Good day, and welcome to the HBT Second Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Haire, Chief Financial Officer. Please go ahead.
Thank you, operator. During this conference call, we'll make 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 Our Chairman and CEO, Clarence Smith, will now give you an update on our results, And then our President, Steve Burdette, will provide additional commentary about our business.
Thank you for joining our 2021 2nd quarter conference call. We're very pleased with the record results in the 2nd quarter with sales of $250,000,000 We've done a good job in our expense controls across the board and combined with pricing disciplines from the merchandising teams and stores, We achieved solid gross margins and 11.7 percent pre tax operating profits. Our ongoing objectives are to grow market share in our We believe that the increased importance that was jump started with the impact of COVID last spring is a longer term trend. While we don't expect the rush that impacted our industry to be at Elevated levels we experienced in recent quarters, we do believe that home is a priority and a sustainable trend for the near future. The strong desire for homeownership combined with Haverty's strong positioning in Florida, Texas and the Southeast and shippers to bring in product to fill orders and reduce our record backlog.
The shipping challenges that home related industries are Experiencing have caused major delays for furniture, which we believe will be problems until the spring of 2022. We're working to increase our inventories as the production and product flow improves. We're investing in our distribution capacity to Support growth over $1,000,000,000 over our regions. We just completed additional racking to our mother ship, the Eastern Distribution Center in Braselton, Georgia, which adds 20% more storage capacity. We will evaluate potential expansions to our network to better serve our planned growth.
Our current focus is on building market share in our key markets with store positioning And target marketing to our core customer and new homeowners. Examples of this were the opening of Myrtle Beach earlier this year, The opening of a 3rd store in Austin in the fast growing Pflugerville Round Rock markets And a store opening tomorrow in The Villages in Central Florida. We're in a deep dive reviewing potential locations in our best markets, which will reach the fastest growing areas and leverage our existing infrastructure. We expect to announce several new fill in locations for the 2022 openings. We're very excited about the rollout of the We Furnish Happiness marketing campaign, which we believe more clearly separates Havertys from our competitors and continues to raise the bar on service, quality, furniture and design.
We continue to be focused on our front door, habertys.com. We've committed to significant We've contracted with Adobe to bring on a collection of applications and services that will lay the Foundation for unmatched customer experience. The new foundation will improve functionality, help us create content easier and faster, provide better personalizations using AI driven automation and enhance our analytics and reporting. Our goal is to have the best in class website experience. I'll now turn the call over to Steve Burdett, President.
Thank you, Clarence. I'm very excited with our results for the Q2. This performance was due to the commitment, passion and the termination of the store, distribution, home delivery, service and home office teams, whom I want to congratulate personally for their efforts. Our supply chain network has been able to increase the flow of products into our warehouses over the 2nd quarter, even with all the headwinds. Container capacity continues to be under pressure with the continued increase in demand across all of retail.
We expect this to continue to be an issue for the remainder of the year, even if there is a softening in demand. Also, container prices on the spot market Continue to increase with prices varying between $12,000 $22,000 a container. We have been able to balance our shipping mix so that no more than 20% to 30% is on the water at one time at these increased rates. As I stated last quarter, We finalized our contracts on May 1, which are significantly below the spot market rates. Foam continues to be an issue for some of our domestic vendors.
However, their production has increased during the Q2, but still not at 100%. Our import vendors are not having any foam issues. The recent closures in Vietnam due to the increased spread of the Delta variant Are not expected to have an impact on our customers if the closures remain at the projected 2 weeks. They are expected to open back up beginning the week of 8 However, if the closures are prolonged 4 to 6 weeks, then there may be an impact to our customers who already bought and future customer lead times. Also, we are seeing port congestion in Vietnam and China along with continued issues at the LA port and rail yards.
Our merchandising and supply chain teams are monitoring the situation very closely with our vendors. Our pool is now approximately 2 times larger than last year, with the average pool age stretching to approximately 8 weeks from 6 weeks over the last 90 days. Our special order lead times have increased to 12 weeks to 20 weeks depending on the vendor, causing some softening in our special order business. Our distribution, home delivery, service network Delivered a record quarter. Over 90% of our markets are delivering within a week to the customer's home once we have the product in our warehouses.
