Havertys Furniture Companies, Inc. — 2021 Third-Quarter Form 10-Q
Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers through company-operated stores and its website. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $260.4 million | $217.5 million | $746.9 million | $506.9 million |
| Gross profit | $148.0 million | $122.2 million | $424.5 million | $281.4 million |
| Gross margin | 56.8% | 56.2% | 56.8% | 55.5% |
| SG&A | $116.2 million | $100.1 million | $338.3 million | $270.3 million |
| Income before interest and taxes | $31.8 million | $24.5 million | $86.3 million | $45.4 million |
| Net income | $24.2 million | $18.3 million | $66.5 million | $33.7 million |
| Diluted EPS, Common Stock | $1.31 | $0.97 | $3.55 | $1.77 |
- Q3 net sales increased 19.7%; nine-month sales increased 47.3%. Comp-store sales increased 17.7% in Q3 and 22.5% year to date.
- SG&A declined to 44.6% of sales in Q3 from 46.0% and to 45.3% year to date from 53.3%, reflecting sales leverage and lower pandemic-related costs in the comparable period.
- Net cash provided by operating activities was $89.0 million in the first nine months of 2021 versus $99.8 million in 2020. The 2021 amount was supported by $34.0 million of customer-deposit inflows and partly offset by a $29.1 million inventory investment.
- Capital expenditures were $28.1 million year to date, compared with $7.2 million in 2020. Management expects approximately $37.0 million of capital expenditures for full-year 2021.
- Cash and cash equivalents were $225.7 million at September 30, 2021, plus $6.7 million of restricted cash. Total current assets were $378.5 million against current liabilities of $245.8 million.
- Inventories increased to $119.0 million from $89.9 million at December 31, 2020. Customer deposits increased to $120.1 million from $86.2 million.
- No borrowings were outstanding under the $60.0 million revolving credit facility. Availability was $15.7 million based on the borrowing base. The facility matures September 27, 2024.
- Lease liabilities totaled approximately $238.0 million, consisting of $34.1 million current and $203.9 million noncurrent liabilities.
Material Changes Versus the Prior Comparable Period
- Results benefited from strong post-reopening consumer demand, but comparisons with 2020 were affected by store closures and suspended deliveries during the early pandemic period.
- The 2021 gross margin improvement reflected pricing actions, sales mix, and partial offset of higher product and inbound freight costs.
- Q3 2021 SG&A increased $16.1 million in dollars, including higher compensation and labor, warehouse, and marketing costs, but decreased as a percentage of sales.
- 2020 included a $31.6 million gain from the sale and leaseback of three distribution facilities, contributing to $34.3 million of other income for the first nine months of 2020. The comparable 2021 period had essentially no other income.
- Cash flow from investing activities changed from $67.2 million provided in 2020 to $28.0 million used in 2021, primarily because 2020 included $74.4 million of sale proceeds.
- The company repurchased 537,196 common shares for approximately $19.5 million during Q3. Approximately $22.3 million remained available under the repurchase authorization at September 30, 2021.
- The company opened a new-market store in Myrtle Beach, South Carolina, opened a location in The Villages, Florida, closed a Dallas location, and planned an Austin, Texas opening for the first quarter of 2022. Net selling space was expected to remain flat for 2021.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated full-year 2021 gross margin of 56.5% to 56.8%, variable SG&A of 17.0% to 17.3% of sales, and fixed and discretionary SG&A of approximately $278.0 million to $281.0 million.
- Demand remained strong, but product availability and delivery capacity constrained sales. Custom upholstery production lead times increased from four to six weeks before the pandemic to approximately 16 weeks, and custom upholstery represented 20.0% of written upholstery sales in Q3 2021 versus 29.8% in Q3 2020.
- Supply-chain risks included raw-material shortages, transportation constraints, vendor shutdowns, labor shortages, and COVID-19 disruptions in Vietnam and Indonesia. Management stated that the duration and effect of the pandemic could not reasonably be estimated.
- The company had one additional retail lease under construction at September 30, 2021. It also renewed leases covering ten stores and purchased a distribution center and a retail location during the quarter.
- Interim inventory LIFO calculations depend on management estimates and may change with the final year-end valuation.
- The company disclosed ordinary-course legal claims and proceedings but did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify whether supply-chain and labor constraints continue to limit deliveries, inventory availability, and custom upholstery demand.
- Compare realized full-year gross margin and SG&A results with the ranges provided in the filing.
- Monitor inventory and customer-deposit balances for working-capital effects and future delivery obligations.
- Confirm cash generation after capital expenditures, dividends, share repurchases, and lease payments.
- Review borrowing-base availability and the revolver’s dividend and other financial covenants.
- Separate ongoing operating performance from the nonrecurring 2020 sale-leaseback gain when evaluating year-over-year earnings.
- Assess the effect of store openings, closures, planned expansion, and changes in net selling space on future comparable-store performance.