Haverty Furniture Companies, Inc. (HVT) Earnings Call Transcript & Summary

Good afternoon, and welcome back to the conference. I'm Dan Aldridge with Asbury Investor Relations, and I have the pleasure of introducing Clarence Smith this afternoon who's the Chairman and CEO of Havertys. For those of you who don't know the company, Havertys has been around for 135-plus years and has been one of the winners coming out of the pandemic. They're playing into a lot of the secular trends, like millennial homeownership, the continued rising of home price appreciation, new homebuilding. And yes, millennials are now buying homes. So with that said, very pleased to have Clarence Smith with us today, and I'll turn it over to him for opening comments.

Well, thank you, Dan. Glad to be on the program. Havertys is a branded retailer, and we only sell Havertys-branded product. We've developed it over the last 20 years. I mean we're one of the oldest retailers in the country. We think we're also one of the oldest companies in Atlanta. But the main thing there is that we've been in business all these years and we know how to take care of our customer. We have upgraded our product. We build quality products from the best designers in the country, frankly, in the world. We use domestic suppliers and Asian suppliers. And in the mattress end of our business, we do sell the top brands. It's the only part of our business where we sell somebody else's brand, those would be Tempur-Pedic, Sealy, Serta and Beautyrest. I think the most important thing about us today is that we are in the home business. We're blessed to have been in the home business all these months and over the past year while people focus on the home. And we're in the best regions in the country. Our biggest states where we have the most stores are in Florida, Texas, Georgia and the Carolinas, where people are moving. And we have continued to source from what we believe are the best manufacturers in the world and we're getting that product. We have upgraded over the last decade our product mix. We're doing more design business, more special order, more custom. And we now think we've moved into consideration sets of Ethan Allen, Crate and Barrel. And we've outperformed, we think, with a better value and a better service level. One other issue there in our service, all of our warehouse people, all of our delivery people are our own team members. Those are our people in your home, you know who they are when we get there. And we think that last mile, the focus that we have, is a significant advantage.

That's a great start. Sorry, I didn't mean to cut you off. You got something else to say?

No, go ahead, Dan.

So actually you talked a lot about customer service, and customer service is key for you guys. So talk a little bit about what's your average customer demographic. Has that changed at all? And how is that customer advantage to you guys?

Well, I think we're dealing to -- with a customer who has a little more income than what is normal in the furniture industry. Our average income for our customer is a little over $100,000. And in the metro markets, it would even be higher than that. We've focused recently in the last 1.5 years on a younger customer. So it's a target that's moved down, 25 to 54. And I think our main focus of our target is someone who's in the early 40s. These are homeowners. They live in the suburbs. We do target a woman. She is the one that's the decision maker. And she has a family and has a college education generally. So a better quality customer who's focused on making sure her home is part of what expresses who she is.

Okay. So speak a little bit about customer acquisition, retention initiatives, specifically the new advertising campaign, a TV campaign that you guys have out that's very different than what you've done in the past.

Well, last year we engaged a new firm, EP out of Greenville. And a couple of years ago, we brought in a new director of marketing for us. And she has done a fantastic job. This agency has helped us target a better customer using more digital, more social direction. And I think we have a new campaign that you've just mentioned called We Furnish Happiness. And the message is that we're not happy until you're happy. And I think that's raised the bar on what we expect from ourselves and from our team members, but it also is something our competition would not be able to say and doesn't really want to say. We think that we've been in the business for a long time. It really is our mission to help our customer's vision of their home come true, and we're not happy until they're happy.

Talk a little bit about -- when you talk about in-home and customer service, obviously you guys have put a lot of emphasis on the in-home design. I think it's a higher average ticket, if I'm correct, and even some higher margins. So talk about how that business has grown and where that's going.

Well, that has grown dramatically. We added designers to all of our stores about 7 years ago. We are now very good in that program. So our customers, if they want to have some help in making their vision of their home come true, we have a free designer in the store that will come in their home and help them set that up. It's about 25% of our business. And in some stores, it's getting up to about 30%. Not everybody wants a designer and we know that. But we do offer that service and encourage it. And I think that's what's helped us grow our average ticket, which now is almost right at $3,000, and many stores higher than that. And when you have a -- when you get in the customer's home, it's close to double that amount. So it is a major part of who we are and how we're separating ourselves from the promotional players, who in our markets are Rooms To Go and Ashley, and they compete on credit and discounting, and that's really not our focus right now.

So moving on a little bit, you talked about the service side. Obviously during the pandemic, a lot of stuff went digital and you guys did a lot of things to make sure that the business was set up well to succeed. So talk about what you saw in the digital space, what the opportunity is for Havertys going forward there. And to put it into context with a listener, what is the penetration of sales from a digital perspective today versus what it was 2 years ago?

