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

Good morning, and welcome to the Share Series Fireside chat. Today, we're pleased to have Clarence Smith, Chairman and CEO of Havertys Furniture, with us. I'm Michael Legg, Managing Director and Senior Equity Analyst at The Benchmark Company. I currently rate Havertys buy with a $45 target price. The company has a debt-free balance sheet and generates significant free cash flow. Participants are encouraged to submit questions through Ask a Question tab in the upper right of the screen, which I'll direct to Clarence following our discussion. Clarence, it's nice to see you. Thank you for joining us, and congrats on the success Havertys has achieved over the past century.

Thank you.

You've taken a long way since its founding, and I was hoping you could start with the background of the company to set the stage and discuss the company's target demographic, geographic reach and competitive positioning as it stands today.

Okay. Thank you, Michael. Havertys is a retail chain of furniture, home furnishings located mainly in the South. We have 16 states. We're expanding to 17 this next year, from Virginia and Maryland to Texas. We have targeted the middle, upper middle, mostly now the more upper middle customer, a household income over $100,000 in the larger markets, probably $125,000 plus. We're doing more customization and special order, particularly, recently, we have decorators in every store. We, right now, average about one a store. Our goal is to get 1.5 because many stores have 2 decorators. And that's about 25% to 30% of our business. And it's also helping us increase our average ticket. So we have tried to move away from the promotional players in our marketplace. And where we are, that's Ashley, Rooms To Go were the big players just nationally, but also where we are, and they're very promotional. They offer credit terms pretty heavily, and they discount. They've just targeted a different customer. We have moved into the customization, upgraded our product mix, special order, more upholstery in the custom and moved into the consideration set of, I would say, Ethan Allen, Our House, some -- a little bit to restoration there on the higher end, but more of the design groups and, I'd say, smaller players in many of our markets. So we think it's a great niche for us. We've grown our average ticket to well over $3,000, it's $3,200. And if we get to the customers' home, it's over twice that. So -- that's been what has driven our business. We'll continue to focus on that, and we see great opportunities in the near term in the next several years in adding stores, which we're doing now more aggressively than we have in the past.

That's great. And the design services, you hit it on there, we'll talk about it a little later. But first, I wanted to kind of touch base on the recent past couple of years, specifically as we were kind of thrown a curve ball with COVID, presented many challenges on the supply chain side, ultimately resulted in above-trend revenues. The first issue was the supply chain. So can you discuss the disruptions we had in the supply chain during COVID and where we are today?

Yes, it was dramatic. When COVID hit, we did what many people did is that we literally shut our business down for almost a month. We pulled down all of our lines. We pulled our credit in. We built up everything. We sold off 3 of our distribution centers, which we considered crown jewels at the time, doing everything we can to raise cash because we didn't know what will happen. And then as you know, things exploded. So through the industry and the disruption, just like it did for every other retail company, getting the goods from Asia, the supply chain shut down. In many cases, it was well over a year before you can get some product. So we were very disciplined when that happened. And I'm very pleased to see that our team stayed focused on what we were doing and what our best sellers were and didn't try to move outside of that, even though it meant that our supply chain extended out further. So we never really got in trouble. We had 2 record years back to back over $1 billion for 2 years in a row. And now we're coming back to a little bit more normal, but there has been problems. There were problems with other retailers who bought heavily anything they could. They've gotten inventory issues. And now if they have a debt issue, in addition to inventory that's high cost, they're going to have troubles. And we're starting to see a little bit of that, and we think that, again, creates opportunities for us. So we, at the same time, cut our head count about 25%. We went from 3,500 people to about 2,500 doing more business, which allowed us to obviously have better margins and better profits. And we don't see going back. We cut our hours down to 7:00 at night in every store versus 9 to 9:30. And we don't need to go back. We think that we can do more business with fewer people being more efficient, frankly, paying the best people better also.

So it was on hindsight COVID was actually a blessing for the company in that it really got you to focus on some key issues, head count reduction, I believe you also did a lot of work on your website. Could you talk a little bit about how that actually evolved?

Yes. Yes, we knew that the website was critical. We invested very heavily, and continue to. We're on the Adobe platform that we put in, which allows us to be much more efficient doing A/B testing, more creative, be able to move much quicker for the customer to be able to react quicker to the product. We're continuing to enhance that, and we know that we can do better there. But what happened with the sales is they went from about 2% to 6% to 7% online. We thought that would continue to go up. It's not. It's come back down to about 3% to 4% of what we sell pure online. Our customers want to see the product, and we're selling a better customer. We mentioned that. And we know they like to see, feel, touch and experience it. And it's allowed us to be in their home now, more design, more custom, adding to the average ticket. So the online business itself is not growing as a percent, but it is very, very critical. I mean, obviously, everybody goes there first when they're shopping for furniture or anything else. And we have 3D design that the customer can do, and we can help back and forth with her on setting a design for her home and what it looks like. So the investment there, we're continuing. We knew we needed to do more. We're continuing to spend a lot of money making sure we have what we consider one of the best home furnishings website out there.

