Business Context and Reporting Period
Haverty Furniture Companies, Inc. filed its Quarterly Report on Form 10-Q for the period ended June 30, 2006. The Company is a full-service home furnishings retailer operating exclusively under the Havertys brand without franchising. The report covers the second quarter and the first six months of fiscal year 2006.
Key Financial Metrics
(All figures in thousands, except per share data)
| Metric | Q2 2006 | Q2 2005 | 6 Months 2006 | 6 Months 2005 |
|---|---|---|---|---|
| Net Sales | $211,034 | $192,394 | $420,122 | $400,027 |
| Gross Profit | $103,891 | $91,546 | $208,665 | $190,228 |
| Gross Margin % | 49.2% | 47.6% | 49.7% | 47.6% |
| Net Income | $3,591 | $1,309 | $8,694 | $4,483 |
| Diluted EPS (Common) | $0.16 | $0.06 | $0.38 | $0.20 |
| Operating Cash Flow (6mo) | $13,676 (vs. $333 in 2005) | |||
| Cash & Equivalents (End of Period) | $7,495 | |||
| Total Debt (Current + Long-term) | $42,554 |
Material Changes vs. Prior Period
- Sales Growth: Net sales increased 9.7% in Q2 and 5.0% for the six-month period compared to 2005. Comparable store sales rose 7.8% in Q2 and 3.4% for the six months.
- Profitability: Net income surged 174% in Q2 and 94% for the six months ended June 30, 2006. Gross profit margins expanded by 165 basis points in Q2 and 211 basis points for the six months, driven by higher-margin proprietary imported products.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased due to higher credit program costs ($2.6M increase in Q2) and advertising spend. However, these were offset by improved gross margins and a reduction in interest expense.
- Balance Sheet: Accounts receivable decreased by approximately $17.9 million year-over-year due to a shift toward third-party financing. Inventories increased by $11.1 million to improve in-stock positions.
Outlook, Risks, and Unusual Items
- Unusual Items: The Company recorded a gain of approximately $1.3 million from the sale of a warehouse and other properties in Q1 2006. A favorable inventory adjustment of $0.5 million was also recorded in Q1, which is not expected to recur.
- Guidance & Outlook: Management expects gross profit margins to remain near the first six months' level for the remainder of the year. Planned capital expenditures for 2006 are $30.0 million for stores, distribution, and IT. The Company anticipates a net 1.5% increase in retail square footage for 2006.
- Risks: Management cites higher energy costs, rising interest rates, and geopolitical concerns as factors affecting consumer spending on big-ticket items. Continued discounting by competitors poses a risk to pricing integrity.
- Financing Strategy: The Company is utilizing longer-term no-interest financing promotions to stimulate sales, which increases the cost of credit programs but helps increase average transaction sizes.
Investor Verification Checklist
- Margin Sustainability: Verify if the 211 basis point gross margin expansion is sustainable given the one-time $0.5 million inventory adjustment and reliance on imported proprietary goods.
- Credit Risk Exposure: Review the shift in financing mix; while third-party financing reduced receivables, the increased usage of in-house long-term no-interest programs may impact future bad debt provisions.
- Cash Flow Quality: Confirm the significant improvement in operating cash flow ($13.7M vs. $0.3M prior year) is driven by working capital management (receivables reduction) rather than just earnings growth.
- Capital Allocation: Assess the impact of $13.2M in capital expenditures and $3.0M in dividends paid against the $7.5M decline in cash balances.
- Store Expansion ROI: Monitor the performance of new market entries (Port Charlotte, Ft. Lauderdale, Cincinnati) and the impact of closing three older stores on overall comp-store sales.