more sales consultants or designers, we will make decisions in favor of increasing designers and sales consultants.

And then just as sales have pulled back after COVID, are any of the sales commissions and the salespeople, are they still making the money they need to be happily employed? Or is their compensation down? How does that look?

For 2023, compensation was down about 10%. However, we've adjusted those numbers based on traffic. Our average salesperson earned over $85,000 this year, which is a significant increase from the mid-50s we saw pre-pandemic. We are comfortable with this compensation level, but there is a minimum number of sales consultants we need to maintain to serve the business effectively. We will not go below that number, but we are making adjustments based on traffic to enhance customer experience. We believe this approach leads to better close rates and overall improvement for our sales consultants.

And then just one more. Outdoor, is that still slated to start launching in select stores?

It's just started. We're bringing it in now. I saw some of it in the stores a couple of weeks ago. It's just begun. We don't have it all out there yet. So I don't have a track record. I think initially, the response has been good.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed.

Hi, good morning. Wanted to start with a big picture question. Can you talk about what your view is of the housing market in 2024 that's informing your planning for the business? And do you think, based on your positioning, that you can outperform the overall market?

Well, I think I'll comment on the housing. It definitely has affected our business. Now the houses are getting built; it's just not enough of them. And the interest rates have certainly affected the ability for these people to afford it. So our biggest states are Florida, Texas, Georgia, where people are moving. When people move into Florida, they buy new furniture. So anything involving a new transaction helps our business. I don't see through any of that. I don't see any clarity beyond that other than when we have new houses, it helps our business. And I don't see any new insights into that.

Okay. So then another question, wanted to understand better the cost inflation that you're seeing on the various categories and the increase on the SG&A. I know you don't guide to revenues, but when I do the math, let's assume, let's say, flat revenues, it implies an operating margin that's down based on my calculation, about 250 basis points at the midpoint based on the ranges you gave. So maybe just kind of walk us through sort of the increases you're seeing? And do you see this as temporary, or are there efforts to kind of try to get back to that high-single-digit, double-digit operating margin?

Sure. Let me outline the three guidance points from the press release. Firstly, concerning our gross profit margins, we expect a decline. In 2023, we benefited from a LIFO adjustment of approximately 100 basis points, whereas in 2022, it had a negative impact of around 100 basis points. For 2024, we do not expect any significant LIFO changes, meaning we will not have the $9 million benefit in 2024 that we experienced in 2023. However, we still anticipate maintaining strong margins of between 59.5% and 60%.

Regarding variable general and administrative expenses, we noted earlier some details about financing costs. We are making adjustments by opting for 48-month terms instead of 60 months, which are more cost-effective, and we are not experiencing any decline in sales. In the fourth quarter of the previous year, our figure was around 20%. At the current volume levels, we have reduced cost absorption. Thus, based on our fourth-quarter performance, I feel confident in guiding a range of 19.9% to 20.2%, which aligns with our fourth-quarter results. For non-variable SG&A, there is approximately a $10 million difference between the 2023 results and the 2024 guidance. About half of this variance relates to occupancy costs. Specifically, a few million dollars will stem from new store openings in 2024 that were not present in 2023. Additionally, in 2023, a lease modification provided a $3 million credit which will not recur in 2024. In total, this translates to around $5 million in increased occupancy expenses due to these factors. If we apply a 2% inflation rate to $285 million, that accounts for the remainder of the non-variable G&A increase.

And then the last question I had, on the store openings, I guess, how should we think about the contribution of your new stores? You're opening more stores this year if your average store did about $7 million in sales in 2023. How is normally the ramp-up of a new store to get to that level? Like how usually what's year one? How does it ramp up to maturity?

Yes, that's a great question. If you look at the average revenue per store, it's between $6 million to $7 million. Typically, it takes us about a year to break even, and by the end of the third year, we are fully ramped up and operational. I'm not sure if Steve has any additional insights on the operational side, but from a financial perspective, that's how we generally model things.

Ladies and gentlemen, there are no further questions at this time. I'd like to turn the call back to management for closing remarks.

Thank you for your participation in today's call, and we look forward to talking with you in the future when we release our first quarter results later this year. Thank you.

This concludes today's conference. You may now disconnect your lines. Enjoy the rest of your day.