Okay. Great. Yes, it does look very impressive when I look at it. Just now, on the consumer, disposable income has really been impacted by inflation over the past year. Can you see what you're seeing with the consumer in terms of buying behavior?

Well, we're reaching a better customer, but I will say that -- the key indicator for us is new home sales in the South. So that has been affected, as you know, dramatically by the mortgage rates, insurance rates. So we're very sensitive to that, and that is continuing to be a drag. However, because we've been targeting a better customer, I think that our business is outperforming the industry as a whole and certainly the promotional end of the business because they're much more price sensitive. So we're appealing to a better customer who can afford to buy furniture, who does have a home and wants to make sure it reflects their personality and who they are, and I think we're gaining share because of that.

Very good. And then with your Southeast focus, when you do look at new home sales, existing home sales, the migration towards the Southeast is very different than the national footprint. Can you talk a little bit about how your geographic focus is more beneficial for you being in Florida, Texas for some of the national retailers?

Well, I think we're in the best markets in the country, where people are moving, and we're continuing to refocus on that. Our biggest states are Florida, Texas, Georgia, the Carolinas, and that's where people are moving. I mean there are also recent data, everybody knows about people moving to Florida. Texas is also where they're moving. But we were seeing some new data that the people who are leaving Florida are not going back Northeast or going West. They're moving back into Georgia and North Carolina. They call them halfbacks. That's where we are, and we have a very strong position there. So where we're growing our new stores is in Florida. We repurchased our distribution center there, the one we sold several years back, and we know that we can expand that. We want to reemphasize, reinvest in all of Florida and Texas and the Carolinas. And we're focused on reinventing and repositioning ourselves in all of these key markets within our distribution footprint. And we think that's going to give us ample growth opportunities in the next several years.

Great. So you compete with national retailers, but you also compete with a lot of local mom and pops who probably don't have the balance sheet that you have to be able to weather any type of downtrend based upon inflationary discretionary income issues. Can you talk what you're seeing from the smaller competition out there today?

Well, I referred a little bit to the -- some of the players who got in trouble buying the wrong things at the wrong time. We think we have a significant advantage over any of the smaller players because of our buying power. I mean we have teams on the ground in Asia and Vietnam, where we bring in a lot of our case goods. We've got the strongest position with our vendors. And most every vendor we deal with, we're their top supplier, in some cases, frankly, almost their only supplier. So we're going to get the product. I think that some of these smaller players are going to have inventory problems or do have inventory problems. They're not going to get the great values that I think we do because of our buying power. And they're going to have trouble if they have debt. And if they have debt, they can't refinance it. It's going to allow us to see more opportunities, as we just did with the Bed Bath & Beyond stores, which weren't direct competitors, but it did open up the kind of opportunity that I think we're seeing now and we'll see in growing our business going forward. The fact of the matter is the smaller players are not -- they don't have enough status. They don't have enough depth to be able to invest in their business, to be able to bring product in from Asia, to have the impact, to have the values that we can develop.

And you mentioned earlier, Havertys traditionally does not get promotional in pricing. But what are you seeing in the market now from competition from a promotional pricing perspective? And how do you plan on sticking to your guns on that?

Well, we don't think we need to be more promotional, and we're not planning to do that. We do offer credit, and I say free credit, but it is more limited than it was in the past because it's more expensive. We don't discount across the board. A lot of players do that all the time. That's not who we are. It's -- I think it denigrates the brand, and we want to build a brand. So I don't see us being more promotional. I haven't really seen a lot of change comparing us to the competition. But I do think that, that will become more of a factor as things get a little tougher for some of these players.

Okay. And then you mentioned design services, getting your average ticket up around $3,200 now, been a big success for you. Can you talk about the growth of the design services business and how you see that panning out over the next couple of years?

