Edited Transcript of HVT earnings conference call or presentation 20-Feb-19 3:00pm GMT

Following the 5 store closings in 2018 of weaker-performing stores, we expect to end 2019 with 123 stores, a net increase of 3. This includes 1 new store in Newnan, Georgia, South of Atlanta; 2 new markets; and 1 relocation.

Our H Design program of 120 designers in our stores has been critical and helping us have 17 consecutive quarters that our average ticket has increased over the prior comparative period. This performance demonstrates the impact and importance of executing on our vision of helping customers bring the vision of their home to life.

Special order upholstery continues to lead our merchandise growth. The H Design average sale was over 2x the average store sale and helps drive the improvement in overall closing rate. This team of professional decorators demonstrates that our customer-centered focus of engaging every customer and customizing every experience is effective.

Our improved omnichannel experience is significantly smoother and provides a seamless process for our customers to interact and transact with Havertys, whether online or in the store.

We have several impressive higher-quality collections now hitting the floors, which we feel will appear to the more fashion-oriented customer we're attracting.

These introductions feature lighter finishes, more contemporary styles and region-specific merchandise that has been very well received. We continue to strengthen our quality control teams, both domestically and in Asia. Our QC team is a significant factor that separates Haverty's quality from the competition and is particularly important as we relocate to factories in different countries to assure constant product quality.

We're in a deep dive to better understand our customer and the best reacher with our marketing. We're analyzing, developing more detail about what she wants in merchandise and how she wants it presented. We're adjusting our product and marketing mix to better serve our target customer.

We're working closely with our store managers for proper sales staffing and maximizing the digital tools out there to serve our customer better. We've implemented more directed incentives for our store and leadership teams to focus on sales growth. We're highly motivated to increase comparable store sales, which will move us back to achieving our operating profit goals. We feel that our product and store presentations are well positioned to grow in 2019 and 2020. We're taking advantage of every opportunity to separate Haverty's as the source for the best home furnishings values and services anywhere, whether online or in the store.

I'll now turn the call back over to Richard Hare.

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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 fourth quarter of 2018, sales were $209 million, a 2.8% decrease over the prior year quarter. Our comparable store sales were down 1.6% for the quarter.

Our gross profit margin increased 73 basis points to 54.8%. Merchandise pricing and mix contributed to the increase in gross profit margin.

Selling, general and administrative expenses decreased $1.7 million to $101.9 million. This was largely driven by reduced selling costs due to lower sales volumes as well as reduced occupancy costs.

We recorded $12,000 of other income in the fourth quarter of 2018, which was a fraction of last year's fourth quarter amount of $1.9 million. In the prior year quarter, we recorded insurance proceeds associated with Hurricane Irma as well as a flood claim associated with our Wichita, Kansas location.

Net interest expense was down $230,000 to $239,000 in the fourth quarter. This decrease is primarily the result of increased interest income on our cash and cash equivalents.

Income before income taxes decreased 12.8% to $12.3 million in the fourth quarter of 2018 versus $14.1 million in the same quarter last year.

Our tax expense was $2.9 million during the fourth quarter of 2018, which resulted in an effective tax rate of 23.6%. And in the prior year period, tax expense included $5.9 million for the enactment of the Tax Cuts and Jobs Act of 2017, which became effective in the fourth quarter and significantly reduced the company's federal tax rate from 35% to 21%. During the 2018 calendar year, we recorded tax expense of $10.1 million, which resulted in an effective tax rate of 25%.

Net income for the fourth quarter of 2018 was $9.4 million or $0.45 per diluted share on our common stock compared to net income of $2.9 million or $0.13 per diluted share in the comparable quarter last year. Our diluted earnings per share in 2017 for the fourth quarter and year decreased $0.27 per share as a result of the enactment of the Tax Cuts and Jobs Act of 2017.

Now turning to our balance sheet. At the end of the fourth quarter, our inventories were $105.8 million, which was up $2.4 million over the same period last year and down $2.5 million over the third quarter of 2018. We ended the quarter with $71.5 million of cash and cash equivalents, and our $60 million revolving credit facility remains untapped. As a reminder, we have no funded debt on our balance sheet.

Looking at some of the uses of cash flow, capital expenditures were $21.5 million for the year. For the year ended December 31, 2018, the company paid a total of $35.5 million of cash dividends to the holder of its common stock and Class A common stock. We paid $15 million in regular quarterly dividends representing $0.18 per common share each quarter. We also paid out an additional $20.5 million to our shareholders as our Board of Directors authorized a special cash dividend of $1 per common share in November.

We purchased an additional $4.3 million of common stock during the quarter approximating 202,663 shares. During 2018, we purchased $18.7 million or 890,000 shares of common stock, and we have $16.3 million remaining under current authorization. In total, during 2018, we returned $54.2 million to our shareholders through regular and special dividend payments and our stock buyback program.

Our earnings release lists out several additional forward-looking statements, including 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 expect our gross profit margin for the full year to be approximately 54.6%, flat with 2018's annual profit -- gross profit margin. Fixed and discretionary type expenses within SG&A are expected to be in the $260 million to $262 million range for 2019. Variable SG&A costs for 2019 are expected to be 18.2% as a percent of sales.

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

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

As previously disclosed, the U.S. has recently enacted tariffs on furniture, accessories and components used in the manufacturing of furniture imported into the U.S. from China. The tariff is currently 10% and may increase to 25% in March of 2019. We continue to believe that we can manage the 10% tariff level without a material impact to our business. If the tariff is increased in March, we will continue to work with our vendors and partners to minimize its impact on our company and on our customers.

This completes our commentary on the fourth quarter financial results. Thank you for 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) Our 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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