Havertys Furniture Companies, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
Havertys is a specialty retailer of residential furniture and accessories serving middle- to upper-middle-income consumers. The company operated 122 stores in 17 Southern and Midwestern states at December 31, 2012, with approximately 4.4 million retail square feet, and reported one operating segment: home furnishings retailing.
The filing covers the fiscal year ended December 31, 2012, with comparable information for 2011 and 2010. Fourth-quarter 2012 net sales were $182.3 million, compared with $168.3 million in the fourth quarter of 2011.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $670.1 million | $620.9 million | +7.9% |
| Comparable-store sales | +6.8% | +0.3% | Improved |
| Gross profit | $352.0 million | $320.7 million | +9.8% |
| Gross margin | 52.5% | 51.7% | +80 basis points |
| SG&A expense | $328.8 million | $315.9 million | +4.1% |
| SG&A as a percentage of sales | 49.1% | 50.9% | Improved 180 basis points |
| Income before income taxes | $23.5 million | $4.6 million | +410.9% |
| Net income | $14.9 million | $15.5 million | -3.6% |
| Diluted EPS — Common Stock | $0.67 | $0.70 | Declined |
| Cash flow from operations | $52.2 million | $19.1 million | Increased |
| Capital expenditures | $25.0 million | $17.6 million | Increased |
Operating performance improved substantially. Management attributed the gains to higher average tickets, stronger sales of higher-quality merchandise, a 12.6% increase in upholstery sales, a 17.9% increase in custom and special upholstery orders, gross-margin expansion, and fixed-cost leverage. Net income declined despite higher pretax income because 2011 included a $14.1 million tax benefit from releasing most of the deferred-tax-asset valuation allowance.
At December 31, 2012, cash and cash equivalents were $53.6 million, restricted cash was $7.0 million, inventories were $96.9 million, total assets were $402.1 million, and stockholders’ equity was $259.4 million. Total reported debt was $19.4 million, consisting of lease obligations; no revolving-credit borrowings were outstanding.
Cash flow from operations of $52.2 million exceeded capital expenditures of $25.0 million. Investing cash outflow was $24.8 million, and financing cash outflow was $23.4 million, primarily reflecting approximately $22.0 million of special-dividend payments. Year-end cash increased by $4.0 million to $53.6 million.
Material changes versus the prior comparable period
- Sales growth accelerated from 0.1% in 2011 to 7.9% in 2012, while comparable-store sales growth increased from 0.3% to 6.8%.
- Gross margin improved from 51.7% to 52.5%, supported by product mix, custom upholstery, and selective promotional pricing.
- SG&A rose in dollars but declined materially as a percentage of sales, from 50.9% to 49.1%.
- Pretax income increased by $18.9 million to $23.5 million; the reported net-income comparison was distorted by the substantial 2011 tax benefit.
- Operating cash flow increased by approximately $33.1 million, aided by higher accounts payable and customer deposits and improved operating results.
- Capital expenditures increased by $7.4 million, including store improvements and information-technology projects.
- The store base increased from 119 to 122 locations. Four stores opened and one closed during 2012, increasing retail square footage to 4.353 million square feet.
- The quarterly dividend was reinstated in the second quarter of 2012, and the company paid a special dividend of $1.00 per Common Stock share and $0.95 per Class A share in the fourth quarter.
Guidance, outlook, commentary, risks, and unusual items
Management expected positive total sales and comparable-store sales growth in 2013, citing recent momentum and anticipated housing-sales improvement. Management expected 2013 gross margins to be similar to or slightly above 2012 levels. Fixed and discretionary SG&A costs were expected to be approximately $220 million to $222 million, while variable SG&A was expected to be 17.0% to 17.5% of sales. Total SG&A was expected to decline modestly as a percentage of sales. Planned 2013 capital expenditures were approximately $20.0 million.
Management planned one new store, three major store expansions, and three closures in 2013, with an expected approximately 1.0% net reduction in selling space. The Bright Inspirations store-refresh program was expected to continue through 2013.
The $50.0 million revolving credit facility matures September 1, 2016. Net availability was $43.8 million at year-end after borrowing-base and covenant-related reductions; the company reported no borrowings, no outstanding letters of credit, and compliance with the agreement. The facility is secured by substantially all personal property, including inventory, accounts receivable, and cash, and restricts additional debt, liens, dividends, share repurchases, and certain real-estate transactions.
Important risks include discretionary consumer demand, housing and employment conditions, intense competition, changing consumer preferences, foreign sourcing and tariffs, raw-material and transportation costs, supply-chain disruptions, dependence on distribution centers and information systems, payment-card security, regulated consumer credit operations, lease commitments, pension obligations, and self-insurance claims. Approximately 75% of furniture product costs related to goods not produced domestically, and the largest ten suppliers represented approximately 52.4% of 2012 purchasing spending.
Unusual or nonrecurring items included the 2011 $14.1 million deferred-tax valuation-allowance release, the 2012 special dividend, $3.0 million of pension-plan contributions in 2012, and the transition to being primarily self-insured for employee health-care claims. The pension and supplemental executive retirement plans remained underfunded by approximately $13.1 million in aggregate at year-end 2012, and the company expected to contribute $6.6 million to the pension plan in 2013.
Ernst & Young issued unqualified opinions on the 2012 consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and effective internal control over financial reporting. The filing reported no material pending legal proceedings.
Most important facts for investors to verify
- Whether positive comparable-store sales and housing trends continued after year-end 2012.
- Whether the projected 2013 gross-margin and SG&A leverage targets were achieved.
- The sustainability of cash generation after capital expenditures, pension contributions, lease payments, and dividends.
- The effect of the special dividend and recurring quarterly dividends on liquidity and covenant capacity.
- Exposure to the $212.3 million of future operating-lease payments and $81.8 million of purchase obligations disclosed at December 31, 2012.
- Progress on the planned 2013 store openings, expansions, closures, and net reduction in selling space.
- Changes in inventory levels, LIFO effects, product availability, and customer deposits.
- Potential impact of foreign sourcing, supplier concentration, freight and fuel costs, and supply-chain disruptions.
- Future pension funding requirements, actuarial assumptions, self-insurance reserves, and remaining deferred-tax valuation allowances.
- Continued compliance with the revolving-credit agreement, including the fixed-charge coverage test and net borrowing availability.