Well, it's moved from the low 20s to now almost 30% of our business. I think that will continue to go up. I don't have a cap or a goal, but it could go up however the customer wants it to. We don't -- we're not a design house and don't want to be known as a design house. But we do know that our customers need help in putting all of these looks together to creating the look they want in their home, and we offer that at no charge. And I think the design service could get to be 40%, I don't know. We don't have a cap to it. We want to make sure, though, that we're not known as a place that all you can get is design, which would be like Ethan Allen. That's a design house. We're not. We don't offer draperies like they do, but we do a heck of a business in rugs and accessories to make the room pull it together. I think it will continue to be the driver of our average ticket. I think as we get into more people's homes, we're already seeing $10,000, $20,000 sales transactions. As you get into somebody's home and build a relationship, and we're relationship-driven, not an individual item-driven, and I think that will continue to help us grow that end of the business.

Great. And then in servicing the customer, you also continually look at your categories. One of the new categories, I believe, you're going to be rolling out next spring or early next year is going to be outdoor. Can you just discuss that a little bit with us, please?

Yes.We got out of that category. We're going to be back in starting this month and starting to arrive this month in January. It's not a major play, but it's a new play. It's just 2 or 3 groups that we'll have in about half our stores and offer it mainly to people who are trying to do the whole home. When we have designers in the home, they want outdoor or patio, and we're going to be able to offer that. It's a great value. We do some lines also through third-party Internet on outdoor, but this is the first time we'll have a program in about 5 years. We have one 5 or 6 years ago. It was too broad. It wasn't well-timed, and we got out of it. And now we're going to be more refined, more specific in markets where we know that we have a lot of demand for that. So it's a new category. I can't say it would be significant, but it's new.

But one of the parts to this question is how this kind of -- like you continually evolve your floor, and you continually adjust the product towards the customer. Is that true? Or is that just...

Yes, absolutely. I mean we're a fashion business, and we recognize that. We are meeting next week with our whole plan and what our philosophy -- how are we revising our philosophy to better reach our customer. We are doing more custom special order, you know that, but that's almost all in upholstery. So it is a fashion end of the business, and it changes quickly. And we have to be -- we have to move quickly to however the customer is reacting to and be able to get the quicker product. One of the winners that we've had recently is a leather group that has become one of our top sellers that we're flowing from Asia in a quick ship. They're able to come up with different leather colors and covers and be able to get us a quick ship, and it's helped the business in that area significantly. And this is -- these are high-priced groups, but are doing quite well for us.

Great. I just want to remind people, if you want to ask a question, please submit it through the tab at the top right in the corner. Clarence, so now you've done a great job streamlining the company from a head count perspective. You've got the design services working. You've got your supply chain back. And now you're starting to grow a little bit. You bought some stores in Bed Bath & Beyond recently. You've committed to 5 stores a year from a growth perspective. Can you just talk about your growth plans?

Well, you just articulated the biggest part of it. Yes, 5 stores a year, and we feel very good about that. And actually, I think we can do better than that because we're seeing some really good opportunities. We did buy out of -- at the auction, 4 of the Bed Bath & Beyond stores. And 3 of them are in Florida, great markets where we were having trouble finding the locations. And we're also negotiating, and we'll announce when we actually have the leases with several Bed Bath & Beyond locations that went back to the landlords. And we're seeing other locations that we feel very good about, not necessarily Bed Bath & Beyond. But I think it does point out the kind of retail sites that are going to fit us. They're smaller than our historic, but we know that we do quite well. We, many years ago, got the Circuit City stores. And that allowed us -- and before that, we got into the Sears Home & Life stores. They were smaller footprints than we were used to. They were in the 30,000 to 35,000 square feet. When we were selling out of the biggest boxes we have in the company are in the 50,000 range. But we learned very quickly that we can do as well or better in a smaller format store. And we have some stores that are in the 25,000 range, which do really quite well. That just opens up more opportunities for our growth, to expand where our customers are going within the markets that we serve. And we think there are more opportunities now than maybe we've seen in 20 to 30 years. So we've spent a lot in the past 5 or 6 years, over $100 million redoing our stores, upfitting our stores. Now we're adding locations with a new look that we know works and is comfortable, that our customers are comfortable with, and it's frankly the most exciting time that we've seen in a good while.

Great. And then you also recently hired in the past year some of the head up in your real estate. Do you want to talk about that a little bit?

Yes. Katie Mendolera came with us only 4 or 5 months ago, maybe 6, but she was our investment banker at Truist. So she knows us. She has worked with us for 5 years. And she's helped us in making all these moves work for us. She knows how to make deals and exciting to have new energy on our team to all pull that together. So she works with Richard Hare very closely, our CFO; and Steve Burdette. And she's brought new talent, and we're going to do more deals that makes sense for Havertys.

