Havertys Furniture Companies, Inc. — Q2 2018 Form 10-Q Summary
Business context and reporting period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers through company-operated stores under the Havertys brand. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $198.8 million | $196.8 million | $398.2 million | $397.3 million |
| Gross profit | $107.8 million | $107.1 million | $216.8 million | $216.8 million |
| Gross margin | 54.2% | 54.4% | 54.4% | 54.6% |
| Income before interest and taxes | $8.9 million | $10.3 million | $17.8 million | $20.6 million |
| Net income | $6.2 million | $6.2 million | $12.5 million | $12.2 million |
| Diluted EPS—Common Stock | $0.29 | $0.29 | $0.58 | $0.56 |
| Operating cash flow | Not separately provided | Not separately provided | $28.9 million | $20.1 million |
- Q2 net sales increased 1.0%; comparable-store sales increased 1.3%. First-half net sales increased 0.2%, while comparable-store sales increased 0.1%.
- Q2 SG&A increased to $98.8 million, or 49.7% of sales, from 49.2% in the prior-year quarter. First-half SG&A was 50.2% of sales versus 49.6%.
- Q2 net income was essentially flat despite lower operating income, primarily because income tax expense declined to $2.2 million from $3.5 million. The six-month effective tax rate was 25.7% versus 37.4% in 2017.
- Cash, cash equivalents and restricted cash totaled $82.8 million at June 30, 2018, compared with $87.6 million at December 31, 2017. Unrestricted cash was $74.6 million.
- Inventories increased to $107.5 million from $103.4 million at year-end, primarily to support a holiday sales event.
- The company had no funded debt and no borrowings under its $60.0 million revolving credit facility. Net availability was $48.4 million at June 30, 2018.
- Lease obligations totaled $52.7 million, including $3.9 million current and $48.8 million long-term.
- Six-month investing cash use was $13.7 million, including $14.6 million of capital expenditures. Financing cash use was $19.9 million, including $7.6 million of dividends and $9.3 million of common-stock repurchases.
Material changes versus the prior comparable period
- Sales growth was modest, with Q2 comparable-store sales improving from a 0.2% decline in 2017 to a 1.3% increase in 2018; first-half comparable-store growth declined from 0.7% to 0.1%.
- Gross margin declined 20 basis points in Q2 and 20 basis points for the first half, reflecting higher freight costs, merchandise pricing and mix, promotions, and store-closure and remodeling markdowns.
- SG&A increased $1.9 million in Q2 and $2.5 million for the first half, driven by higher third-party credit costs, employee-related costs, medical insurance expense, delivery costs and personnel costs.
- Operating cash flow increased $8.8 million year over year, while capital expenditures increased $4.2 million and financing cash use increased $11.6 million, principally due to stock repurchases and higher dividends.
- The company adopted ASC Topic 606 using the modified retrospective method and ASC 2016-18 regarding restricted cash on January 1, 2018. Management expected the ongoing income statement impact of ASC 606 to be immaterial.
Guidance, outlook, risks and unusual items
- Management expected full-year 2018 gross margin of approximately 54.5%, compared with 54.3% in 2017. Second-half margin was expected to be approximately 20 basis points above the full-year margin, and fourth-quarter margin approximately 30 basis points above it. These assumptions excluded potential tariff effects.
- Full-year fixed and discretionary SG&A was expected to be approximately $257 million to $259 million, compared with $253.2 million in 2017. Variable SG&A was expected to be approximately 18.5% of sales versus 18.2% in 2017.
- Capital expenditures were estimated at approximately $20 million for 2018. Planned store closures and other changes were expected to reduce net selling space by approximately 2.3%; the Western Distribution Center expansion was expected to be completed in the third quarter.
- Proposed tariffs were identified as a significant risk. Havertys imported approximately $100 million of China-manufactured inventory in 2017, including products purchased through third-party suppliers, and may be unable to fully pass higher costs to customers or secure alternative sources promptly.
- Other forward-looking risks include economic and housing-market conditions, competition, consumer preferences, merchandise costs, energy costs, capital-expenditure timing, new products and operational rationalization.
- The company reported ordinary-course legal claims but did not expect them to have a material adverse effect. It reported no off-balance-sheet arrangements and no material changes in market risk.
- ASU 2016-02 lease accounting was scheduled to become effective for Havertys in the first quarter of 2019 and was expected to add operating-lease assets and liabilities to the balance sheet; the financial impact was still under evaluation.
Important facts for investors to verify
- Whether freight, promotional activity, markdowns and potential tariffs cause gross margin to diverge from the approximately 54.5% full-year expectation.
- Whether modest comparable-store sales growth can offset rising variable and fixed SG&A costs.
- The ultimate effect of proposed or enacted tariffs on product costs, pricing, demand and operating profit.
- Progress and spending on store closures, the Chattanooga new-market opening, and the Western Distribution Center expansion.
- The effect of the 2019 lease-accounting adoption on reported assets, liabilities, leverage metrics and disclosures.
- Inventory levels and working-capital trends, particularly following the holiday sales event.
- Future capital allocation, including dividends and the remaining stock-repurchase authorization.