Havertys Furniture Companies, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Havertys operates a single reportable segment: home furnishings retailing through company-operated stores under the Havertys brand. The filing covers the three months ended March 31, 2013, with comparative results for the three months ended March 31, 2012. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $186.1 million | $163.6 million | Up 13.8% |
| Comparable-store sales | Up 11.5% | Up 5.7% | Improved |
| Gross profit | $100.3 million | $85.3 million | Up $15.0 million |
| Gross margin | 53.9% reported; 53.5% excluding adjustment | 52.2% | Improved 130 basis points on adjusted basis |
| SG&A | $86.7 million, or 46.6% of sales | $81.2 million, or 49.7% | Rate improved 310 basis points |
| Income before taxes | $13.5 million | $4.0 million | Up $9.4 million |
| Net income | $8.3 million | $2.5 million | Up $5.8 million |
| Diluted EPS, Common Stock | $0.36 | $0.11 | Up $0.25 |
| Operating cash flow | $5.4 million | $11.2 million | Down $5.8 million |
Net margin was approximately 4.4% in Q1 2013 versus 1.5% in the prior-year period. The effective tax rate was 38.6%, compared with 38.9% in Q1 2012. Average ticket increased approximately 12.3%; upholstery sales increased 18% and casual dining sales increased 23% year over year.
At March 31, 2013, cash and cash equivalents were $53.9 million and restricted cash was $7.0 million. Total assets were $399.9 million, total liabilities were $132.1 million, and stockholders’ equity was $267.8 million. The company reported no funded debt and no borrowings under its $50.0 million revolving credit facility. Net availability was $43.8 million after a $6.2 million reduction related to the fixed-charge coverage ratio test.
Investing activities used $4.0 million, primarily for $4.0 million of capital expenditures. Financing activities used $1.1 million, including $0.9 million of dividends and $0.2 million of lease-obligation payments. Cash increased $0.3 million during the quarter.
Material changes versus the prior comparable period
- Sales growth accelerated, with net sales up 13.8% and comparable-store sales up 11.5%.
- Profitability improved materially due to product mix, pricing discipline, fewer accessory closeouts, and lower inbound ocean freight costs.
- SG&A increased in dollars by $5.4 million but declined as a percentage of sales from 49.7% to 46.6%.
- Operating cash flow declined despite higher earnings, primarily because of smaller working-capital benefits and larger reductions in accounts payable and other liabilities.
- The company began paying dividends in 2013; no dividends were paid in Q1 2012.
- In-house financing represented approximately 4.0% of sales, compared with 5.0% in the prior-year quarter.
Guidance, outlook, risks and unusual items
- Management expects full-year 2013 gross margin to be modestly above the 2012 annual rate of 52.5%, but below the adjusted Q1 2013 rate of 53.5%. Full-year SG&A expectations were unchanged from the 2012 Form 10-K.
- 2013 store plans include three showroom expansions and 18 Bright Inspiration store refreshes. Three stores are scheduled for closure, which is expected to reduce net selling square footage by approximately 1% to 2%.
- Planned 2013 capital expenditures total $20.0 million, including $15.6 million for new stores and improvements and $2.2 million for information technology.
- The company recorded a non-cash, out-of-period adjustment that increased gross profit by $0.8 million, or $0.02 per diluted share after tax, related to historical vendor pricing-allowance accruals. Management concluded the prior financial statements were not materially misstated.
- Accelerated vesting goals for 128,800 restricted stock units were met in April 2013, expected to increase shares outstanding by 86,015 and increase Q2 2013 expense by $0.5 million.
- Risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new-product execution, and operational rationalization. Interim LIFO inventory valuations are estimated and subject to year-end adjustment.
- The company is subject to ordinary-course claims and legal proceedings; management does not expect any resulting liability to materially affect financial condition, results of operations, or cash flows.
Important facts for investors to verify
- Reconcile reported gross margin with the 45-basis-point benefit from the vendor-allowance adjustment and monitor whether the adjusted margin trend is sustainable.
- Assess the sustainability of the 11.5% comparable-store sales increase and the 12.3% average-ticket growth.
- Review the decline in operating cash flow and changes in inventory, customer deposits, accounts payable, and other liabilities.
- Confirm execution of the planned store expansions, refreshes, closures, and $20.0 million capital-expenditure program.
- Monitor revolving-credit availability, including the fixed-charge coverage ratio reduction, despite no outstanding borrowings.
- Evaluate the effect of the April restricted-stock vesting event on Q2 expense, share count, and dilution.