What we sell online, and that means directly online, is only in the mid-single digits. It is up dramatically from 1% or 2% to 5% or 6%, but it's not the major part of our business. However, the website and how that works and how it expresses who we are and how to appeal to our customer is critical. It is our front door. And we have significant investments underway right now to make sure that we have the best functioning website in the industry, and we're dedicated to making that happen. You can buy online with us transparently, whether you're -- and it doesn't matter where you are. You can buy today and have it delivered in Miami, never have to talk to a customer -- I mean to a salesperson. But that's not how most of our customers want to deal with it. And one of the reasons is that we deliver all of our own furniture in our footprint in the 16 states. And most people want to see the product at the price ranges we're dealing with and the customization. And they can, because we're only delivering within this footprint and we deliver almost everything we sell. So while the website is important, is critical, and whilst buying online is whatever the customer wants to do, we want to make that easy, most people still want to see the furniture in the store and then they can buy it back home later. And it doesn't matter, it's transparent. And it doesn't affect the salesperson, they get credit if they've dealt with that customer.

Yes. I think you just answered my next question, which is around your thoughts and strategy on new store builds as online increases and how that informs those decisions. I know you guys have opened a few stores recently. Can you talk about the importance of physical retail to your business and the defensive moat that you guys have there?

I think that you need to have a physical presence in a market to really do business. And -- however, we don't need to have a number of -- we don't have to have a lot of stores, we don't have to have large stores, because of the website and how you can show more without having a massive building. Our current footprint in most of our stores is around 30,000 to 35,000 square feet. It used to be, and we have some great stores that are, in the 55,000 square feet. The newer stores that we're opening are in the high 20s, low 30s and are producing tremendously. And we don't think that you have to have major big buildings, but you do have to have a presence to really grow market share in individual cities. So we're now opening a store -- we just opened a store in Myrtle Beach which is a smaller store and doing really, really well. We're going to open a new store which is a smaller footprint store in The Villages in Central Florida in the next few weeks. It's a new concept store which is a little more design-oriented for that market. And we're opening a third store in the Pflugerville area of Northeast Austin which will be our third store there in a terrific market. So going forward, we see growing by 2 to 3 stores a year. Relocating some of our best stores, as we always do when we have over 120 stores. And investing in remodeling and repositioning some of our better stores in our best markets. We want to grow within this footprint of the 16, 17 states, mostly from the South, and grow our production out of those buildings. Growing our sales per square foot is really what we're focusing on.

Great. So I got one question from the audience, and I'm going to ask since we're talking about stores right now. And obviously, the Southeast is your main market. You're in the Midwest a little bit, it seems like there probably is some opportunity for expansion there. But the question specifically is around expansion into the Southwest. Obviously, you're already in Texas. But if you look 2 to 3 years out, will Havertys have more stores in the Southwest?

I think so. I mean Texas is our second biggest state with number of stores. To move further west, you'd probably have to open up a distribution center, maybe to Phoenix or even into California, we certainly would. I don't see California on the horizon. I do see that the Phoenix area is a possibility, we've looked at that. And it, however, would require further investment in distribution. And right now, we see a lot of opportunity where we are. And that would probably be moving up to East -- the Atlantic Coast a little more. We can reach that. There's a lot of density there. We have name recognition. And we think great opportunities up that side.

So you talked a little bit about the supply chain, and I think that's obviously a competitive dynamic for you guys. Obviously, very important to own that last mile and you've touched on it a little bit. But can you talk a little bit more about how that's a competitive advantage for you versus your customers? And any initiatives that you have going on there to further that differentiation?

I think the technology that we put in place to make sure that the customer knows where we are when we're trying to get the product to her is probably one of the best in the industry. This big-ticket delivery is not something that's easy to execute. And it's one of the reasons we want to own that last mile. I mean Ashley does third-party. Rooms To Go most does third-party. Amazon hasn't figured it out. Wayfair does, frankly, third-party. So we think it's a significant advantage. And if you go to the supply chain on the other side, we have technology that tracks product in Asia. When it goes through the factory, we know what's going on the containers, when we get containers. Now that area right now is a major problem because you know about the backup and the backlog of getting containers, getting the product, getting it on the ships. And just the delays in getting any of those products is significant today. However, because of our relationships with these vendors, we think we're getting a better supply quicker than most any of our competition. And it is a lot about relationships. It's about long-term commitment and making sure that we have the right information. And we want to do better than anybody else to be able to get the product to our customer in time.

Do you have any thoughts on when some of the blockage will loosen up and kind of the global supply chain? I mean it's obviously impacting everybody and the question you hear a lot.

