Havertys Furniture Companies, Inc. — Form 10-Q Summary
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 under the Havertys brand. This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $207.6 million | $211.7 million | $604.9 million | $601.0 million |
| Gross profit | $112.0 million | $113.7 million | $328.7 million | $322.3 million |
| Gross margin | 53.9% | 53.7% | 54.3% | 53.6% |
| Income before interest and taxes | $10.2 million | $12.7 million | $30.8 million | $30.2 million |
| Net income | $6.0 million | $7.4 million | $18.2 million | $17.4 million |
| Diluted EPS — Common Stock | $0.28 | $0.34 | $0.84 | $0.79 |
| Cash dividends per Common share | $0.1500 | $0.1200 | $0.3900 | $0.3200 |
For the nine months, operating cash flow was $48.7 million versus $47.2 million in 2016. Capital expenditures were $15.4 million, compared with $25.3 million, and financing activities used $11.0 million versus $31.3 million in the prior-year period, primarily because the company repurchased $21.3 million of stock in 2016 but none in 2017.
At September 30, 2017, cash and cash equivalents were $86.9 million, restricted cash was $8.1 million, and total assets were $470.2 million. Total liabilities were $176.2 million and stockholders’ equity was $294.0 million. The company reported no funded debt. Lease obligations totaled $55.3 million, including $3.7 million classified as current.
Havertys had a $60.0 million secured revolving credit facility, no borrowings, no outstanding letters of credit, and $42.4 million of net availability at September 30, 2017. Management stated that cash, expected operating cash flow, and available liquidity should fund obligations, dividends, stock repurchases, and planned capital projects for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Third-quarter net sales decreased 1.9%, while nine-month sales increased 0.7%.
- Third-quarter comparable-store sales declined 2.9%; nine-month comparable-store sales declined 0.6%.
- Written third-quarter sales decreased 3.5% and written comparable-store sales decreased 4.2%. Hurricane Irma-related closures of 55 stores reduced estimated third-quarter total and comparable written sales by approximately 1.2%.
- Third-quarter net income declined 18.8%, and diluted Common Stock EPS declined from $0.34 to $0.28. Nine-month net income increased 4.3%, and diluted Common Stock EPS increased from $0.79 to $0.84.
- Third-quarter SG&A increased to 49.2% of sales from 48.1%. Advertising and marketing expense increased $2.1 million, while administrative and warehouse/delivery costs declined.
- Nine-month SG&A increased $4.5 million and rose to 49.5% of sales from 49.1%, primarily because of new-store and renovation occupancy costs, staffing, compensation, advertising, and technology expenses.
- Average written ticket increased 0.5% in the third quarter and 2.0% for the nine months. Custom upholstery written sales increased 2.6% and 4.0%, respectively.
Guidance, Outlook, Risks, and Unusual Items
- Management expected full-year 2017 gross margin of approximately 54.2%, with margins in the fourth quarter approximately 15 to 25 basis points below the full-year average because of higher inbound ocean freight and LIFO effects. A negative year-over-year fourth-quarter LIFO impact of $1.3 million to $1.5 million was expected.
- Normal fixed and discretionary SG&A costs were expected to be approximately $257.0 million in 2017 versus $249.9 million in 2016. Variable SG&A was expected to remain approximately 18.2% of sales.
- Capital expenditures were estimated at $28.0 million for 2017 and $18.0 million for 2018. The company planned two new stores and completion of its Western Distribution Center expansion in 2018, with broadly flat net selling space.
- The Lubbock, Texas store generated additional 2017 insurance-recovery gains of approximately $1.4 million. The Wichita, Kansas store was closed in July after a water-pipe rupture, with reopening expected in late November 2017; the company had received $0.4 million of insurance proceeds and expected additional amounts.
- Interim LIFO inventory valuations are based on estimates and may change with the year-end valuation.
- The company identified economic conditions, housing-market trends, competition, consumer preferences and spending, merchandise and energy costs, capital-expenditure timing, new products, and operational rationalization as factors that could cause actual results to differ from forward-looking expectations.
- Management stated that ordinary-course legal claims were not expected to have a material adverse effect. No off-balance-sheet arrangements were reported.
- ASU 2016-02 lease accounting was scheduled to become effective for Havertys in the first quarter of 2019; the company was assessing the effect of bringing additional operating lease assets and liabilities onto the balance sheet. Revenue-recognition changes were scheduled for January 1, 2018, with an expected retained-earnings reduction of less than $100,000.
Investor Verification Checklist
- Verify the sustainability of the nine-month sales and EPS improvement given the third-quarter comparable-sales decline.
- Assess the effect of inbound freight inflation and the expected $1.3 million to $1.5 million fourth-quarter LIFO headwind on margins.
- Monitor SG&A leverage, new-store and renovation costs, and the planned 2017–2018 capital expenditures.
- Confirm the timing and insurance proceeds related to the Wichita store closure and the final Lubbock recovery.
- Review lease obligations and the eventual balance-sheet impact of the new lease-accounting standard.
- Evaluate liquidity, credit-facility borrowing-base availability, dividend commitments, and any future share repurchases.
- Consider exposure to housing-market conditions, consumer spending, competition, merchandise costs, and other risks disclosed in the company’s Form 10-K.