Haverty Furniture Companies, Inc. ($HVT)

Greetings, and welcome to the Haverty Furniture Company's First Quarter 2026 Earnings Conference Call.[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tiffany Hinkle, Assistant Vice President, Financial Reporting and Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our first quarter earnings call. I'm here today with our President and CEO, Steve Burdette; and Executive Vice President and CFO, Richard Hare. Before we begin, I'd like to remind everyone that today's conference call may contain forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those made or implied in such statements, which speak only as of the date they are made and which 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 SEC. A replay of this call will be available on our Investor Relations website this afternoon. For commentary about our business, I will now turn the call over to Steve.

Good morning, and thank you for joining our 2026 first quarter conference call. We are excited to report another increase in both written and delivered comp sales for Q1, marking our third consecutive quarter of positive comps. Our net sales for Q1 were $189.1 million, which was up 4.1% with comps up 4.3%. Total written sales were up 6.4% with comps up 7%. Gross margins for the quarter came in at 61.5% versus 61.2% last year. Pretax income for the quarter was $6 million or a 3.2% operating margin versus $5.3 million or a 2.9% operating margin, resulting in $0.26 a share versus $0.23 a share. During the quarter, our written sales increase was due in part to the strong 2-week run-up to the President's Day weekend, which was up 8.3%. During the quarter, we saw traffic down low single digits despite the disruptions that we experienced with weather in January over a 10-day period and the beginning of operation at Epic Fury in March. Closing percentages were flat with last year, but average ticket rose 11.9% to approximately $3,700. Our design business accounted for 35.3% of our business for the quarter, rising 6.3%, with a design average ticket rising 11.7% to approximately $8,300. Our custom special order business rose 10.1% to 34.5% of our upholstered business, driven by our continued success in design. Having the ability to offer a customer a choice of over 1,000 fabrics with different styles, patterns and colors creates opportunities for our sales and design teams to ensure our customers are getting their desired selection. Our merchandising and supply teams continue to focus on bringing in the latest trends to meet customer demand. The merchandising team has become more nimble in assortment planning, enabling us to get newer products to the floors faster. We are in the fashion business, so updating our products with fresh new looks creates excitement not only for our sales and design teams, but for our customers. From a category perspective for the quarter, occasional was up double digits, upholstery and dining room were up mid-single digits. Mattresses were up low single digits, bedrooms were flat and accessories were down slightly. Inventories increased $10.7 million to $106.9 million during the quarter. This increase was planned and driven by three factors: the introduction of new products across our lineups, our continued focus on having best sellers in stock and the pull forward of orders ahead of Chinese New Year to ensure continuous product availability. We expect to see our inventory drop below $100 million by the end of Q2, putting us at the level we feel is needed to meet our customers' delivery expectations. We will start to see the effects of the administration's new reduced Section 122 tariffs implemented in February during Q2. However, we expect further changes to the tariff percentages by the administration in early Q3 as we approach the expiration of these Section 122 tariffs in mid-July. Also because of the prolonged Epic Fury operation, rising oil prices will impact us in Q2 in several areas across the business. Vendor input costs are rising, resulting in price increases, fuel surcharges on bunker fuel rates on containers, rising fuel expense for dedicated fleet serving DC to DC and rising fuel expenses at the pumps for home delivery fleet serving our customers. These rising costs will impact margins and expenses. However, these costs are factored into our margin and expense guidance, which Richard will address in his comments, along with updates on LIFO. Our marketing creative and media plans continue to resonate with our customers through connected TV, broadcast TV, social media and other digital channels. We're leveraging AI data and technology to optimize our media placement and customize messaging by market. In February, we brought on a new technology partner that allows us to measure the full customer journey from seeing an ad to visiting the website to visiting a store. This allows us to better measure our customers' path to purchase as well as determine which tactics and messages drive more store visits. We will continue to lean in on direct mail in Q2, leading up to our biggest promotion of the first half of the year, Memorial Day. Our improving organic traffic to the site is supported by strengthening the SEO foundation and laying the groundwork for AI search optimization. Our written e-commerce sales continue to outperform, increasing double digits for the quarter. Our marketing dollars were flat for the quarter as a percent of net sales as we continue to leverage this expense. Our use of 60 months no interest financing for competitive reasons has increased our credit costs during the quarter. However, we expect to still be aggressive with our credit offerings going forward to ensure our customers have the financing they need to meet their furnishing needs. We ended the quarter with 128 stores. On April 3, we opened our Fenton, Missouri store, which will be our second store in the St. Louis market. The store is off to a fast start with traffic performing in the top tier of our stores in April. And on May 8, we will open our fourth store in the Nashville market in the Mount Juliet area. Our other three stores, Pittsburgh and two in Houston are still on plan for Q4 2026 and Q1 2027 opening. We are excited to announce that we have signed three additional leases that will open -- that will all open this year. We acquired from the American Signature bankruptcy, a store in Fredericksburg, Virginia that will open in late Q3. We will be relocating our Snellville store in East Atlanta, which will increase that footprint by approximately 50% with significantly more drive-by and foot traffic potential. Finally, we will open in McKinney in Northeast Dallas, taking over an existing building that was a former furniture store. Both stores in Atlanta and Dallas will open in Q4. These three new additions to our store growth plans in '26 and early '27 will give us a total of 8 new stores. We have scaled back our remodels from four stores to two stores, allowing us to focus on these new stores in the second half of this year. However, we are still committed to our ongoing refresh of our mattress departments and design centers, which will be completed in all stores by 2027. Along with this aggressive store growth, we have made the difficult decision to close two additional stores in San Angelo, Texas, which will close in June and in College Station, Texas, which will close in August. Both stores are in markets that do not fit our long-term growth strategies due to demographic shifts, weak housing growth or the level of investment the market would require. We want to thank all our team members who have served the San Angelo and College Station customers over the years. The distribution, home delivery and customer service teams continue to outperform with excellent controls on our back-end costs. These dedicated Haverty team members focus on providing our customers with a world-class experience on each delivery. The growth that Haverty's will have in 2026 could not be possible without these team members' passion and commitment to furnishing happiness. All our growth will be done within our existing infrastructure, again, allowing us to further leverage these fixed costs. We are optimistic for the remainder of 2026 for several reasons. Our customer remains resilient during these difficult times. Our aggressive growth plans for this year, our third quarter in a row with positive comps in both written and delivered and our commitment to new products arriving every month, creating excitement for our teams and customers. And we can do all of this because we are debt-free, we value our vendor partnerships. We remain customer-focused. We're providing complementary design services. We offer Haverty branded quality products. We are committed to executing with integrity, and we offer a regret-free experience that gives our customers and team members confidence in the Haverty brand. I would like to thank our 2,400 team members across our 17 states for their hard work and dedication that contributes to Haverty's 141 years of success. I will now turn the call over to Richard.

