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Haverty Furniture Companies Inc. (NYSE: HVT)
Q1 2019 Earnings Call
May. 01, 2019, 10:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good day, and welcome to Haverty's first-quarter 2019 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Richard Hare. Please go ahead.
Richard Hare -- CFO
Thank you, operator. During this conference call, we'll make forward-looking statements, which are subject to risk and uncertainties. Actual results may differ materially from those made or implied in such statements, which speak only as of the date they're made, and 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, CEO and Chairman Clarence Smith, will now give you an update on our results and provide commentary about our business.
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Clarence Smith -- CEO and Chairman
Thank you for joining our 2019 first-quarter conference call. Sales were $187.2 million, down 6.1% with comp store sales down 4.7% compared to last year's Q1. Written sales were down 3.2%, with written comp store sales down 2%. Our average ticket was up 6.9%, the 18th consecutive quarter that the average ticket has increased over the prior comparative period.
Q1 net income was $3.62 million versus $6.31 million last year. The start to 2019 has been challenging for our operations and positive sales growth for a few reasons that I'd like to now review. The Chinese tariff that was implemented last fall is something we've been weathering. Additional threat of a 25% tariff on January 1 impacted product availability of a few important categories.
Several of our Chinese suppliers of our best-selling goods stopped production completely rather than take on the tariff, while other major companies began the process of moving production to Vietnam. Negotiating pricing during the fourth quarter into an unknown of an expected 25% tariff, created an order placement gap, which, combined with the Chinese New Year shutdown, became a real issue for shipment arrivals in the first quarter. Transition plans for some of these companies was more difficult to execute as quickly as they planned. While we significantly reduced the impact of tariff on goods from China from annual shipments of over $100 million at cost to near $75 million, relocating product to new factories in Vietnam and other countries created an enormous logistical and quality assurance effort.
These moves will take more time. We feel much better about product quality, flow and continuity from mid-Q2 going forward. 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 three 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 best-sellers 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.
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 four locations. As previously disclosed, two are in new markets, one is in the Atlanta market and one 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.
Questions & Answers:
Thank you. [Operator instructions] The first question will come from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.
Anthony Lebiedzinski -- Sidoti
Good morning and thank you for taking the questions. 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?
I think we did see it across the base, Anthony, and as much as anything, when our best sellers are out of stock, that would affect every region. So there was nothing that really stood out there.
Got it. OK. So when you look at how you did it in the first quarter, is it possible for you to isolate how much of the same-store sales weakness was due to the lack of consistent product flow because of the tariffs versus other issues?
You did have a number of things at work. But the tariff, we know that it hit particularly our hottest selling category, which is leather coming from China. So all of our leather comes basically from China and our best-selling groups. And that category was down high-single digits compared to the previous year, and it was our growth category.
Richard, you've got some...
Yes. I was just going to say, you'll see in the 10-Q that we release, the upholstery category was down a little bit -- a little over 10%. It was our largest decline in categories year-over-year in the first quarter. That definitely stands out.
OK. That's very helpful. And switching over to the average ticket. Obviously, you've pointed out that you've done 18 consecutive quarters of increases there.
Just wondering about your ability to sustain that type of momentum.
I think we'll still see growth there because not only are we doing the H Design and doing more full house or full displays for somebody's home, we're selling a better product. I mean, our average SKU price is up. So we're selling more leathers. We're selling higher end product.
We're doing well with our case goods in the better areas. So I think that that's something that will continue to grow, maybe not dramatically. And we don't want to be known ultimately as a design house, we're just offering a service that a portion of our customers want, which is around 25%. And I think that there is, though, some area for that to grow in our average ticket going forward.
I think that will be a driver.
All right. Well, thank you very much and best of luck.
[Operator instructions] The next question will come from Bobby Griffin with Raymond James. Please go ahead with your question.
Bobby Griffin -- Raymond James
Good morning, Clarence and Richard. Thanks for taking my questions. So first, I just want to talk more about some of the issues coming out of China, Clarence. And maybe can you just give us, at a high level, what you're hearing from your suppliers? And are you seeing anything today through April that gives you a sense that things are getting more normal, where your product availability will start to normalize here and we can kind of move past these issues?
Sure, sure. I think that's happening now. I mean, we feel like we'll be in good position by Memorial Day for in-stock in our best-sellers. And we've been able to flow that product, relocate to other manufacturers the product.
And we feel pretty good about our position going into the most important couple of weeks of the first half, and that's from now through Memorial Day. And then getting deliveries out through June, I think we feel pretty good about that. It's been pretty traumatic, though, and hit us pretty hard in the first quarter, as we talked about. I mean, when you have key suppliers that all of a sudden say, "We're not shipping any more," and we have to relocate, that's traumatic.
I think we've worked through it pretty well. And we weren't able to deliver in the first quarter like we liked, but I think as far as the relocations and the repositioning and the renegotiating, we've done a pretty good job.
Good. And no, that's good to hear. And the gross margin, even with the some of the tariff headwinds in there, I mean, it was impressive. It was better than I was expecting this quarter.
Rich, is there any other detail you can kind of give me on the year-over-year walk? I know you mentioned there were some costs last year from markdowns, but anything else to help me think about the year-over-year expansion?
Yes. It's the same guidance as we gave last quarter when we had -- some of our categories, we took slight price increases when we had to absorb some of the tariffs. So we don't see a big expansion in our gross margin for the whole year, but I think you'll see the variances in the quarter very similar to last year.
OK. Yes, and I was thinking, I was referring to just the first quarter that's reported. It was a little better than I expected. So I appreciate the detail.