What I'm hearing is it's going to go into next year. I don't see it really getting better this year, maybe a little bit better. We're having to pay premiums to get containers. Maybe some of the commodity issues like foam and wood improve, but the backlogs are so significant that I don't see it getting better. What I've heard until the first quarter, maybe late first quarter of 2021, we're getting good flow, but it's still a significant backlog.

So obviously, customer service is key for you guys. So how do you manage the customers' expectations in that environment?

It's communication. It's not easy. Customers coming in today, we have to tell them by vendor whether it's 3 months, 4 months. Most people will wait. We have not had a significant cancellation percentage. Even though people are having to wait a long time and because there have been delays, it's all about communication and being upfront digitally and with our salesperson who's communicating directly with that customer.

So we're going to switch gears a little bit. Another question from the audience, really more around the business segment. But talk a little bit about mattresses and kind of what you're doing there, how you differentiate, what does the runway look for -- like for that business for the next couple of years?

Mattresses are an important part of our business. It's generally 10% or 11% of our total business. We've recently seen some good sales there. They had major production problems with foam all the way back to March last year and that's improving. It's still a problem. We think that most people in the kind of quality, the Tempur-Pedic and Beautyrest and Serta, would like to deal with somebody who's going to stand behind the product and be around for a long time. And we have experts in our stores that understand the product. And I think that will be continually an important part of our business. It's double-digit now. We think there's great opportunity there, particularly as the product flow improves.

So talk a little bit more about your customer. So we talked a little bit about customer demographic, you guys doing specific things to target the younger customer. As we mentioned kind of at the outset, you're seeing millennials now moving into larger homes, getting into home ownership. Are you doing anything specifically to target millennials or even the Gen Z as they're growing up and coming into their prime earning seasons?

One of the major things that we've done is targeting the movers. A lot of our digital advertising is targeted to new movers. These are people that might not have thought about us in the past. And I think that's grown a percentage of our -- of our new customers, particularly over the pandemic, who are thinking about furniture but not necessarily thinking about Havertys. And as -- that's really our best target, somebody who's moving into a home. And if you think about particularly Florida or even Texas, but Florida, people moving to Florida have already gotten rid of their furniture. They're looking to redo and have a new look down there, and that's our biggest state. And so the new mover target, I think, has helped us reach that younger customer and helped us enhance that demand.

So when you kind of look at the different housing metrics that you mentioned, do you guys correlate more closely with new household formation or household turnover?

It's really new home sales in the South is the best indicator for us. And that used to be existing home sales. But as we move into these fast-growth areas of Florida, Texas, Atlanta and the Carolinas, it really is more to new home sales. And that, recently, because of the inflation and the cost of new homes and the fact that they're not as many, is a factor. But as long as there's demand for homes, we believe our business is going to be strong. So we see a pretty good avenue of growth over the next couple of years.

So let's talk a little bit about results. You guys have had great results several quarters in a row now. When you look at it from a geographical perspective, obviously Texas and Florida are really strong. Is there anything else that you would call out, not only from a geographic perspective, but do you see differences in rural versus urban markets, for instance?

Well, we are focusing on making sure that we have a really strong position in our major markets. And that's -- that's really one of the strategies we have in place this year and for next year, is to compete and defend the markets that we're in. And I think as we've upgraded our product, it really relates better for the larger markets. A smaller market, an outlying town, it doesn't support the kind of product and the kind of merchandise we're selling. So we're focused on making sure that our key markets, we're defending with well-built, beautiful stores in the right parts of the market that are growing. And that's the focus that we will have in our real estate area. And we're targeting our market share to make sure we're growing our market share in these areas. And that will be our focus for the next couple of years.

So let's talk about the assortment a little bit as it relates to kind of geographical differences, and I think it would be helpful for the audience who may not know Havertys as well. But can you describe a little bit about how much of the assortment is decided centrally versus locally? Meaning could you say that 80% of the assortment is managed and developed centrally versus we leave 20% up to the local, regional managers so they can add their own flare and styles and things that may sell better at that local market?

Well, we do have a centralized buying team. We do have our regional managers who have input into what kind of mix. I will say that because of our distribution centers, we have 3 main ones, the 1 here outside North Atlanta in Braselton, Central Florida and in Texas in Dallas. So that allows us to have a regional mix in Florida, which is a different market, lighter colors, lighter fabrics. And it allows us to have a different mix for Florida, a different mix for the Texas Western region. And then the main facility here in Braselton covers all of the products for all of the regions. So I'd say that at least 80% is a common mix and then the 10% to 20% is different for the West and different for Florida. The individual markets, I don't think have a lot of say. It's more set regionally. And I think it's -- today, in trying to flow best sellers, you have to have a focus on making sure you get your best sellers in stock, and the fringe product is not near as important.

