Edited Transcript of HVT earnings conference call or presentation 31-Oct-18 2:00pm GMT

We undertook several operational moves this year that have helped us to be more efficient. These include closing 5 underperforming or redundant stores, renegotiating significantly leases and contracts, and consolidating distribution operations. Our company-wide efforts over the past several years to reduce handling damages and returns as well as closeouts has helped us increase our gross margins by reducing markdowns.

Our merchandising team has a significant number of higher-quality collections arriving this quarter, which we believe will be exciting for our customers, H Designers and sales teams. These introductions feature a combination of more fashion-oriented products and region-specific merchandise.

Our teams are keenly focused on the China 10% tariff and the potential for the upcoming 25% tariff at the 1st of the year. Our merchants have been working very closely with our vendors to reduce the impact, and we feel there will be minimal effect this quarter. However, the announced 2019 25% tariff will cause some retail price increases, disruptions, product changeovers and delays from relocating to factories outside China.

We continue to strengthen our strong quality control team, both domestically and in Asia. We're dedicated to making sure that all Havertys product meets our quality standards for immediate delivery and can stand up to the style, finish and use that our customers demand. Our quality control team is a significant factor that separates Haverty's quality from the competition and is particularly important as we relocate the factories in different countries.

We're continuing with major investments in new systems and technology to improve our supply chain and distribution procedures all the way back to the factory floor. This will give us full transparency throughout the entire product cycle. We're driven to be the most efficient provider throughout the customer order cycle and to provide the quickest delivery on special orders at the best pricing with excellent quality.

We're investing in business intelligence systems, third-party research and internal staff to more closely understand our customers' shopping behaviors and their reactions to our stores, products and promotions. We have a wealth of information on our customers' buying behaviors because unlike other retailers and take with retailers, we deliver to our customers' homes.

We plan to have 2.2% less retail square footage, with a late year addition of a store in Chattanooga, Tennessee. We will end the year with 120 stores. We're planning to open new stores and fill in markets within our distribution footprint in 2019. We will announce planned new store locations when leases are finalized.

We feel that our product and store presentations are well positioned to grow our sales for the fourth quarter and into 2019. We're in excellent shape with our upgraded store presentations, strengthened marketing and H Designs and exciting collections that are hitting our floors.

We have a strong inventory of bestsellers, and our sales and delivery teams are inspired and energized. We're taking advantage of the opportunity to separate Havertys as the source for the best home furnishings, values and service during this rapidly changing retail landscape.

I'll turn the call 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 third quarter of 2018, sales were $210.5 million, a 1.4% increase over the prior year quarter. Our comparable store sales were up 2.6% for the quarter. Our gross margin -- our gross profit margin increased 90 basis points to 54.8%. Merchandise pricing and mix and reduced product markdowns contributed to the increase in gross profit margin.

Selling, general and administrative expenses as a percentage of sales was 49% for the third quarter of 2018 versus 49.2% for the third quarter of 2017. Total SG&A increased $1.1 million to $103.2 million. This was largely driven by increased warehouse and delivery costs due to higher wages, increased fuel costs and higher administrative costs, which were partially offset by reduced occupancy cost and reduced group medical cost.

We recorded $700,000 of other expense during the third quarter of 2018, which includes the loss on the disposal of property that had been used as a delivery truck drop site.

Net interest expense was down $233,000 to $260,000 in the third quarter. This decrease is primarily the result of increased interest income on our cash and cash equivalent balances.

Income before income taxes increased 15.3% to $11.2 million in the third quarter of 2018 versus $9.7 million in the same quarter last year.

Our tax expense was $2.9 million during the third quarter of 2018, which resulted in an effective tax rate of 25.5%. In the prior year period, the effective tax rate was 38.4%. The Tax Cut and Job Act of 2017 became effective in the fourth quarter of last year and reduced the company's federal tax rate from 35% to 21%. The primary difference in the effective tax rate and the statutory rate is due to state income taxes and additional tax expense or benefit associated with vested stock awards.

Net income for the third quarter of 2018 was $8,352,000 or $0.39 per diluted share on our common stock compared to net income of $5,983,000 or $0.28 per share in the comparable quarter last year.

Now turning to our balance sheet. At the end of the quarter, our inventories were $108.3 million, which was up $8.7 million over the same period last year. We ended the quarter with $96.3 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 cash flow, capital expenditures were $18.2 million for the first 9 months of this year. We expect to spend approximately $20 million in CapEx for this calendar year.

During the first 9 months of 2018, the company paid a total of $11.3 million of cash dividends to the holders of its common stock and Class A common stock. We increased our dividend 20% to $0.18 per common share in the first quarter of 2018, which followed a 25% increase in the third quarter of 2017.

We purchased an additional $5.2 million or 235,695 shares of common stock during the quarter. Year-to-date, we have purchased $14.5 million or 687,562 shares of common stock, and we have $5.5 million remaining under our current authorization.

Our earnings release list out 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.

In 2018, we continue to expect our gross profit margin for the full year to be approximately 54.5%. Fixed and discretionary-type expenses within SG&A are expected to remain in the $257 million to $259 million range in 2018. Variable SG&A costs for 2018 are expected to be 18.5% as a percentage of sales.

We expect our overall effective tax rate in 2018 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 difference.

The United States recently enacted tariffs on furniture accessories and components used in the manufacturing of furniture imported into the United States from China. The tariff of 10% was effective September 24, 2018, and will rise to 25% on January 1, 2019. As previously disclosed, we continue to expect there will not be a significant impact from the tariffs on our business in 2018. We are currently working with our vendors to determine the overall impact of the 25% tariff beginning in 2019.

This completes our commentary on the third quarter financial results. We appreciate your participation in today's call. Operator, now we would like to open the call up for some 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 Budd Bugatch with Raymond James.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [2]

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