Earnings Call Transcript - HVT Q3 2025

Operator, Operator

Greetings and welcome to Haverty's Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tiffany Hinkle, Assistant Vice President of Financial Reporting and Investor Relations. Thank you. You may begin.

Tiffany Hinkle, Assistant Vice President, Financial Reporting and Investor Relations

Thank you, operator. Good morning, and thank you for joining us for our third quarter earnings call. I'm here today with our President and CEO, Steven Burdette; and Executive Vice President and CFO, Richard Hare. Before we begin, I'd like to remind everyone that today's conference call may contain 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. A replay of this call will be available on our Investor Relations website this afternoon. For commentary about our business, I will now turn the call over to Steve.

Steven Burdette, President and CEO

Good morning. Thank you for joining our 2025 third quarter conference call. We are excited to report an increase in both written and delivered comp sales for Q3. Our sales for Q3 were $194.5 million, which was up 10.6% with comps up 7.1%. Total written sales were up 10% with comps up 8%. Our steady growth in written and delivered sales over the past 4 quarters reflects improvements across marketing, merchandise assortments, promotions, supply chain, distribution, home delivery, service and store execution. While this quarter's results are positive, we remain focused on the significant opportunities in front of us that will allow our return to a $1 billion-plus company with no additional investments needed in our distribution infrastructure. Gross margins continue to be strong, coming in at 60.3% compared to 60.2% in Q3 2024. Our pretax profits for the quarter were $6.4 million or 3.3% operating margin compared with $6.9 million or 3.9% operating margin in Q3 2024. Our EPS for the quarter came in at $0.28 compared to $0.29. Richard will provide additional details regarding the increase in SG&A expenses and LIFO impact for the quarter. During the quarter, our Labor Day event was the company's largest event of the year and was key to our success in the quarter. We had a terrific written 4-day increase of 13.6% over last year with strong metrics. Traffic was positive in the mid-single digits. Average ticket grew to over $4,000 with design average ticket over $8,000. And conversion rates showed a slight decrease compared to last year. The industry faces ongoing challenges. High interest rates and rising home prices continue hurting the housing market. Tariffs remain an issue, geopolitical tensions persist, consumer confidence is falling and the government shutdown is now heading into week 5. Recent and planned interest rate cuts have yet to lower mortgage rates or boost the housing sector. Despite these pressures, our customers with household incomes over $150,000 are still spending, giving us confidence for the rest of 2025 and into 2026. Traffic for the quarter stayed positive with growth in the mid-single digits compared to last year. The average ticket increased 6.1%, reaching $3,668 and the designers average ticket rose 11.9% to $7,986. Our design business remained robust, accounting for 34.2% of sales, driven by a 7.1% increase in upholstery special orders. Conversion rates for the quarter showed continued improvement over Q2, finishing the quarter down slightly in the low single digits. Our merchandising and supply chain teams have done a great job moving much of our production out of China during the quarter, so we could resume our special order business. The announcements of potential new tariffs on furniture by the administration in late August was disappointing. Ultimately, these new tariffs were finalized at 25% on all upholstered wood products out of Mexico, along with Vietnam, Cambodia, Thailand and Indonesia beginning October 14, but will be moving to 30% beginning January 1, 2026. Our merchandising and supply chain teams have worked with our vendors to secure pricing to not disrupt any shipments. As with previous price increases, we will adjust retail prices strategically to maintain our values and margins. We appreciate our vendors' collaboration in helping us deliver strong values to our customers. The positive out of these new tariffs is that they are not stackable on the existing reciprocal tariffs put in place back in the summer. We are monitoring the administration's current trip to Asia and the upcoming Supreme Court decision to see what the impact will be on tariffs going forward. The new merchandising team has now been in place for a full year, and we are starting to see their impact on our product assortments. We just brought our store management team from the field to Atlanta for a 3-day leadership event at the end of September to celebrate our 140th anniversary and to show them in person the new products arriving over the next 6 to 9 months. The merchandising team did a fabulous job presenting the new products, creating lots of excitement for our store management to take back to their teams. From a category performance, all categories showed nice increases during the quarter. Bedroom and bedding outperformed all categories with increases in the low to mid-double digits, followed by upholstery and occasional in the high single digits and dining room and decor in the mid-single digits. Our inventories have remained basically flat in Q3 compared to Q2 this year. We anticipate that inventories will increase slightly in Q4 due to the additional tariffs implemented in October. Our marketing creative and media plans continue to resonate with our customers through broadcast, connected TV and digital marketing channels. Our expanded use of AI and data has improved our targeting and personalization, making our marketing investments more efficient. And we saw web traffic, including organic and site engagement increased by double digits as our written e-commerce sales grew 13.6% for the quarter. We invested an additional $2.8 million this quarter in marketing, including our first direct mail campaign in several years. The direct mail piece proved to be very successful in attracting new customers to Haverty with a 12-page layout that showcased our product offerings and design capabilities. We continue offering 60-month no interest financing to remain competitive, and our credit costs continue to remain in line with last year. We completed the closing of the Waco store at the end of September. However, we are pleased to announce the opening of our third store in the Houston market in mid-October. The new store is in New Caney, which is in the northeast part of Houston. This will bring our store count back to 129, which is where we will end the year. We will return to our store growth goals of 5 per year in 2026. As stated on our last call, we have finalized 4 additional leases for 2026 openings in St. Louis, Nashville and 2 more in Houston. We have 1 new market and 1 relocation in the LOI process now, but are unable to announce. We will make investments in our stores throughout 2026 in the bedding departments and design centers to maintain our focus on improving the customer experience. Our distribution, home delivery and customer service teams continue to do a fantastic job controlling expenses while furnishing happiness to our customers. The management teams are great at balancing the number of team members with the workflow demand needed due to natural turnover. We continue to believe that due to Haverty's controlling the final mile delivery with Haverty team members, it is a huge advantage to our success in providing our customers with unwavering service. Thank you to all our Haverty team members for your dedication to our customers and the company's success. Our people define us, and I am proud to be a part of this great team. With a debt-free balance sheet, operational consistency, integrity, consumer focus, in-home design services and our regret-free experience, Haverty's offers confidence to our customers to furnish their homes with the Haverty brand. I will now turn the call over to Richard.

