Haverty Furniture Companies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The unaudited statements cover Havertys, a single-segment retailer of residential furniture operating under the Havertys brand. The filing was signed November 2, 2016.
Financial Results and Position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $211.7 million | $209.9 million | $601.0 million | $589.0 million |
| Gross profit | $113.7 million | $111.7 million | $322.3 million | $314.6 million |
| Gross margin | 53.7% | 53.2% | 53.6% | 53.4% |
| SG&A expense | $101.7 million | $98.7 million | $294.8 million | $283.8 million |
| Income before interest and taxes | $12.7 million | $13.0 million | $30.2 million | $31.8 million |
| Net income | $7.4 million | $7.7 million | $17.4 million | $18.6 million |
| Diluted EPS, Common Stock | $0.34 | $0.34 | $0.79 | $0.81 |
- Q3 net sales increased 0.8%; comparable-store sales increased 1.2%. For nine months, net sales increased 2.0% and comparable-store sales increased 1.9%.
- Q3 net margin was approximately 3.5%, compared with approximately 3.6% in the prior-year quarter. Nine-month net margin was approximately 2.9%, versus approximately 3.2% in 2015.
- Average written ticket increased 3.2% in Q3 and 2.2% for nine months. Custom-order upholstery written business increased 3.0% in Q3 and 5.0% for nine months.
- At September 30, 2016, cash and cash equivalents were $75.6 million, restricted cash was $8.0 million, and total assets were $468.5 million.
- Inventories were $99.1 million, down from $108.9 million at December 31, 2015. Customer deposits were $30.5 million, up from $21.0 million at year-end.
- Total liabilities were $174.9 million and stockholders’ equity was $293.6 million. The company reported no funded debt; lease obligations totaled $56.3 million, including current and noncurrent amounts.
Cash Flow, Liquidity, and Capital Allocation
- Operating cash flow for the first nine months was $47.2 million, compared with $45.8 million in 2015.
- Capital expenditures were $25.3 million, compared with $22.5 million in the prior-year period. Investing activities used $11.0 million, aided by $12.0 million of investment maturities and $2.3 million of insurance proceeds for destroyed property and equipment.
- Financing activities used $31.3 million, including $21.3 million for common-stock repurchases and $6.9 million of dividends. Cash increased $4.9 million to $75.6 million.
- The amended revolving credit facility was increased to $60.0 million and extended to March 31, 2021. No borrowings were outstanding at September 30, 2016; net availability was $42.0 million after borrowing-base limitations and a $6.0 million reduction related to a fixed-charge coverage ratio test.
- Management stated that expected operating cash flow, cash balances, and available credit should fund operating needs, dividends, repurchases, and planned capital projects. The company had no off-balance-sheet arrangements.
Material Changes Versus Prior Period
- Sales growth slowed materially from 2015: Q3 comparable-store growth was 1.2% versus 3.0%, and nine-month comparable-store growth was 1.9% versus 3.8%.
- Gross margin improved 50 basis points in Q3 and 20 basis points for nine months, partly reflecting favorable year-over-year LIFO reserve changes.
- SG&A rose 3.1% in Q3 and 3.9% for nine months. SG&A as a percentage of sales increased to 48.1% from 47.0% in Q3 and to 49.1% from 48.2% for nine months.
- Higher selling, occupancy, delivery and warehousing, medical, salary, and other administrative costs more than offset gross-margin improvement, contributing to lower operating income and net income for the nine-month period.
- Share repurchases increased to $21.3 million from $14.0 million. On August 9, 2016, the board authorized an additional $10.0 million repurchase program after the remaining prior authorization is used.
- Property and equipment increased $7.9 million from year-end, while lease obligations increased $3.2 million, reflecting store expansion and an additional store lease.
Guidance, Outlook, Risks, and Unusual Items
- Management expected full-year 2016 gross margin of approximately 53.7%.
- Normal fixed and discretionary SG&A expenses were expected to be approximately $251.0 million in 2016, compared with $240.9 million in 2015. Variable SG&A costs were expected to be approximately 18.0% of sales, versus 17.9% in 2015.
- 2016 capital expenditures were estimated at $32.0 million. Current 2017 plans included two new stores, two relocations, and commencement of a Western Distribution Center expansion, with estimated 2017 capital expenditures of $24.0 million, subject to project timing.
- A December 2015 blizzard damaged the Lubbock, Texas store. During 2016, the company recorded $2.4 million of insurance-related gain, including $0.5 million in Q3, and received related insurance proceeds. Additional recovery for building replacement and business interruption was expected but had not yet been recognized.
- Interim LIFO inventory valuation is estimated and may change at year-end. The company also identified legal claims arising in the ordinary course, but expected no material adverse effect.
- Principal disclosed risks include economic and housing-market conditions, competition, consumer spending and preferences, merchandise and energy costs, capital-expenditure timing, new-product execution, and operational changes.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether sales and comparable-store trends improve from the relatively modest Q3 growth rate.
- Monitor SG&A leverage, particularly occupancy, delivery, medical, salary, and administrative costs, against the company’s full-year expectations.
- Assess the effect of store expansion, renovations, distribution-center projects, and planned 2017 capital spending on returns and cash generation.
- Confirm the timing and amount of remaining Lubbock insurance recoveries and any effect on reported earnings.
- Review borrowing-base availability, fixed-charge coverage covenant compliance, and the company’s reliance on cash generation despite having no funded debt.
- Consider future effects of pending accounting standards for share-based payments, leases, revenue recognition, and credit losses.