Yes, makes sense. So we're going to switch gears completely now and talk about capital allocation. So obviously, Havertys has done a great job over the last several years returning capital to shareholders, especially in the last 18 months, whether it's through the dividend, the buyback program you had, but then the special dividend that you had after you've made it through kind of the pandemic. So I would love to hear your thoughts on capital allocation priorities and how they changed.

I'm going to go back a little bit. We -- we used to be a credit player. And so we carried our own receivables. And I'm going to say great -- before the Great Recession, we were instructed, advised that having your own credit is a risk. And we had about the same amount of debt as we did in receivables. And so we got out of that in time so that by the time the Great Recession hit, we didn't have any debt. And we have a focus on making sure we don't get back into debt. This is a cyclical business. But meanwhile, we've grown our cash position significantly. And in the last several years, we've returned a lot back to shareholders. We've always had a philosophy of returning capital back to shareholders, and it's been a mix. It's been basically half and half in getting into the -- buying back stock and issuing dividends. We have a quarterly dividend of about $1 a share annually. And we've also, from time to time, had special dividends when that made sense. And so the Board has a philosophy of returning to shareholders about 50% of what we are. And that's what we've historically been doing. We do have an allocation of what we can buy back in stock, we have an allowable there. But we're not in that market right now. We did increase our quarterly dividend earlier in the year and we look at it all the time. This Board looks every meeting what is our cash position, what do we want to do with it, and we've got a combination that I just outlined.

Perfect. So just a couple of high-level questions here. We've only got about 5 minutes left. But the first one, just to kind of recap for the audience a little bit, if you could think of the 3 to 4 main things that are going to help drive Haverty's growth over the next 3 years, what are those?

Well, I think, first of all, understanding who our customer is and targeting her correctly. And I think we've made great strides there with our new agency, with our new campaign, with a digital focus, with looking at a younger customer and targeting her better and making sure she understands who we are and what we offer. We want to make sure our stores present our product better than anybody else and that they're positioned in the right markets. And when I say the right markets, it might be the neighborhood. I mean we -- when you have over 120 stores, you're always looking to relocate. We do think there are some markets we're not in that we can serve quite well out of our distribution footprint. And we will and are looking at those aggressively. I do think after this pandemic plays out, and that it's still playing out and it will play out through next year, because a lot of players today can't get the product, even though they can sell it, they can't get it, and I think we're going to be able to look at opportunities from other retailers, from other manufacturers, locations that make sense for us and we'll react to those. I think so, you've got the customer focus, you got the quality product and the locations. Those are the things that we're focusing on and making sure that we present the product digitally however she wants so that she understands who we are.

And then, obviously, the flip side of that question is what are the biggest risks that you guys face for that strategy getting turned upside down?

Well, If interest rates go up dramatically and housing gets hit significantly, that will impact our business. We've had a big runup. We didn't know what was going to happen when we shut down from COVID and the business has been great for the last several quarters. And we think that the backlog alone will help us continue. And I think that the demand for the home will continue, it's changed how people look at the home. But if there's something macro significantly, it will hit us. Historically, we're a cyclical industry. I think it's less cyclical today because of our tie to the home and the demand for making the home what she wants. And I think we're better at that than anybody.

Yes. And I think you guys have proven throughout several decades, if not over a century, that you've been able to weather the cyclicality of the macro very well.

We like to say we've survived 21 recessions. Good things are ahead for us.

So last question for me, and then I'll turn it back over to you for any closing comments before I wrap up. But thinking about the purpose of this conference, the audience kind of a mix of retail institutions, mainly retail. But for that audience, what would you say differentiates Haverty as an investment compared to other equities or your peers?

I think it's our track record. I think you talked about it. I mean, first of all, I think people in a pandemic and in uncertain times go to something and somebody they trust. We've been in business for 136 years doing the same thing with the same family involved. And I think that track record of also returning capital to our investors is there. It's consistent. We've not changed with that. So I believe we now understand our customer better. We've upgraded our product and how we reach her. And I think it's a great place to be. We like being in this position today.

So any closing thoughts from you, Clarence, before I wrap it up?

I appreciate the interest and everybody's interest in talking to Havertys. Thank you.

Well, thank you, Clarence. Thank you, Havertys, for participating in the conference today. To the audience, thank you again. Remember to provide feedback to us on the conference. Tell us what companies you want to see present here at future conferences as well. And for anybody who asked questions that we didn't answer live, we will get back to you and get those questions answered from the company. So with that, that ends the first Shareholder Equity Conference. Thank you very much. And again, thank you, Clarence.

Thank you.