Thanks, Steve, and good morning. In the first quarter of 2026, we reported net sales of $189.1 million, a 4.1% increase over the prior year quarter. Comparable store sales were up 4.3% over the prior year period. Our gross profit margin increased 30 basis points to 61.5% from 61.2%. Excluding the impact of the $524,000 LIFO expense in Q1 of 2026 and the $24,000 LIFO expense in the prior year quarter, our adjusted gross profit margin increased 60 basis points to 61.8% from 61.2%. Selling, general and administrative expenses increased $4.1 million or 3.8% to $111.3 million. As a percentage of sales, these costs approximated 58.9% of sales, down from 59% in the prior year's quarter. We experienced increased selling, occupancy and administrative costs during the quarter. Other income expense for the first quarter of 2026 was $53,000 and interest income was approximately $967,000 during the first quarter of 2026. Income before income taxes increased $667,000 to $6 million. Our tax expense was $1.7 million in the first quarter of 2026, which resulted in an effective tax rate of 28.5% versus 28.6% in the prior year period. Net income for the first quarter of 2026 was $4.3 million or $0.26 per share compared to net income of $3.8 million or $0.23 per share in the comparable quarter last year. Now turning over to our balance sheet. At the end of the first quarter, our inventories were $106.9 million, which was up $10.7 million from December 31, 2025, and up $18.2 million versus Q1 2025. At the end of the first quarter, our customer deposits were $40.4 million, which was up $4.9 million from the December 31, 2025 balance and down $2.3 million from the Q1 2025 balance. We ended the quarter with $107.5 million of cash and cash equivalents, and we have no funded debt on our balance sheet at the end of Q1 2026. Looking at some of our cash flow usage. Capital expenditures were $7 million for Q1 2026, and we paid out $5.3 million of regular dividends during the quarter. We purchased $2 million of common stock during the quarter at an average price of $21.97, and we have approximately $16.4 million of existing authorization under our buyback program. Our earnings release lists 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. Our 2026 guidance reflects tariffs currently in effect as of May 5, 2026. We are closely monitoring the tariff developments to manage our exposure and minimize the impact on our business. We expect our gross margins for 2026 to remain between 60.5% and 61%. We anticipate gross profit margins will be impacted by our current estimates of product, freight and LIFO expenses. Our fixed and discretionary type SG&A expenses for 2026 are expected to remain in the $307 million to $309 million range. The increases over 2025 are primarily related to store growth and modest inflation. The variable type costs within SG&A for 2026 are expected to remain in the range of 18.6% to 18.8%. Our planned capital expenditures for 2026 is $34 million, an increase of $0.5 million from our previous guidance. Anticipated new or replacement stores, remodels and expansions account for $27.7 million. Investments in our distribution network are expected to be $3.2 million and investments in our information systems technology are expected to be approximately $3.1 million. Our anticipated effective tax rate in 2026 remains 26%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes my commentary on the first quarter financial results. Operator, we would like to open up the call for questions at this time.

