Havertys Furniture Companies, Inc. — Q2 2015 Form 10-Q Summary
Business Context and Reporting Period
Havertys is a home furnishings retailer operating one reportable segment under the Havertys brand. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The company operated 114 comparable stores for comp-store reporting and expected to reach 122 stores by year-end 2015.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net sales | $187.7 million | $175.1 million | $379.1 million | $356.9 million |
| Net sales growth | 7.2% | 2.4% | 6.2% | (0.1)% |
| Comp-store sales growth | 4.8% | 3.2% | 4.3% | 1.1% |
| Gross profit | $100.2 million | $94.1 million | $202.8 million | $192.0 million |
| Gross margin | 53.4% | 53.8% | 53.5% | 53.8% |
| Income before interest and taxes | $8.4 million | $8.0 million | $18.8 million | $18.3 million |
| Net income | $4.8 million | $4.8 million | $11.0 million | $11.0 million |
| Diluted EPS — Common Stock | $0.21 | $0.21 | $0.48 | $0.48 |
| Operating cash flow | Not separately provided | Not separately provided | $18.1 million | $23.1 million |
Q2 net income was effectively flat despite higher sales, as SG&A increased faster than gross profit and net interest expense rose to $0.5 million from $0.2 million. The implied Q2 net margin was approximately 2.6%; the six-month net margin was approximately 2.9%.
At June 30, 2015, cash and cash equivalents were $66.7 million, investments were $6.5 million, and restricted cash was $8.0 million. Total assets were $473.0 million and stockholders’ equity was $299.2 million. Inventory increased to $112.3 million from $107.1 million at December 31, 2014.
The company reported no funded debt and no borrowings under its $50.0 million revolving credit facility. Net availability was $43.8 million after application of borrowing-base and fixed-charge-coverage adjustments. Lease obligations totaled $53.6 million, including current obligations.
Six-month capital expenditures were $14.5 million. Financing cash outflows included $3.6 million of dividends, $1.9 million of common-stock repurchases, $1.2 million of taxes on vested restricted shares, and $1.2 million of lease-obligation payments. Cash increased by $1.2 million during the period to $66.7 million.
Material Changes Versus the Prior Comparable Period
- Sales improved substantially, with Q2 growth of 7.2% and first-half growth of 6.2%, compared with 2.4% and a 0.1% decline, respectively, in the prior-year periods.
- Comp-store sales increased 4.8% in Q2 and 4.3% for the first half. Average written ticket increased 3.3% in Q2 and 4.1% for the first half.
- Custom-order upholstery written business increased 10.2% in Q2 and 10.7% for the first half.
- Gross margin declined 40 basis points in Q2 and 30 basis points for the first half, primarily due to closeout sales associated with new merchandise introductions.
- SG&A increased $6.5 million in Q2 and $11.1 million for the first half. SG&A as a percentage of sales rose modestly to 49.4% from 49.3% in Q2 and to 48.8% from 48.7% for the first half.
- Operating cash flow declined $5.0 million year over year, primarily because of greater inventory and prepaid-expense increases, a smaller increase in customer deposits, and working-capital timing.
- Capital expenditures increased $2.8 million year over year to $14.5 million, while construction allowance receipts of $3.3 million reduced financing cash usage.
- The company repurchased approximately 92,557 shares during the second quarter at an average price of approximately $20.98 per share. Approximately $10.0 million remained authorized under the repurchase program.
Guidance, Outlook, Risks and Unusual Items
- Management maintained its expectation for 2015 gross margin of approximately 53.3% and did not expect to change its promotional strategy during the second half.
- Full-year fixed and discretionary SG&A expenses were expected to be approximately $239 million to $240 million, compared with $233 million in 2014. Variable SG&A costs were expected to be at the high end of the prior 17.5% to 17.7% of sales guidance range.
- 2015 capital expenditures were estimated at $32 million to $33 million. Plans included four store openings and one closure, increasing net selling square footage by approximately 3.2%.
- Imported-product availability was disrupted by the West Coast port slowdown during the first half, affecting delivery throughput and delivery-date predictability. Management reported stabilization late in Q2 and an improved stocking position.
- New competition entered the Dallas market in March 2015 and pressured sales and gross profit at expected levels.
- Other income included a $0.8 million payment from settlement of credit-card antitrust litigation in Q2 2015.
- The defined benefit pension plan was terminated and settled in 2014. The remaining supplemental executive retirement plan is unfunded and paid directly by the company.
- Management stated that available cash and expected operating cash flow should fund obligations, dividends, repurchases, and planned capital projects. Risks include economic and housing-market conditions, competition, merchandise and energy costs, supply-chain conditions, capital-expenditure timing, new-product introductions, and operational changes.
- The company reported no off-balance-sheet arrangements, no material changes in market risk, and no material changes affecting internal control over financial reporting. Management concluded disclosure controls were effective.
Important Facts for Investors to Verify
- Whether sales momentum and positive comparable-store trends continued after the port disruptions and during the second half of 2015.
- Whether merchandise closeouts and promotional activity caused gross margin to reach or remain near the approximately 53.3% full-year expectation.
- Whether SG&A growth, new-store costs, labor costs, and marketing spending remained within management’s guidance.
- Inventory levels, customer deposits, delivery throughput, and working-capital trends, given the decline in operating cash flow.
- Actual capital expenditures, store openings and closure activity, and the resulting lease obligations.
- Availability and covenant conditions under the revolving credit facility, including the fixed-charge-coverage adjustment that reduced availability to $43.8 million.
- The sustainability of cash dividends and share repurchases in light of operating cash generation and expansion spending.
- The effect of Dallas-area competition, housing-market conditions, merchandise costs, and supply-chain disruptions on future sales and margins.