Edited Transcript of HVT earnings conference call or presentation 1-May-19 2:00pm GMT

Along with several furniture retailers who have reported sales, we have seen a slowdown of demand in the past several months. Historically, our sales sensitivity has been closely aligned to housing sales in our regions. Home sales and housing starts in our regions have been losing momentum for the past year. Homebuilders have struggled with labor and land pricing, which has caused pricing pressure, hitting affordability and accessibility. We believe that lower mortgage rates and improved housing affordability should have a positive impact on our sales in the near term.

This year, we'll be growing our store base again. We expect in 2019 with 123 stores, a net increase of 3 stores and a planned 2% growth in retail square footage. This includes returning to St. Louis, which we left in 1908, with a new major store in the Chesterfield Western retail market, a new store in Newnan, Georgia, south of Atlanta and a soon-to-be-announced Coastal City, which overlaps with existing markets.

Our store team is excited about the Baton Rouge store relocation, which will give us a highly visible site on Interstate 10 at the Mall of Louisiana. These locations are all leases and at good rates.

We have a series of remodeling projects planned to enhance the mattress departments across the chain, which should be an 18-month implementation.

CapEx is budgeted at $19 million for 2019. The largest investment is $4 million for IT projects and upgrades. These include adding a live chat function to our website, a major upgrade to the website platform, moving more functions to the cloud, building a business intelligence data warehouse and converting to the latest 3D room planner for our website in H Designers.

While we were disappointed with the sales performance of the first quarter, we're optimistic about the reception to many of our new collections and higher quality product hitting our floors. We have had very good customer reaction to our new products. The improved quality and updated styling that our merchandise team has developed will be an important differentiator in the markets that we serve.

We are pleased to see comparative store delivered sales up in the low single digits for April. However, our backlog of deliveries is 5% lower due to the late Easter holiday. We're now building our in-stock levels in our bestsellers after a shortfall of Q1. Our team is energized, enthusiastic and highly motivated to gain share across the 16 states we serve.

I'll turn it back over to Richard.

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Richard B. Hare, Haverty Furniture Companies, Inc. - Executive VP & CFO [4]

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Thank you, Clarence, and good morning. In the first quarter of 2019, sales were $187.2 million, a 6.1% decrease over the prior year quarter. Our comparable store sales were down 4.7% for the quarter. Our gross profit margin increased 44 basis points to 55.1%, as margins in the prior year quarter were negatively impacted by markdowns for store closures and remodels.

Selling, general and administrative expenses decreased $2.2 million to $98.8 million. This was largely driven by reduced selling and delivery costs due to lower sales volumes. We recorded $154,000 of other income in the first quarter of 2019, which was a fraction of last year's first quarter amount of $1 million. In the prior year quarter, we recorded a gain on the sale of our Two Notch store located in Columbia, South Carolina, and we recognized the flood claim associated with our Wichita, Kansas location.

We recorded net interest income of $349,000 in the first quarter of 2019. We recorded net interest expense of $471,000 in the first quarter of 2018, resulting in a variance of $820,000 over the prior year period. This variance is the result of the adoption of the new lease accounting standard in 2019, which I will discuss in more detail momentarily.

Income before income taxes decreased $3.8 million to $4.7 million in the first quarter of 2019 versus $8.5 million in the same quarter last year. Our tax expense was $1.1 million during the first quarter of 2019, which resulted in an effective tax rate of 23.4%. In the prior year period, tax expense was $2.2 million, which resulted in a tax rate of 25.4%. The primary difference in the effective tax rate and the statutory rate is due to the state income taxes and additional tax benefit associated with vested stock awards.

Net income for the first quarter of 2019 was $3,621,000 or $0.17 per diluted share on our common stock compared to net income of $6,313,000 or $0.29 per share in the comparable quarter last year.

Now turning to our balance sheet. At the end of the first quarter, our inventories were $109.4 million, which was essentially flat with the same period last year, up $3.5 million over the fourth quarter of 2018. We ended the quarter with $73 million of cash and cash equivalents, and our $60 million revolving credit facility remains untapped. As a reminder, we have no funded debt.

Looking at some of the uses of our cash flow, capital expenditures were $3.8 million for the quarter. We also paid $3.7 million in regular quarterly dividends, representing $0.18 per common share. We did not purchase any common stock during the first quarter of this year, and we have $16.3 million remaining under our current authorization in our buyback program.

As expected, on January 1, 2019, we adopted the new lease accounting standard that requires companies to capitalize their lease obligations on their balance sheet, along with additional qualitative and quantitative disclosures.

In summary, we have a total of $186.3 million of lease liabilities and $188.4 million of lease assets on our balance sheet. With regard to the income statement, our results in 2019 will not be directly comparable to our results in prior years. In 2019, our rent expense will be less than the associated depreciation and interest expense by approximately $2 million compared to the prior year results.

We don't expect the adoption of the new lease accounting pronouncement to have a material impact on our statement of cash flows. Further details regarding our implementation of the standard are included in the notes with the financial statements in our Q1 2019 earnings press release.

In addition, our earnings release list out several 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. In 2019, we continue to expect our gross profit margin for the full year to be approximately 54.6%. Fixed and discretionary-type expenses within SG&A are expected to be in the $258 million to $260 million range for 2019. Variable SG&A costs for 2019 are expected to be 18.1% as a percentage of sales.

Our planned CapEx for 2019 is $19 million, which includes opening 4 locations. As previously disclosed, 2 are in new markets, 1 is in the Atlanta market and 1 is a relocation in an existing market.

We expect our overall tax rate in 2019 to be 25%, excluding any impact from the vesting of stock-based compensation awards. Our federal tax rate is expected to be 21%, and state and local taxes make up the remaining differences.

This completes our commentary on the first quarter financial results. We appreciate your participation in today's call. Operator, now we would like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Anthony Lebiedzinski with Sidoti & Company.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

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So the first, on the same-store sales, just wanted to get a better sense. For the first quarter, did you see that weakness all across the board as far as your store base? Or were there any particular regions that were more affected than others?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, President & CEO [3]

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