Richard Hare, Executive Vice President and CFO

Thank you, Steve, and good morning. In the third quarter of 2025, net sales were $194.5 million, a 10.6% increase over the prior year quarter. Comparable store sales were up 7.1% over the prior year period. Our gross profit margin increased 10 basis points to 60.3% from 60.2%. Excluding the impact of the $624,000 LIFO expense in the third quarter of 2025, our gross profit margin would have been $0.606. The overall increase in margins was due to product selection and merchandising, pricing and mix. Selling, general and administrative expenses increased $11.4 million or 11.3% to $112.3 million. As a percentage of sales, these costs approximated 57.8% of sales, up from 57.4% in the prior year's quarter. We experienced increased advertising, selling, occupancy, and administrative costs during the quarter. Other income expense in the third quarter of 2025 was $348,000 and interest income was approximately $1.1 million during the third quarter of 2025. Income before income taxes decreased $400,000 to $6.4 million. Our tax expense was $1.7 million for the third quarter of 2025, which resulted in an effective tax rate of 26.4% compared to an effective tax rate of 28.3% in the prior year period. Net income for the third quarter of 2025 was $4.7 million or $0.28 per diluted share of our common stock compared to net income of $4.9 million or $0.29 per share in the comparable quarter last year. Now turning to our balance sheet. At the end of the third quarter, our inventories were $92.4 million, which was up $9 million from the December 31, 2024 balance and up $3.7 million versus the Q3 2024 balance. At the end of the third quarter, our customer deposits were $43.9 million, which was up $3.1 million from the December 31, 2024 balance and flat with Q3 of 2024. We ended the quarter with $130.5 million of cash and cash equivalents, and we had no funded debt on the balance sheet at the end of the third quarter of 2025. Looking at some of our cash flow usage. CapEx was $3.6 million for Q3 2025, and we also paid out $5.2 million of our regular dividend in the quarter. We did not purchase any common shares of stock of our share repurchase program during the third quarter of 2025, and we have approximately $6.1 million of existing authorization in our buyback program. Our earnings release lists several additional forward-looking statements indicating our future expectations of certain financial metrics. I'll highlight a few, but please refer to our press release for additional commentary. Our 2025 guidance includes tariffs currently in effect as of October 29, 2025, and does not include the effect of additional proposed tariffs that have not been finalized by the Trump administration. We expect our gross margins for 2025 to be between 60.4% and 60.7%. We anticipate gross profit margins will be impacted by our current estimates of product, freight, and LIFO expenses. Our fixed and discretionary type SG&A expenses for 2025 are expected to be in the $296 million to $298 million range, an increase from our previous guidance due to higher anticipated advertising and admin costs. The variable type costs within SG&A for 2025 are expected to be in the range of 18.6% to 18.8% based on our expected level of selling costs for the remainder of the year. Our planned CapEx for 2025 remains at $24 million. Anticipated new or replacement stores, remodels, and expansions account for $19.6 million. Investments in our distribution network are expected to be $1.8 million and investments in our information technology are expected to be approximately $2.6 million. Our anticipated effective tax rate in 2025 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 financial commentary on the third quarter financial results. Operator, we would like to open the call up for any questions.