Staffing continues to be our number one concern in both distribution and home delivery. The extra unemployment monies that have stopped In most of the states, we operate our warehouses, but there is still not enough people looking for work to fill the jobs available. However, we remain optimistic that we will see this improve during the Q3. Again, I want to invite thank the entire Haverty team for all their efforts during the Q2. Now I'll turn the call over to Richard.
Thank you, Steve, and good morning. In the Q2 of 2021, Delivered sales were $250,000,000 127.3 percent increase over the prior year quarter. If you recall, our retail operations were closed due to the pandemic in the month of April in 2020. 103 stores reopened on May 1, 2020, And the remaining stores reopened by June 20. Total written sales for the Q2 of 2021 were up 67.5% over the prior year period.
Comparable store sales were up 46.9% over the prior year period. This only includes stores that were open for a full month in both periods. Our gross profit margin increased 240 basis points from 54.2 percent to 56.6 percent due to better merchandising, pricing and mix And less promotional activity during the quarter. These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight And product costs. Selling, general and administrative expenses increased $39,800,000 or 54.7 percent to to $112,400,000 primarily due to increased sales activity.
However, as a percentage of sales, These costs declined over 2,000 basis points to 45% from 66.1%. As demonstrated in the past three quarters, our financial model has substantial operating leverage at these sales levels. Other income in the Q2 of 2020 was $31,800,000 which included a gain on the sales leaseback of 3 distribution facilities in 2020. If you recall, the gross proceeds from the sale was approximately $70,000,000 Income before income taxes increased $10,500,000 to $29,200,000 Our tax expense was $6,300,000 during the Q2 of 2021, which resulted in an effective tax rate of 21.6%. The primary difference in the effective rate and statutory rate is due to the state income taxes and the tax benefit from vested stock awards.
Net income for the Q2 of 2021 was $22,900,000 or $1.21 per diluted share on our common stock compared to net income of $13,600,000 or $0.72 per share in the comparable period last year. Excluding the gain on the sale of our distribution assets in 2020, Our adjusted earnings per share in the Q2 of last year was a $0.52 loss. Now turning to our balance sheet. At the end of the second quarter, our inventories were $115,000,000 which was up $25,000,000 from the December 31, 2020 balance and up $10,200,000 versus the Q2 of 2020. At the end of the second quarter, our customer deposits were $116,100,000 which was up $29,900,000 from the December 31 balance and up $58,500,000 versus Q2 of 2020.
We ended the quarter with $235,300,000 of cash equivalents. We have no funded debt on our balance sheet at the end of the Q2 of Looking at some of our uses of cash flow, capital expenditures were $10,900,000 for the first half of twenty twenty one, And we paid $8,600,000 of regular dividends during the first half of twenty twenty one. During the second quarter, we did not purchase any common shares in our buyback And we have $16,800,000,000 remaining under current authorization for this buyback program. Our earnings release lists out several additional 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.
We expect our gross margins for 2021 to be 56.5% to 56.8%. We anticipate gross profit margins will be impacted by our current estimates Our fixed and discretionary type SG and A expenses for 2021 and are expected to be in the $275,000,000 to $278,000,000 range. This is an increase over our previous estimate, primarily due to rising warehouse Compensation and benefit costs. The variable type costs within SG and A for 2021 are expected to be in the range of 17.3% to 17.5%, a slight decrease over our previous guidance. Our planned CapEx For 2021 has increased from $23,000,000 to $37,000,000 Anticipated new or replacement stores, remodels and expansions account for $18,700,000 Investments in our distribution network are expected to be $15,200,000 and investments in our information technology are expected to be approximately $3,100,000 The largest increase in our planned CapEx for 2021 is in our distribution network.
In the Q3 of this year, we will be buying back our Virginia warehouse, which we sold and leased back last year. As we evaluate our future growth plans. Our anticipated effective tax rate in 2021 is expected to be 24%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes our commentary on the 2nd quarter financial results.
We appreciate your participation in today's call. And now I'd like to ask the
Our first question comes from Anthony Lebiedzinski with Sidoti.
Good morning and thank you for taking the questions. So you talked about the demand still being positive here in the Q3, which is good to see. Can you talk about, other than the fact that people are buying more in stock merchandise Are you seeing any other changes as to what people are buying? I know you touched on mattress sales also being up in the quarter, but then maybe If you could just talk about like as far as if you're seeing any sort of differences as to what people are buying, that would
be helpful.
