Business Context and Reporting Period
Haverty Furniture Companies, Inc. is a specialty retailer of residential furniture and accessories operating 120 stores across 17 states in the Southern and Midwest regions. The company targets middle to upper-middle income consumers, offering proprietary "Havertys Collections" brands alongside national bedding brands. This Form 10-K covers the fiscal year ended December 31, 2006.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Net Sales | $859.1 million | $827.7 million |
| Gross Profit | $426.2 million (49.6% margin) | $395.6 million (47.8% margin) |
| Net Income | $16.0 million | $15.1 million |
| Diluted EPS (Common) | $0.70 | $0.66 |
| Operating Cash Flow | $28.0 million | $31.7 million |
| Total Debt | $50.4 million | $48.5 million |
| Debt to Total Capital | 14.7% | 14.8% |
| Capital Expenditures | $23.6 million | $35.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.8% year-over-year, driven by a 1.8% increase in comparable-store sales and expansion into new markets (Port Charlotte and Ft. Lauderdale, FL; Cincinnati, OH).
- Margin Expansion: Gross profit margin improved by 181 basis points to 49.6%, primarily due to the introduction of higher-margin proprietary imported products. This offset a negative 11 basis point impact from the LIFO reserve.
- Expense Pressure: Selling, General, and Administrative (SG&A) expenses rose to 47.1% of sales (from 45.6% in 2005). Increases were driven by higher third-party financing costs (68 basis points), occupancy costs from new stores, and delivery compensation.
- Inventory Build: Inventories increased 15.9% to $124.8 million due to lower warehouse inventory levels at the end of 2005, increased showroom square footage, and Q4 sales volume below plan.
- Credit Portfolio: Credit service charge revenue declined 19.5% to $2.8 million as customers shifted toward interest-free promotional financing. The allowance for doubtful accounts decreased to 2.3% of receivables.
Guidance, Outlook, and Risks
2007 Outlook: Management anticipates a challenging business environment. The company plans to increase net selling space by approximately 4.0% through new store openings in Huntsville, AL; Rockville, MD; Tampa, FL; and Austin, TX. Capital expenditures are projected at $15.6 million. Management expects to reduce advertising expenses while maintaining brand messaging and is adjusting distribution headcount to improve efficiencies.
Strategic Initiatives: The company is expanding its direct import program from Asia, expecting direct imports of case goods to triple by the end of 2007. They are also transitioning Havertys.com into a full e-commerce platform, with initial phases expected by the end of 2007.
Risks and Contingencies:
- Economic Sensitivity: Sales are discretionary and sensitive to housing market weakness, consumer confidence, and interest rates.
- Supply Chain: Approximately 70% of merchandise is imported. Risks include exchange rate fluctuations, tariffs, and supply chain disruptions affecting delivery times.
- Competition: Intense competition from national chains and department stores, particularly regarding aggressive pricing and credit terms.
- Oil Prices: Rising fuel costs impact transportation and delivery profitability.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 1.8% comp-store sales growth given the weak housing market and competitive discounting.
- Inventory Levels: Monitor the 15.9% increase in inventory against future sales velocity to assess potential markdown risks.
- SG&A Leverage: Track whether SG&A expenses can be reduced as a percentage of sales in 2007, specifically regarding third-party financing costs and delivery expenses.
- Direct Import Execution: Assess the success of the expanded direct import program in maintaining gross margins without quality or delivery issues.
- Credit Quality: Review the allowance for doubtful accounts as the company continues to offer longer-term, interest-free financing promotions.