Operator, Operator

Our first question comes from Anthony Lebiedzinski with Sidoti & Co.

Anthony Lebiedzinski, Analyst

It’s great to see a return to positive same-store sales this quarter. You mentioned the strong Labor Day. Could you also discuss the monthly trends in the third quarter and whether there were any significant regional differences in your markets?

Richard Hare, Executive Vice President and CFO

Sure, Anthony. This is Richard. In the third quarter, our written business trends indicated that in July, we were up about 10.6% on a same-day week basis, 10.9% in August, and a little over 8% in September. Deliveries remained fairly steady, with 11.6% in July, 7% in August, and 13.1% in September. I don't think there were significant regional differences. However, Steve, do you have anything else you'd like to add?

Steven Burdette, President and CEO

No. Anthony, there was not much difference there. We certainly had probably more strength in the Midwest, Georgia, Central and Florida were really good. The East was a little lighter, but everybody was positive. All districts were positive across the board.

Anthony Lebiedzinski, Analyst

That's good to hear, certainly. And then as far as tariffs, is there any way you guys could quantify or like give a sense as to the impact of tariffs that had on the quarter?

Steven Burdette, President and CEO

Anthony, we don't have a dollar impact because we adjusted our pricing. We've been clear from the beginning that we make strategic price changes as soon as we are aware of the tariffs. Our approach has worked well, even going back to when we were implementing price increases during COVID. We are confident in our ability to handle this and move forward. So I don't think we experienced an impact, but it would show up on LIFO, and I'll let Richard explain that in more detail.

Richard Hare, Executive Vice President and CFO

Yes, thank you. I mentioned earlier the effect of LIFO expense on our gross margins. As the tariffs come into effect in the third quarter and continue into the fourth quarter, we can expect an increase in our LIFO expense. Last year, we experienced a LIFO benefit of approximately $800,000 for the entire year. So far this year, our LIFO expense for the first three quarters amounts to about $750,000. I anticipate that we will continue to see additional LIFO expenses reflected in the P&L throughout this year and likely into the next year.

Steven Burdette, President and CEO

But Anthony, we don't see that as an impact. We've been able to grow sales, and we've adjusted prices while maintaining our margin. So we are confident about the direction we're taking and how we're managing it.

Anthony Lebiedzinski, Analyst

Understood. Okay. Got you. Okay. And then just in terms of your expense guidance, I know you talked about higher advertising and administrative costs. How should we think about those for next year? Do you think that trend will continue? Or just overall, just wondering if you could comment on what you're seeing in terms of cost of running the business?

