Havertys Furniture Companies, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income markets under the Havertys brand. The filing covers the quarter and six months ended June 30, 2017; financial statements are unaudited.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $196.8 million | $194.8 million | $397.3 million | $389.3 million |
| Gross profit | $107.1 million | $104.2 million | $216.7 million | $208.6 million |
| Gross margin | 54.4% | 53.5% | 54.6% | 53.6% |
| Income before interest and taxes | $10.3 million | $9.3 million | $20.6 million | $17.5 million |
| Net income | $6.2 million | $5.4 million | $12.2 million | $10.0 million |
| Diluted EPS, Common Stock | $0.29 | $0.24 | $0.56 | $0.45 |
| Operating cash flow | Not separately provided | Not separately provided | $20.1 million | $10.6 million |
Q2 net margin was approximately 3.1%, compared with approximately 2.8% in the prior-year quarter. Six-month net margin was approximately 3.1%, compared with approximately 2.6% in 2016. SG&A represented 49.2% of Q2 sales versus 49.6% in the prior-year quarter and 49.6% of first-half sales in both years.
At June 30, 2017, cash and cash equivalents were $65.9 million, restricted cash was $8.1 million, and inventories were $103.8 million. Total liabilities were $164.0 million and stockholders’ equity was $290.3 million. The company reported no funded debt and no borrowings under its $60.0 million revolving credit facility; net availability was $45.8 million. Lease obligations totaled $54.8 million, including current and long-term portions.
First-half capital expenditures were $10.5 million. Dividends paid were $5.1 million, and no shares were repurchased during the first six months of 2017. Cash increased by $2.4 million during the period to $65.9 million.
Material changes versus the prior comparable period
- Q2 sales increased 1.1%, while first-half sales increased 2.1%.
- Q2 comparable-store sales decreased 0.2%; first-half comparable-store sales increased 0.7%.
- Q2 gross margin improved approximately 90 basis points, and first-half gross margin improved 100 basis points, primarily because of lower inbound freight, pricing and product mix, and fewer markdowns.
- Q2 net income increased 15.1% and first-half net income increased 21.2%. First-half diluted Common Stock EPS increased from $0.45 to $0.56.
- First-half operating cash flow increased to $20.1 million from $10.6 million, while capital expenditures declined from $18.5 million to $10.5 million.
- Financing cash use declined to $8.3 million from $28.0 million, primarily because the company purchased $21.3 million of common stock in the first half of 2016 but made no repurchases in 2017.
Guidance, outlook, commentary, risks and unusual items
- Management expects full-year 2017 gross margin of approximately 54.2%. Second-half gross margin is expected to be 20 to 30 basis points below the full-year average because of higher inbound ocean freight and a negative LIFO impact.
- Normal fixed and discretionary SG&A expenses are expected to be approximately $259.0 million in 2017 versus $250.0 million in 2016. Third-quarter marketing activity is expected to be the highest of the year.
- Full-year 2017 capital expenditures are estimated at $28.0 million. Store plans are expected to increase net selling space by approximately 0.3%, and the company plans to begin expanding its Western Distribution Center.
- The company expects cash from operations and existing cash balances to fund obligations, dividends, stock repurchases, and planned capital projects for at least the next 12 months.
- The Lubbock, Texas replacement-store project generated insurance-related gains and proceeds, including approximately $1.0 million of building-related gain and $0.2 million for business interruption and other expenses in the first quarter of 2017. Minor additional receipts were expected during 2017.
- After quarter-end, the Wichita, Kansas store closed on July 14, 2017 following a water-pipe rupture beneath the foundation. The damage assessment and repair timeline were ongoing, and the leased location could remain closed until mid-November.
- Key risks include economic and housing-market conditions, consumer spending, competition, merchandise and energy costs, consumer preferences, capital-expenditure timing, and operational rationalization. The company states that ordinary-course claims and legal proceedings are not expected to materially affect its financial condition, results, or cash flows.
- New lease accounting guidance is effective for Havertys in 2019, and the company is assessing its impact. Revenue-recognition guidance is effective in 2018; management expects revenue timing for home furnishings to remain substantially unchanged and does not currently expect a material impact.
Important facts for investors to verify
- Whether comparable-store sales and consumer demand improve after the Q2 decline.
- The effect of higher inbound freight and the anticipated negative LIFO impact on second-half gross margins.
- Execution of the planned store openings, replacement stores, closure, distribution-center expansion, and $28.0 million capital-expenditure program.
- The financial and operating impact of the Wichita store closure and any additional insurance recoveries.
- Whether planned SG&A increases, particularly occupancy, staffing, technology, and third-quarter advertising, remain consistent with sales growth.
- The eventual balance-sheet impact of adopting the new lease standard in 2019.