Earnings Call Transcript - HVT Q3 2020

Operator, Operator

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

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 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, Chief Executive Officer and Chairman, Clarence Smith will now give you an update on our results and provide commentary about our business.

Clarence Smith, CEO

Good morning. Thank you for joining our third quarter conference call. As we reported earlier, our delivered comparable store sales were up 4% with very strong written comparable sales up 22.6%, the largest increase in at least 50 years. We've been significantly benefiting from the nesting and homebody economy where so many of our customers are focusing on improving their home, the place where they're spending much of their time. We're pleased to report a record quarterly net profit of $18.3 million with $0.97 earnings per share, compared to $6.1 million and $0.31 per share last year. The major contributing factors are strong gross margins up 2.7% and SG&A 3.7% lower. We had lower advertising expenses and lower operating costs across almost all categories. While we are seeing pressure to increase personnel costs and warehouse and distribution, we're committed to holding our costs in the coming quarters in most of our SG&A categories. The gross margin improvement was due to fewer markdowns, less discounting and a higher mix of special order products. Our merchants and stores have done an excellent job in improving our gross margins and we believe this trend will continue. We have a key objective to maintain high single-digit pretax operating income in the quarters ahead. During this pandemic, we've seen the increasing importance of convenience to our customers. Our internet sales are highest producing store at 3.9% of sales, up over 80%. Buy Online Pick up in Store is currently running at 15%, up triple over the past years. We're investing and improving the efficiency and ease of use of our website and increasing the use of digital and social media to best reach our targeted customers. We're dedicated to making it as easy as possible for our customers to interact with us in any way they want. A recent driver of our business is what I call a Triple Double. This has never been achieved since we began measuring. However, in several periods and weekends over the past 2 months, we've experienced a Triple Double of a double-digit increase in traffic, closing rate and average ticket. While this is highly unusual as it is in basketball, it's a strong indicator of the powerful trends in our business that we've seen. We've seen balanced growth across our regions with especially strong performance from our larger markets. It's very rewarding to see our big sectors kicking in with strong sales growth. We feel we're very well positioned in some of the strongest markets in the country with some excellent growth potential. In today's digital and virtual world, we believe that Havertys' emphasis on a strong combination of high personal touch with our H Design combined with state-of-the-art technology helps to create a strong trust in the Havertys brand. We believe that our 135 years of helping our customers' vision of their home come true is a foundation that our customers rely on, especially in difficult times. The unified operating system that we have deployed, whether in-store or online, allows for better visibility for our customers and for our operating and supply chain teams. We believe that we're in a better position than most of our competition in being able to provide accurate product information and reliable delivery because of the strong systems and excellent relationships with our suppliers. However, we know that we must change with the world or go by the wayside, which has recently impacted many retailers. We believe in staying ahead of the changes and playing a part in the inevitable disruption that our industry has experienced. We will thrive in the disruption. We're very thankful for all our team members who are working directly with our customers every day in their homes and in our stores. We greatly appreciate their continued efforts and dedication. We're also appreciative of all our team members who support those on the front lines. We're all part of Team Havertys and are coming together to serve our customers. Tomorrow, we are celebrating our first Founder's Day, October 30, on J. J. Haverty's birthday. While the celebration is in memory of J. J. Haverty, it is dedicated to our valued team members who are building Havertys for the next 135 years and we thank them for their tremendously hard work and dedication to Havertys, our customers, and to each other. We are certainly quite blessed to be in the business of serving homes in the best part of the country during a pandemic. We're dedicated to building our business by being the best and justifying our customers' loyalty today and in the years ahead. I'll turn the call back over now to Richard.

Richard Hare, CFO

Thank you, Clarence, and good morning. In the third quarter of 2020, delivered sales were $217.5 million, a 3.9% increase over the prior year quarter. Comparable store sales were up 4% for the quarter. Total written sales for the third quarter of 2020 were up 22.8% and written comparable store sales were up 22.6% over the prior year period. Our gross profit margin increased 270 basis points from 53.5% to 56.2% due to better merchandising mix and less markdowns recorded during the quarter. Selling, general and administrative expenses decreased $4.1 million or 3.9% to $100.1 million and fell to 46% of sales from 49.8%. This was due to reduced advertising and travel costs as well as reduced salaries and benefits, which were partially offset by increased selling costs. During the third quarter of 2020, we recorded a $2.4 million gain on the sale of a surplus property adjacent to one of our distribution facilities. This transaction was recorded in other income. We recorded net interest income of $51,000 in the third quarter of 2020 versus interest income of $292,000 in the third quarter of last year. Income before income taxes increased $16.4 million to $24.5 million. Our tax expense was $6.3 million during the third quarter of 2020, resulting in an effective tax rate of 25.6%. Net income for the third quarter of 2020 was $18.3 million or $0.97 per diluted share on our common stock compared to net income of $6.1 million or $0.31 per share in a comparable quarter last year. Now looking at our balance sheet at the end of the third quarter, our inventories were $90.9 million, which was down $13.9 million from December 31, 2019 balance and down $9 million versus the third quarter of last year's balance. At the end of the third quarter, our customer deposits were $88.4 million, which was up $58.3 million from the year-end balance and up $53.6 million versus the Q3 2019 balance. We ended the quarter with $211.8 million in cash and cash equivalents. We have no funded debt on our balance sheet at the end of Q3 2020. Looking at some of our uses of cash flow, capital expenditures were $2.9 million for Q3 2020 and $7.2 million for the first 9 months of 2020. We also paid $3.7 million for Q3 2020 and $10.3 million in the first 3 quarters of 2020 on regular quarterly dividends. We purchased $12.9 million of common stock, which equates to 614,054 shares during the third quarter of this year. Year-to-date, we purchased $19.7 million or 1,033,165 shares. We have $16.8 million remaining under current authorization in our buyback program. Our earnings release lists several additional forward-looking statements indicating our future expectations of certain financial metrics. I will highlight a few, but please refer to our press release for additional commentary. We expect our gross margins in the fourth quarter of 2020 to be similar to the margins we achieved in the third quarter of 2020. This is based on current estimates of product and freight costs as well as changes in our LIFO reserve. Our fixed and discretionary type SG&A expenses for the fourth quarter are expected to be in the $67 to $69 million range, compared to $69.6 million for the same costs in 2019. The variable-type costs within SG&A for the fourth quarter of 2020 are expected to be 17.8% compared to 18.2% in the fourth quarter of 2019. Our planned CapEx for 2020 has been increased to $11.4 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, IT upgrades focused on our stores and distribution facilities. We opened one new location in the Dallas-Fort Worth area during the third quarter of this year. Earlier this year, we closed an outlet store in the Atlanta market and we closed another location in the Dallas-Fort Worth area, so our square footage is going to be slightly lower at the end of this year. This completes our commentary on the third quarter financial results. Thank you for your participation in today's call. Operator, we would now like to open the call for questions.

