Business Context and Reporting Period
Haverty Furniture Companies, Inc. filed a Form 10-Q for the quarterly period ended March 31, 2009. The Company is a full-service home furnishings retailer operating exclusively under the Havertys brand. The reporting period reflects the impact of a severe downturn in the home furnishings market, characterized by historically low housing sales, declining home values, tightened lending, and rising unemployment.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $144.2 million | $185.3 million |
| Gross Profit | $73.8 million | $96.4 million |
| Gross Margin | 51.1% | 52.0% |
| Net (Loss) Income | $(7.3) million | $1.0 million |
| Diluted EPS (Common) | $(0.34) | $0.05 |
| Cash and Equivalents | $9.5 million | $2.2 million |
| Operating Cash Flow | $(0.4) million | $0.5 million |
| Debt (Notes Payable) | $0 | $0 |
| Available Credit Facility | $41.0 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by $41.0 million (22.1%) year-over-year. Comparable store sales dropped 22.9%, driven by reduced consumer spending and housing market weakness.
- Profitability: The Company reported a net loss of $7.3 million compared to net income of $1.0 million in the prior year. This was primarily due to the sales decline and a $2.7 million increase in the deferred tax valuation allowance.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased by $14.2 million year-over-year. Management reduced delivery headcount, adjusted advertising spend (shifting from print to TV), and cut administrative costs.
- Balance Sheet: Cash increased by $5.8 million, largely due to a $6.6 million sale-leaseback transaction. Inventories decreased by $4.4 million as purchases were adjusted to match weak demand. Accounts receivable dropped significantly as the Company shifted long-term financing to third-party providers.
Outlook, Risks, and Management Commentary
- Guidance: Management does not anticipate a significant rebound in demand for the remainder of 2009. The Company plans to highlight price-sensitive items and use promotions to drive traffic while maintaining gross profit margins near current levels.
- Liquidity: The Company has a $60.0 million revolving credit facility. While the borrowing base is full, availability is reduced to $41.0 million due to a fixed charge coverage ratio test failure and outstanding letters of credit. No borrowings were outstanding as of March 31, 2009.
- Capital Expenditures: Planned 2009 expenditures are $4.3 million ($2.1 million for store improvements, $1.5 million for IT). The Company closed its Hattiesburg, MS store and is consolidating locations in Little Rock, AR.
- Risks: Key risks include continued volatility in capital and credit markets, potential increased borrowing costs, and the prolonged downturn in the housing and home furnishings sectors. The Company has recorded a valuation allowance against substantially all net deferred tax assets due to cumulative losses.
Investor Verification Checklist
- Verify the sustainability of the 51.1% gross margin given the aggressive pricing strategies mentioned.
- Confirm the impact of the fixed charge coverage ratio failure on future credit availability and potential covenant waivers.
- Monitor the trend in the allowance for doubtful accounts, which rose to 7.5% of receivables from 3.5% in the prior year.
- Assess the effectiveness of the shift from in-house to third-party financing on future credit service charge revenue.
- Review the progress of store closures and consolidations to ensure SG&A reductions are maintained.