[Operator Instructions]Our first question comes from the line of Cristina Fernandez with Telsey Advisory Group.

I wanted to see if you can speak a little bit more about the consumer and demand trends through the quarter, how they progressed by month and whether you're seeing any changes in behavior, whether consumers taking you up more on financing options or any other changes in behavior up or down?

Sure. Cristine, this is Richard. Let me start and then Steve can finish. In terms of the written business trend for the quarter, in January, we were up high single digits, almost 9%. February and March, we were mid-single digits between 5% and 5.5%. So for the quarter, we were up 6.4%. Steve mentioned in his commentary a little bit about financing costs. You saw the G&A was up a little over $4 million. About half of that increase was related to selling costs and of the selling cost, 60% related to third-party credit costs. So it was over $1 million up over the quarter. So we're going to continue to be somewhat aggressive in that regard to be competitive in the marketplace. But Steve, do you want to.

Yes. And I don't think we've seen any real change, Cristina, from really when we started using the 60 months again last Labor Day is when we really started implementing it in our promotions. And so I think we still have about the same usage on credit where we go with it. It's just doing a little bit more volume and it's costing us a little bit more. What's being used there with our bigger tickets is getting into the 60 months and the more expensive part of the financing side of things.

And then the second question I had was based on the consumer demand you see today or year-to-date and your plans for the back half, whether it's some product or store opening, how do you feel about the ability to comp positively in the second half of the year when you're lapping 7%, 8% increases last year?

I won't go with my statement I said, Cristina, we feel optimistic for the remainder of the year for all those reasons we said. I mean, we feel our customer is very resilient. We like our aggressive growth plans that we have coming and a lot of those are going to open up on the back half of the year. Most majority of them are going to come in Q4. But obviously, we do -- we have two that we're opening this quarter, 1 in Q3 and the remainder will be in Q4. And then again, we're excited about with the new merchandising team and the new products that are arriving and getting on the floors. And we feel like we're positioned in the right place. So we feel good. We feel optimistic about it even with all the headwinds that we've got out there in front of us.