Richard Hare, Executive Vice President and CFO

Yes. I'd say for this year, we went up maybe about $5 million band on our non-variable costs from the last quarter to this quarter for the year. About 3/5 of that was advertising cost. The rest is on the administrative cost is more incentive compensation. This year, we are hitting our annual targets in our incentive plans. Last year, we were not. So it's kind of a tough comparison. We have not developed our full budget for next year, but I would expect basically normal inflationary type increases, nothing significant to note in the non-variable side of the business.

Steven Burdette, President and CEO

Anthony, let me focus on marketing. In 2024, we may have overcorrected our marketing efforts. We were facing double-digit declines in sales and needed to manage the situation, especially with an election happening. As you may recall from the second quarter, we raised our marketing spending by approximately $1 million, which we also adjusted in the third quarter to the necessary levels. I'd like to point out that $2.8 million spent on marketing includes significant investment in the Houston market, which is new for us, particularly as we prepared for our third store opening there. Additionally, we've resumed direct mail campaigns, which we consider vital for our future strategy. We have another marketing event planned for the fourth quarter. Overall, I believe our marketing is now at sustainable levels, and I anticipate maintaining similar expenditure in 2026 as in 2025.

Operator, Operator

Our next question comes from Cristina Fernández with Telsey Advisory Group.

Cristina Fernández, Analyst

Congratulations also on the positive comp. I wanted to see if you can talk more about the composition of that comp. It definitely seemed like ticket was the bigger driver. So I wanted to understand, is that mostly due to the price increases? Or are you seeing consumers kind of trade up on the price points or navigate to some of those bigger ticket items?

Steven Burdette, President and CEO

Certainly, the average ticket size is a key factor in that. One aspect we focus on is the increase in design tickets, which is driven by selling more items to customers. We monitor this closely, and it's contributed to the overall growth. Price increases are also playing a role in this aspect. While I can't provide a precise breakdown between the two, both contribute significantly. Additionally, while our conversion rates are not yet above last year's levels, we are seeing a gradual improvement, currently in the low single digits compared to mid-single digits in Q2. This remains a point of focus for us, and we believe there are still notable opportunities for growth ahead.

Cristina Fernández, Analyst

And then on the price increases to offset the newer Section 232 tariffs, what's the timing of that? Have you already taken some or that's something that's going to take place here in the fourth quarter?

Steven Burdette, President and CEO

It has already taken place in early October. As soon as we were aware, our merchandising and supply chain teams collaborated with our factories to finalize everything, and price changes were implemented in early to mid-October. Therefore, they are already in effect as we move forward.

Cristina Fernández, Analyst

My last question is about the broader perspective on how we should consider the level of sales needed to effectively leverage SG&A expenses. You achieved a strong growth rate of 10% this quarter, but expenses increased at a quicker pace. Should we focus on a specific growth rate or an absolute sales figure that would enable you to leverage those expenses and begin to see year-over-year operating margin expansion as sales increase?

Richard Hare, Executive Vice President and CFO

Yes, Cristina, historically, when our sales exceed $800 million, particularly when they reach the mid-$800 million range, we see significant expansion. During the COVID years, when we surpassed $1 billion, we witnessed a drop. Therefore, in my view, sales over $800 million lead to a considerable reduction in costs on the bottom line.

Steven Burdette, President and CEO

Yes. And as I commented on the marketing, Cristina, we're going to keep that. We think it will be fairly flat in '26 to '25. So that will be an opportunity to leverage as well. We can continue to get the growth.

Operator, Operator

There are no further questions at this time. And I would now like to turn the floor back over to Tiffany for closing comments.

Tiffany Hinkle, Assistant Vice President, Financial Reporting and Investor Relations

Thank you for your participation in today's call. We look forward to talking with you in the future when we release our fourth quarter results. Have a great day.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.