Haverty Furniture Companies, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Havertys is a specialty retailer of residential furniture and accessories serving middle- to upper-middle-income customers. The company operated 119 stores in 17 Southern and Midwestern states at December 31, 2011, with approximately 4.2 million retail square feet. The filing covers the fiscal year ended December 31, 2011; fourth-quarter information is presented in the unaudited quarterly data.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $620.9 million | $620.3 million | Up 0.1% |
| Comparable-store sales | Up 0.3% in 2011 versus up 7.0% in 2010 | Decelerated | |
| Gross profit | $320.7 million | $318.8 million | Up $1.9 million |
| Gross margin | 51.7% | 51.4% | Up 30 basis points |
| SG&A expense | $315.9 million | $311.9 million | Up $4.0 million |
| Income before taxes | $4.6 million | $8.7 million | Down $4.1 million |
| Net income | $15.5 million | $8.4 million | Up $7.0 million |
| Diluted EPS, Common Stock | $0.70 | $0.38 | Up $0.32 |
| Cash flow from operations | $19.1 million | $24.2 million | Down $5.1 million |
| Capital expenditures | $17.6 million | $14.1 million | Up $3.5 million |
| Cash and cash equivalents | $49.6 million | $58.0 million | Down $8.5 million |
| Total debt, primarily lease obligations | $13.0 million | $9.1 million | Up $3.9 million |
| Debt to total capital | 4.7% | 3.5% | Up 120 basis points |
Fourth-quarter sales were $168.3 million, up 3.8% year over year, and comparable-store sales increased 3.5%. Fourth-quarter net income was $17.0 million, including a $14.1 million income-tax benefit from releasing most of the valuation allowance on deferred tax assets.
Material changes versus the prior comparable period
- Sales were essentially flat after stronger growth in 2010, while comparable-store sales growth slowed materially.
- Gross margin improved due to a greater mix of higher-price products, pricing discipline and a smaller unfavorable LIFO impact.
- SG&A increased 1.3%, driven by higher advertising and compensation costs, medical insurance, fuel-related delivery costs, store remodeling and relocation activity.
- Pre-tax income declined because the SG&A increase and the absence of approximately $1.7 million of 2010 property-sale gains more than offset gross-profit improvement.
- Net income increased primarily because of the $14.1 million deferred-tax valuation allowance release; the effective tax rate was negative 235.9%.
- Operating cash flow declined as working-capital requirements increased. Investing cash use rose due to capital spending and a $6.8 million escrow deposit replacing an insurance letter of credit.
- The company opened three stores and closed two, ending with 119 stores versus 118 in 2010.
Liquidity, debt and capital allocation
- Havertys funded requirements with operating cash flow and did not borrow under its revolving credit facility during 2011.
- The amended September 2011 credit agreement reduced facility commitments from $60.0 million to $50.0 million, extended maturity to September 1, 2016, and reduced certain fees and borrowing margins.
- Available revolver capacity was $43.8 million at year-end. The facility is secured by inventory, receivables, cash and other personal property, and includes restrictive covenants.
- 2011 dividends totaled $2.6 million, with common-stock dividends of $0.1200 per share and Class A dividends of $0.1125 per share.
- Contractual obligations totaled $315.6 million, including $234.4 million of operating lease commitments and $63.7 million of purchase obligations.
Guidance, outlook, management commentary and risks
- Management expected positive 2012 total sales and comparable-store sales growth, but anticipated sales would remain below 2008 sales of $691.1 million.
- 2012 gross margin was expected to be similar to 2011 levels despite freight and supplier labor-cost pressure.
- Planned 2012 capital expenditures were approximately $21.0 million, with expected net retail square-footage growth of approximately 2.4% from new stores and relocations.
- Fixed and discretionary SG&A costs were expected to increase approximately 3.1% to $213 million-$214 million, while total SG&A was expected to decline slightly as a percentage of sales.
- Key risks include discretionary consumer demand, housing and employment conditions, intense retail competition, imported merchandise and supplier dependence, tariffs and material costs, fuel prices, supply-chain disruption, information-technology and payment-card security risks, and restrictions under the revolving credit agreement.
- The pension plan remained underfunded by $11.1 million, and the supplemental executive retirement plan was underfunded by $6.2 million. Management expected a $3.0 million pension contribution in 2012.
- The company reported no material pending legal proceedings. Management and Ernst & Young concluded that disclosure controls and internal control over financial reporting were effective, and the financial statement audit opinion was unqualified.
Most important facts for investors to verify
- Separate recurring operating performance from the $14.1 million one-time deferred-tax valuation allowance release and its $0.64-per-share fourth-quarter impact.
- Assess whether modest sales and comparable-store growth can offset higher advertising, labor, fuel, occupancy and store-investment costs.
- Review operating cash conversion, inventory levels and the impact of planned 2012 capital expenditures on liquidity.
- Examine lease commitments, pension funding requirements and the credit facility’s borrowing-base and covenant restrictions.
- Monitor consumer demand, housing activity, imported-product costs, tariffs, supplier reliability and transportation expenses.