Great. And at one point in the recent past, you had thought about expanding your DC, distribution centers. Can you talk about where we are there today? And is it possible moving outside of the geographic region you're in now with that type of expansion?

Well, when we bought back the Virginia distribution center, it's actually more of a cross-dock. And what we want to do, and we have plans to do, is expand it to a full distribution center. We have postponed that because of the cost. And frankly, we don't need that right now. But it does allow us to move up into the Atlantic stores and more states up that way. I don't see us go to New York. I don't see us being up there with you, Michael. But I do think we'll be closer. I think there's more demand there and over into Pennsylvania areas that we reach almost. And then also to grow more into the D.C. area, Northern Virginia, where we are. We think there are more opportunities there. But most of our investment is going to be, where I said earlier, it's going to be in Texas, Florida, and yes, markets where we currently have a position. And I don't see us moving out of that footprint within the next year. So I mean it will happen at some point. In order to, let's just say, move to -- if we were trying to move to Chicago or some ways like that, you need to have a distribution center. And to have a distribution center is all new cost. And you probably have to have at least $100 million to maybe $150 million in volume to be able to support that. So we have great opportunities where we are, and frankly, the best markets in the country.

Great. And all your fruits of your labor have allowed you to build up $130 million on your balance sheet, no debt. Yes, my estimates show you having free cash flow of $70 million in 2024. So obviously, cash is abundant for you, given the strong business model you put in place. Can you discuss your dividend policy, including the special dividend that you've had in each of the past 3 years, giving you almost a 10% yield? And then you also have a share buyback in place. You're returning a lot of capital to shareholders. Can you just comment on that, please?

Well, we've been very consistent in returning to our shareholders. We do generate positive cash flow. We did authorize a special dividend just recently, but we've always felt like there should be a balance. Our Board meets every quarter. We talk about this every quarter. We believe in a balance of share buybacks and dividends. We have raised our dividend consistently, and we paid a dividend since 1935, and raised our dividend consistently since, I think, 2010, and we believe in that. And the yield is, what, almost 4%. The special dividend is a special dividend, even though we've done it for 3 straight years. We look at it at the end of the year and see what our position is. We do believe in the stock buyback. We've got different kind of holders of our stock. And some of them like dividends, some of them like share buybacks, so we believe in a balance. And we've always felt strongly about that, and I think we will continue going forward.

Great. Okay. Again, if there's any questions, please submit them. I'll just -- I'll start with a couple of questions, Clarence. We didn't talk about white glove delivery, but one of your differentiators versus your competition is that white glove delivery at the customer service. Can you talk about that a little bit?

Well, I do think it's unusual in our industry. All of the people that will be coming into anyone's home is a Havertys team member. So all of our distribution, all of our customer service, all of our delivery, those are Haverty team members. And I do think it separates us. We are only interested in taking care of that customer with the delivery. And if there's a problem, we'll follow back up. We can come back at the same day. And if you go online to buy something, you'll have a picture of who your driver is, what his name is and when he'll be there, and you can track the truck. I think it does separate us. And I think in the better end of the business, customers would expect that. Everybody expects something to be delivered in good shape. But we're able to do that consistently, and I think better than all of our competition. There are very few players that do all of that themselves. And it's a very difficult thing to do to deliver furniture. It's expensive. We customize it. We open it. We inspect it. We do everything before it gets to the home to make sure it's the right thing. We put it together in the home. We deliver it in the home. It's just -- it's a tough thing to do on a very emotional purchase, and I think we do it better than our competition.

Great. And I'm going to ask you one last question and then let you go. But what keeps you awake at night? What's the biggest risk? What do you see out there that you're most concerned with?

I've talked about how excited we are about our opportunities now. I would have to say it's macro. I mean, I think our position in the right part of the country is exactly where we want to be, and I think we've got great opportunities to grow that. We're dependent on the interest rates and housing. And I think demand for housing is going to be strong. And I think housing as the interest rates come down, we'll do better also. And I think we'll go quickly up with that. So -- but if anything macro hits more than that, that would be your main concern. But we don't have any debt. We do have cash, and we can ride through any kind of issue that comes with us. And I think we'll do it better than our competition and be able to gain share.

Yes. And I think your balance sheet will allow you to emerge many economic weakness stronger than the competition. So while in the short term, it may be somewhat impactful, longer term, you will emerge even stronger, at least, in my opinion. So well, thank you, Clarence, this has been very insightful to give investors an overview of Havertys. And I'd like to thank you for your time, and I wish you continued success.

I appreciate it. Thank you, Michael. Appreciate the time.

All right. Take care.