I think over the last months, we've seen our case goods business improve a little bit more in some of the other categories. Upholstery, while up, is a little less up because of the customization that We're just we're having delays on products. So in some cases, we've had to suspend a few categories, A few vendors on customization and special order. So the main thing is we're seeing growth across all categories. I think case goods Because we were able to get the product and bring it in have been a little stronger in bedroom and dining room.
Got it. Okay. That's very helpful. And so you guys have done a nice job over the last few years improving your gross margins Even with some headwinds. So just overall, how should we think about the potential for gross margins going forward in future years?
You know, Antti, this is Steve. I would say we're committed. You saw the guidance that Richard has provided you and we don't certainly provide guidance on that going forward, but we still feel confident with what Richard put out there, the 56.5% to 56.8 percent for the remainder of the year.
Okay. Got it. And then as far as the just usage of cash, so obviously, you guys have a balance sheet. So as you Containing to build up cash, I mean, would you prefer to perhaps purchase additional stores or distribution facilities or Dividends or buybacks, I mean, how should we think about your priorities or preferences for Usages of your excess cash flow?
Well, Anthony, we've got a Board meeting next week. We meet and discuss this at every Board meeting. Yes, we're generating a good deal of cash. It also points out the opportunity we had to buy back our distribution center, which I I think as a real plus, we may have to invest in that, which could be significant. We look at buybacks.
We look at dividends. And if we don't need the cash, we do like to return it to stockholders as we've done historically. But We'll review that and look at it every quarter.
Got it. Okay. Thanks and best of luck.
Okay. Thank you, Anthony.
We'll take our next question from Bradley Tomitz with KeyBanc Capital Markets.
Hi, good morning, Clarence, Steve and Richard. This is Andrew on for Brad. I wanted to start not talking about Your written sales trends, it was encouraging to see the positive written sales growth quarter to date even against the tough comparison last in 3Q 'twenty. But as we look to the rest of the quarter, could you remind us what the comparison for written sales growth looks like for August And September when you compare it to July? In other words, does the comparison for written sales growth get more difficult or easier As we progress through the Q3.
Yes, Andrew, this is Richard. I think it's a first I appreciate the question. We typically don't get into that level of detail on months, but just generally speaking, the back half of the year for Q3 and Q4 on written and delivered are both obviously more challenging. So we were very pleased to report the positive sales trends in both of those categories Month to date for the Q3, and we're certainly optimistic about the rest of the year.
Understood. And in your commentary, you noted that there was a moderation in pandemic patients among consumers And that's led to a shift in product mix away from custom merchandise. Could you talk about how this shift is impacting margins? And do you Expect this shift to grow in intensity over the next few months?
I don't think it's going to impact margins. I don't see that.
Yes. I don't see this is Steve. I don't see any impact. I did say we have seen because of the delays and the extension of the lead times With our vendors, our domestic vendors, we have seen some delay in the custom orders. But I'm seeing that already bounce back in the early part of July from where it was in the Q2, not back to the levels where we were, but it's moving back up.
So but I definitely don't see any impact to the margins because of the reduction in the special order.
Okay, great.
And we're optimistic that would pick up as vendors get more online and get back Things flow in as we move through the Q3 and Q4.
Great. And could you talk a little bit more about the magnitude of the changes in product and freight costs that you are seeing, and do you expect to eventually offset These changes with your own price adjustments?
We have already we're addressing that as it happens. We don't as soon as we are aware of that, our merchandising and supply chain teams are immediately addressing that And passing those along. So those have been those are passed on as we are finding them out from our vendors.
Got it. And given the resurgences of COVID-nineteen, particularly in some of the southern states, Have you seen any changes in consumer behavior as a result of this resurgence?
We haven't seen anything recently. Our traffic is pretty balanced across the regions. No, we haven't seen anything. It could come to be more significant, but we haven't seen anything today.
Got it. Okay. I think that's all for me. Thank you.
Thank you. Thank you, Andrew.
This concludes today's question and answer session. I will now turn it back to Richard Hare for closing remarks.
Well, we appreciate your Station in today's call, and we look forward to talking to you in the future when we release our Q3 results. Thanks again.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your phone lines.