And then last one, just to clarify on the store openings. Of the eight openings, I think you mentioned some were in 2007 and then there were two store closures. So net for 2026, do you still expect five openings? Or is the number going to come a little bit below that?

If you take -- we're going to have one store that we've had a little bit of construction delays in Houston. It's going to push into early '27. So the eight store openings, we will -- one of those stores will be a relocation of the Snellville store in Atlanta. So ultimately, there are eight new stores, four closings. I'm talking about the additional closing we had in Q1 in Alexandria. So the net right now is four stores growth. for the year. If you take in the one that's going to push into '27. But if you look at the year itself, we'll -- it looks like seven openings and four closures. It will be three openings for the year.

Our next question comes from the line of Anthony Lebiedzinski with Sidoti.

So Steve, you mentioned that you're excited about some of the new product introductions that are coming out there. Is there anything you want to highlight specifically as far as any -- whether new products or product categories that you think will be certainly incremental to the business?

Yes. Anthony, I think it's more about just continuing, as I said, about us being nimbler with our line and our product assortment is recognizing things that are not working and getting in things that are more on trend, we feel like, and the merchants feel that will be a nice replacement. We're taking some small steps in some categories, but they're smaller categories, barstools. We're going after more of our chairs, accent chairs to go along with our strong upholstery lineups that we're having to create more special order opportunity there. But really, it's just more about being fresh with the lineup, being quicker with the lineups and getting them out there for our sales team and design teams.

Got you. Okay. And then you talked about your design program being up more than 200 basis points as a percentage of overall written sales. as far as that's concerned, I mean that was a meaningful improvement from '25. Did you guys do anything differently in terms of your marketing messaging? Or -- and kind of how do you think about the rest of the year as far as being able to further expand on that design business?

Yes. We haven't done anything different. We just continue to emphasize it and make sure we're putting it in front of our customers as much as possible. I did mention that we're talking about refreshing our design centers within our stores. We have gotten that done probably in about 1/3 of our stores so far. We hope to get it done. So we have over half completed this year and the remainder will be done next year. But we have a lot of confidence in it. I think there is still upside with our design business, and it could approach 50-plus percent of our sales. I mean I think we have an opportunity to still grow that. We're doing a really good job there, and it's really good to see with the build in average ticket. And especially when we get into the home, we're getting up more than 3x what our normal average ticket is once we get in the home. So we're really excited about what the opportunity there is for 2026.

Got you. And then as far as the gross margin guidance, just wanted to be clear as far as the -- any potential tariff refunds. Are you including anything, Richard, in that number? Or will those be incremental potentially?

Yes, those would be incremental potentially. So we have indirect and direct business. And so we will book that if and when we get it.

Understood. Okay. And then last question for me. So you guys touched on this a little bit, but fuel prices have gone up quite a bit certainly since you last provided guidance in late February, which was just a few days before the Iran conflict started. You talked about, obviously, a little bit about that. You also have higher financing costs, but yet you are able to maintain your SG&A expense guidance. So what are some of the offsetting factors that are enabling you to maintain your expense guidance even with some of the headwinds as it relates to fuel prices and financing costs?

Yes. I'd say on the back side of this year, we expect to see some leveraging of delivery and transportation costs in the back half of the year. So that's the big mover on the variable piece. And on the non-variable, we've already kind of baked in the advertising occupancy costs, depreciation, those things are already baked in. So we -- those remain unchanged.

We're hoping the fuel thing is not a long-term process, Anthony. We're hoping to see that mitigate over time when you get this war brought to an end.

And then the portion of the fuel costs that hit gross margins, we were 61.5%, and you know what our margin guidance is. So we've kind of baked in a bit of a cushion there, and that's why we left our gross margin guidance alone.

We have no further questions at this time. Ms. Hinkle, I'd like to turn the floor back over to you for closing comments.

Thank you for your participation in today's call. We look forward to talking with you in the future when we release our second quarter results. Have a good afternoon.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.