Haverty Furniture Companies, Inc. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone Q4 filing; fourth-quarter results are presented as unaudited supplemental data. Havertys operates 119 company-owned residential furniture showrooms in 16 Southern and Midwestern states and one reportable segment.
Business Context and Operating Footprint
- Specialty retailer focused on middle- to upper-middle-income consumers, with furniture, mattresses, accessories, delivery, product protection and limited in-house financing.
- Retail selling space was approximately 4.3 million square feet at year-end, down from 4.35 million square feet and 122 stores in 2012.
- Sales financed through third parties represented 32.2% of customer amounts due; Havertys-financed sales represented 3.6%. Third-party financed receivables are not Havertys assets or credit risk.
- Online sales remained minor but increased 11.1% year over year. The website received approximately 6.5 million unique visitors.
Financial and Operating Metrics
| Metric | FY2013 | FY2012 | Change or comment |
|---|---|---|---|
| Net sales | $746.1 million | $670.1 million | Up 11.3% |
| Comparable-store sales | Up 11.0% | Up 6.8% | Comparable stores contributed approximately $72.0 million of 2013 sales growth |
| Gross profit | $401.5 million | $352.0 million | Margin increased to 53.8% from 52.5% |
| SG&A expense | $348.6 million | $328.8 million | Up 6.0%; declined to 46.7% of sales from 49.1% |
| Income before taxes | $52.5 million | $23.5 million | Up 123.2%; margin increased to 7.0% from 3.5% |
| Net income | $32.3 million | $14.9 million | Net margin increased to 4.3% from 2.2% |
| Diluted EPS, Common Stock | $1.41 | $0.67 | Up 110% |
| Net cash from operations | $55.9 million | $52.2 million | Up 7.1% |
| Free cash flow | $35.7 million | $27.2 million | Operating cash flow less capital expenditures |
| Capital expenditures | $20.2 million | $25.0 million | Down $4.8 million |
| Cash and cash equivalents | $83.2 million | $53.6 million | Up $29.6 million |
| Total debt | $17.2 million | $19.4 million | Entirely lease obligations |
| Debt to total capital | 5.4% | 6.9% | Improved leverage |
| Inventories | $91.5 million | $96.9 million | Down $5.4 million |
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by comparable-store performance, higher average tickets, improved merchandising and a 19.8% increase in custom-order upholstery sales.
- Average ticket increased 7.8%. Management emphasized higher-quality, higher-price-point merchandise and pricing discipline.
- Gross margin expanded 130 basis points, aided by product mix, selective promotions, a $1.1 million smaller LIFO impact and a $0.8 million out-of-period adjustment. Excluding the adjustment, 2013 gross margin was approximately 53.7%.
- SG&A increased in dollars but declined 240 basis points as a percentage of sales, reflecting fixed-cost leverage and delivery efficiencies.
- Net income benefited from stronger operating earnings. The effective tax rate was 38.5%, compared with 36.6% in 2012. The filing states that the remaining $1.4 million deferred-tax valuation allowance was fully released in 2013 as related state tax credits expired.
- Operating cash flow increased despite a $4.2 million discretionary pension contribution and working-capital changes. Inventory declined, while accounts payable and other liabilities decreased.
- Financing cash outflows fell substantially because 2012 included an approximately $22.0 million special dividend. 2013 dividends were approximately $5.4 million.
Liquidity, Debt and Commitments
- Havertys funded operating needs and capital expenditures from internally generated cash and did not draw on its revolving credit facility during 2013.
- The credit facility had a $50.0 million commitment, no borrowings outstanding and reported net availability of $43.8 million at year-end. The company stated that it was in compliance with the agreement and had no default.
- Recorded debt consisted of $17.2 million of lease obligations. Separate operating-lease commitments totaled approximately $228.1 million, and total contractual obligations were approximately $335.8 million, including purchase orders.
- Management expected approximately $35.0 million of 2014 capital expenditures, compared with $20.2 million in 2013.
Guidance, Outlook and Management Commentary
- Management expected 2014 gross margin of approximately 53.8%, slightly above the adjusted 2013 margin of 53.7%.
- Fixed and discretionary SG&A costs were expected to be approximately $232 million to $234 million, up approximately 4.1% to 5.0% from comparable 2013 costs. Variable SG&A was expected to be 17.0% to 17.2% of sales.
- Total SG&A was expected to decline modestly as a percentage of sales if sales growth provided additional fixed-cost leverage.
- Planned 2014 store openings, relocations and expansions were expected to increase net selling space by approximately 1.8%. The Bright Inspirations store-refresh program was expected to be completed in 2015.
- Management noted that 2014 sales and comparable-store comparisons would be measured against more difficult prior-year comparisons.
- No pension contribution was expected in 2014, although future benefit payments and actuarial assumptions remain relevant to cash flow and equity.
Risks, Contingencies and Unusual Items
- Demand is discretionary and sensitive to housing activity, consumer confidence, interest rates, credit availability, home values, employment, taxes and broader economic conditions.
- The company faces intense competition from furniture retailers, department stores, mass merchants, manufacturers’ stores, franchises and online channels.
- Approximately 57% of product costs for non-domestically produced goods averaged over the last three years; foreign sourcing exposes margins and availability to tariffs, currency movements, material costs, supplier disruptions and transportation costs.
- The distribution network is concentrated in three distribution centers, creating operational risk if a facility is damaged or disrupted. The business is also dependent on information technology, payment-card processing and customer-data security.
- Havertys is self-insured for certain liability, workers’ compensation, vehicle and health-care claims, requiring actuarial estimates and reserves. Self-insurance reserves totaled approximately $8.2 million at year-end.
- Pension accounting is sensitive to discount rates, asset returns and other actuarial assumptions. The pension plan had a reported $9.4 million funded surplus at year-end, while the unfunded SERP obligation was approximately $6.0 million.
- A $0.8 million out-of-period adjustment increased first-quarter 2013 gross profit and affected quarterly EPS by approximately $0.02. The filing also identifies a smaller LIFO impact and tax-credit valuation allowance release as unusual contributors to reported results.
- No material pending legal proceedings were reported. Management and Ernst & Young reported effective internal control over financial reporting, and the audit opinion was unqualified.
Investor Verification Checklist
- Verify the sustainability of the 11.0% comparable-store sales increase and 7.8% average-ticket growth against tougher 2014 comparisons.
- Separate recurring gross-margin improvement from the $0.8 million out-of-period adjustment, LIFO effects and product-mix benefits.
- Assess whether projected 2014 capital expenditures of approximately $35.0 million can be funded while maintaining cash balances and dividends.
- Review the $228.1 million operating-lease commitments and the credit facility’s covenant-based availability.
- Monitor supplier concentration, imported-product costs, tariffs, freight and inventory availability.
- Evaluate pension and self-insurance assumptions, including potential cash requirements despite the reported pension surplus.
- Confirm the effect of the 2013 tax-credit valuation allowance release and whether future earnings are expected to carry the 38.5% effective tax rate.