Operator, Operator

We'll take our first question from Brad Thomas with KeyBanc Capital Markets.

Bradley Thomas, Analyst

Congrats on a great quarter here. I love the triple-double analogy, my favorite. I was hoping you could give us a little bit more color on the trends through the quarter. How have things started out here in 4Q and give us any insight into how we should think about the delivered side of the business and your ability to start working through some of the strong orders that you had in 3Q.

Richard Hare, CFO

Thank you, Brad. Let me begin and then Clarence can elaborate. So far in the fourth quarter, we are seeing metrics that align closely with what we reported for the third quarter, specifically a 22.8% increase in written sales. We're experiencing similar trends early in this quarter. We are making investments, particularly in our capital expenditures as we enhance our delivery capacity. Additionally, as we transition from the third to the fourth quarter, we anticipate slight increases in our variable costs, rising from 17.3% to 17.8%. Part of this increase reflects additional personnel costs in delivery, warehouse, and transportation areas, where we have added staff. Our overall headcount remains approximately 26% lower than pre-COVID levels, down from 35% last quarter, showing that we are gradually bringing back personnel as we expand our distribution capabilities. The third quarter was notably our fourth highest sales quarter in the past 18 years. We continue to invest in this segment of our business and are enhancing our production capabilities. Regarding inventory and delivery, we've observed a decrease in our inventory levels, but we expect these to rise somewhat in the fourth quarter. However, we do not anticipate an inventory build; products will go out as soon as they arrive. We have many products en route and substantial visibility in that area. We are actively investing in distribution, and things appear to be progressing positively as we head into 2021.

Bradley Thomas, Analyst

Just to follow up on that a little bit. I think the customer deposit number that you reported on the balance sheet, the $88 million, looks like the highest number in the company's history, at least in my model. How are you feeling about your ability to work through that? Do you feel like you can start to take it back to normal lead times by the end of the year or is it something you think will drag into 2021?

Clarence Smith, CEO

Brad, this is Clarence. I do think that this will take us into next year. Our backlog has stayed pretty consistent, which is higher than we've ever had. We do have an enormous amount of product coming in. Much of it is sold. We have well over 1,000 containers on the water and more coming. So I know that this will carry over into the first quarter and maybe the end of the second quarter. With this consistent sales trend and the backlog, I don't see that we'll be able to fulfill that this quarter but we certainly are counting on that to complete most of the deliveries that are important to customers before the holidays.

Bradley Thomas, Analyst

Got you. Very helpful, Clarence. If I could squeeze one more in. Just as we're thinking about fine-tuning models for 2021, it seems that you all are going to start the year hopefully with momentum and some backlog that you are working through, you got a very easy comparison particularly in Q2. 3Q, while strong from an earnings perspective isn't the most gigantic number to the 4% comparison and a lot seems to be set up for a very good year for you all in 2021. I guess can you help me just think about some of the offsets, for example in the gross margin line, do we need to see that come back a little bit because you may have to be at more normal level of promotion in the back half? On the SG&A side, are there costs that you're going to have to put back in next year? How should we think about some of those offsets to what looks to be a very good year for you next year?

Richard Hare, CFO

Yes, those are important questions. Currently, we are in a period with minimal promotions, so it's essential to assess how long this may continue. These are unusual times, which should be taken into account when forecasting gross profit margins. As for SG&A, we've made significant improvements in the third quarter. We mentioned potential increases for the fourth quarter in both variable and non-variable expenses. We aim to avoid returning our headcount to pre-COVID levels, but we are increasing it slightly on the delivery side. My target is to reduce headcount by around 20% and maintain that level. However, we have reintegrated some costs into our fourth quarter projections. Clarence, do you have anything to add?

Clarence Smith, CEO

Yes, Brad. I feel, and our team feels that the gross margin, we don't see that going back down. We're committed to getting credit for the product that we develop. We're doing more special orders, more custom, and I don't see our gross profit margins coming down from where they are.

Operator, Operator

And we currently have no further questions. I would now like to turn the conference back to Mr. Richard Hare for closing remarks.

Richard Hare, CFO

Thank you, Brad. We appreciate everybody's participation in today's call and we look forward to talking to you in the future when we release our fourth quarter results. Thanks again.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for your attendance and participation, and you may now disconnect.