And then lastly for me, just refresh us a little, when you expand into a new market, how that kind of ramp-up period goes for a store, what type of cost maybe we should account for as we're modeling that out, and anything else we need to keep in mind as you're going into these new markets.
Well, the one that's the -- that will cost us the most to get started is St. Louis because they do not know us there. We haven't been there since 1908. So -- and we have to build a team.
We will place some of our key people there and they'll hire up. But the markets like Baton Rouge is a relocation. The store -- this is the Carolinas that we're -- the coastal areas is an area where we're already well-known. Atlanta is clearly our best awareness from our customer base.
So the start-ups there are not significant. The one that will be more is St. Louis. That's certainly in our budget.
And Richard, do you want to give any color on that?
Yes. No. And most of these are laying in the latter part of the year.
Right. They're in the third and fourth quarter, mostly fourth quarter.
I appreciate that detail and thanks again for answering questions. Best of luck going forward.
[Operator instructions] The next question will come from Brad Thomas with KeyBanc Capital Markets. Please go ahead.
Brad Thomas -- Keybanc
Hi. Good morning, Clarence and Richard. Just want to, first, follow up a little more about the sales trends and try to break this apart here a little bit more. One thing that was interesting was that the written comp, the negative two, actually, was a little bit better than the cadence you'd had in the fourth quarter, while, of course, your delivery comps slowed.
That is correct.
Yes, well, your delivery comps slowed.
Yes, that's right.
So I guess, I was hoping to just help understand that about the written comp. And it was asked earlier, but maybe to ask in another way, do you have a sense for maybe how much of a headwind you think it was, maybe not having the right product in the floor, not having the right product being listed as being in-stock, what that written comp might have looked like in 1Q?
Well, there is some -- there'd be some guesswork there. But when somebody's coming in and looking for a category and we can't deliver it, we would hope to be able to move them to delivery dates out a while, but you know that it's going to hurt business. And we know that we did lose some business because we could not execute on it. I hope it was a minimum, and I believe we can recover.
But the key point is that we're now back and we're back in stock. We've seen good trends after Easter, which was just a short time ago. And as you know, in the furniture business, Easter week is the worst week of the year, almost every year. So we're glad to get that behind us and feel pretty good about that turnaround.
Gotcha. And then as we think about the delivered comp, the negative 4.7%, I mean, have you had cancellations of orders that occurred in the quarter that you weren't able to fulfill or something like that? I'm just trying to understand why that delivered comp slowed so much.
I don't think some of these cancellations were higher because we wouldn't have booked -- we wouldn't have set it up if we knew we couldn't deliver it. It's more that we didn't have the product to deliver and we had to reposition and relocate to other places to make that happen.
And then as we think about the backlog, I think you described the backlog as being a little bit lower due to the timing of Easter. So as we think about things, you don't have a great backlog to work with, but you're happy with how Easter started. And so hopefully that drives a better 2Q. Is that the way to think about it?
Right. Because, actually, with backlog down only 5%, well, that's something we can catch up on pretty quickly. Clearly, we've got to sell the product going forward, but we feel OK about our position now for Q2 and the rest of the year.
OK, OK. Great. Let's see, a couple other housekeeping items, if I could. I apologize if I missed it, but, Richard, if you haven't already shared it, could you tell us what the fixed and variable expenses were in 1Q for our models?
Sure. The fixed was $63,798,000, and the variable is $35,081,000 for a total -- add those together, it's $98,879,000.
Perfect. And then with respect to the change in the lease accounting, just to be clear on this, just some moving around on the income statement of where some of the expenses are showing up, right? As we you think about the year as a whole, is there any net headwind to net income from the change in lease accounting for you all?
Yes. I mentioned it in summary in my previous comments, but if you look at the geography on the income statement, our rent expense is going to go up about the same amount as our depreciation will be declined by. So rent's going to go up about $8 million. Depreciation's going to go down about the same.
But then under our interest expense line item, the capitalized interest expense, that basically goes away, $2 million of that goes away. So that's the geography there. Does that make sense?
Right. And so the net effect is just moving which line it hits on the income statement. As we think about 2018 versus 2019, we're seeing some retailers that are having a headwind to earnings from the accounting change. You don't technically have a headwind from earnings, just a moving around on which line item it's hitting, is that right?
Well, I don't have a headwind. I've got a little bit of a lift by about $2 million.
OK, OK. Great. I guess, the only other question I had, I thought it was interesting, Clarence, you mentioned some enhancements in the mattress category. I'd be curious if you could share any more color around what you're doing there.
The bedding, the mattress business has been a real positive for us this year. It is one of the few merchandise positives. In the new lineup that our vendors have put in, the higher quality product is doing really well. So we feel good about the category.
And it is up, and we're going to improve our presentation across the whole chain. We've done one update. We found a look that we really like better, and we're going back in to put that across the board.
When you see our 10-Q we'll issue later this week or early next week, you'll see that that is the only category that's up. It's up about $1.6 million in sales, and I think they had really three really good product launches during the quarter.
That's very helpful. Thank you all for the color. I appreciate and good luck.
[Operator instructions] I'm showing no further questions at this time. I'll turn it back to you, sir.
Well, thank you for your participation in today's call, and we look forward to talking with you in the future when we release our second-quarter results.
Duration: 26 minutes
Richard Hare -- CFO
Clarence Smith -- CEO and Chairman
Anthony Lebiedzinski -- Sidoti
Bobby Griffin -- Raymond James
Brad Thomas -- Keybanc
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