Haverty Furniture Companies, Inc. - Q1 2010 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Haverty Furniture Companies, Inc., a retailer of residential furniture in the middle to upper-middle price ranges. The report covers the three-month period ended March 31, 2010. The company operates in a single reportable segment: home furnishings retailing.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $156.0 million | $144.2 million |
| Gross Profit | $81.3 million | $73.8 million |
| Gross Margin | 52.1% | 51.1% |
| Net Income (Loss) | $2.4 million | ($7.3 million) |
| Diluted EPS (Common) | $0.11 | ($0.34) |
| Operating Cash Flow | $7.6 million | ($0.4 million) |
| Cash and Equivalents | $52.4 million | $9.5 million |
| Debt Outstanding | $0 | $0 |
| Credit Facility Availability | $39.0 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.2% year-over-year, driven by a 10.1% increase in comparable store sales. This marks the second consecutive quarter of positive comparable store sales.
- Profitability Turnaround: The company returned to profitability with a net income of $2.4 million, compared to a net loss of $7.3 million in Q1 2009. This was aided by a reduction in the provision for doubtful accounts ($162k vs $415k) and improved gross margins.
- Expense Management: Selling, General, and Administrative (SG&A) expenses decreased 2.5% to $78.9 million despite higher sales volume, due to rigorous cost reductions in compensation, advertising, and delivery efficiencies.
- Liquidity Improvement: Cash and cash equivalents increased by $8.0 million to $52.4 million, supported by strong operating cash flow of $7.6 million.
Outlook, Risks, and Management Commentary
- Guidance and Strategy: Management aims to maintain gross profit margins near 51.7% (2008 levels) despite anticipated pressure from rising freight, material, and labor costs. Planned capital expenditures for 2010 are $15.2 million, including $10.5 million for new stores and improvements.
- Store Rationalization: The company closed two locations (Albany, GA and Fredericksburg, VA) in Q1 2010 and plans to open a new store in Columbus, GA in Q4 2010. Net selling space is expected to decrease by 1% to 2% in 2010.
- Credit Facility Status: The company has a $60 million revolving credit facility with no outstanding borrowings. However, net availability is $39.0 million, reduced by $10.0 million due to a failure to meet a fixed charge coverage ratio test for the preceding twelve months and $7.6 million for outstanding letters of credit.
- Tax Matters: The effective tax rate was 3.2% in Q1 2010, significantly lower than the statutory rate due to a $0.9 million reduction in the valuation allowance for deferred taxes. The reported tax expense is primarily for Texas state taxes based on gross profit.
- Risks: Key risks include changes in the economic environment, competition, merchandise costs, and energy costs. The company notes that forward-looking statements are subject to uncertainties.
Investor Verification Checklist
- Verify the sustainability of the 10.1% comparable store sales growth in subsequent quarters.
- Monitor the fixed charge coverage ratio to ensure the $10 million reduction in credit facility availability is resolved.
- Track the impact of rising freight and material costs on the ability to maintain the 51.7% gross margin target.
- Review the execution of the store closure and opening plan to confirm the projected 1-2% reduction in net selling space.
- Assess the adequacy of the allowance for doubtful accounts given the historical decline in receivables.