HVT

Haverty Furniture Companies, Inc. - 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2005, and the nine months ended on that date. Haverty Furniture Companies, Inc. is a full-service home furnishings retailer operating under the Havertys brand without franchising. The financial statements are unaudited and reflect a restatement of prior periods due to lease accounting adjustments and reclassifications of inventory handling costs.

Key Financial Metrics

Liquidity: Cash and cash equivalents declined to $764,000 from $10.1 million at year-end 2004. The company maintains an $80.0 million revolving credit facility with $63.9 million in unused capacity as of September 30, 2005.

Material Changes vs. Prior Period

• Revenue: Net sales increased 2.3% in Q3 and 6.1% for the nine-month period. However, comparable store sales declined 1.0% in Q3, driven by a weak retail environment and increased discounting by competitors.
• Profitability: Net income decreased 10% in Q3 and 40% for the nine-month period compared to 2004. Gross profit margins declined approximately 90 basis points year-over-year for the nine months due to warehouse closures, markdowns, and higher transportation costs.
• Expenses: Selling, General, and Administrative (SG&A) expenses increased as a percentage of sales (up 100 basis points in Q3) due to rising fuel costs, demurrage charges on imports, higher medical insurance premiums, and costs associated with transitioning to a new distribution model.
• Restatements: Prior year figures were restated to correct lease accounting errors (specifically regarding rent holidays and option periods) and to reclassify inventory handling costs from SG&A to Cost of Goods Sold.

Guidance, Outlook, and Risks

• Outlook: Management expects Q4 2005 gross profit margins to be relatively flat compared to year-to-date results. The company plans to open 5-6 stores in 2006 and expects to add approximately 1.9% retail square footage in 2005.
• Capital Expenditures: Planned 2005 expenditures are $40.0 million for stores, distribution, and IT. The company is expanding its Eastern Distribution Center in Braselton, Georgia, with Phase 1 completion expected late in 2005.
• Risks: Key risks include consumer reluctance to purchase big-ticket items due to high energy costs and interest rates, supply chain disruptions (specifically demurrage costs on imports), and competitive pricing pressures.
• Unusual Items: The company recorded a $2.6 million gain in Q3 from the sale of two retail locations and a warehouse. Additionally, the company accelerated the vesting of "out-of-the-money" stock options to reduce future compensation expense under upcoming accounting standards (SFAS 123R).

Investor Verification Checklist

• Restatement Impact: Verify the specific impact of the lease accounting restatement and inventory cost reclassification on year-over-year comparability.
• Cash Position: Confirm the sustainability of operations given the low cash balance ($0.8 million) and reliance on the revolving credit facility.
• Margin Pressure: Assess the long-term impact of rising fuel costs and demurrage charges on gross margins and SG&A.
• Comparable Sales: Monitor the trend of comparable store sales, which declined in Q3 despite overall revenue growth from new stores.
• Stock Repurchases: Note the company repurchased 300,000 shares in Q3 at an average price of $12.70, with approximately 1.8 million shares remaining authorized.