Havertys Furniture Companies, Inc. — 2020 Second-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 120 company-operated stores and its website. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
COVID-19 materially disrupted operations. All stores closed March 19, deliveries stopped March 21, 103 stores reopened May 1, the remaining 17 reopened by June 20, and deliveries resumed May 5.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $110.0 million | $191.9 million | $289.4 million | $379.1 million |
| Gross profit | $59.6 million | $103.6 million | $159.2 million | $206.6 million |
| Gross margin | 54.2% | 54.0% | 55.0% | 54.5% |
| SG&A expense | $72.6 million | $95.8 million | $170.2 million | $194.7 million |
| Income before interest and taxes | $18.8 million | $7.9 million | $20.9 million | $12.3 million |
| Net income | $13.6 million | $6.0 million | $15.5 million | $9.7 million |
| Diluted EPS, Common Stock | $0.72 | $0.29 | $0.81 | $0.47 |
| Operating cash flow | Not separately provided | Not separately provided | $24.5 million | $14.8 million |
Second-quarter sales declined 42.7% year over year, while first-half sales declined 23.7%. The company reported that written sales for May and June increased 13.9% and written comparable-store sales increased 17.5% versus the same 2019 period, but sales delivered from May 5 through June 30 decreased 13.4% because delivery capacity was constrained.
SG&A declined $23.1 million in the quarter and $24.5 million year to date, reflecting store closures, furloughs, workforce reductions, lower advertising, and other cost controls. SG&A as a percentage of sales increased to 66.1% in the quarter from 49.9% because fixed costs were spread over substantially lower revenue.
Net income benefited from a $31.6 million gain on the sale of three properties. Excluding this unusual gain, reported profitability would have been materially lower; the filing does not provide a separately stated adjusted net income or adjusted EPS.
At June 30, 2020, cash and cash equivalents were $151.1 million, compared with $75.7 million at December 31, 2019. Including restricted cash, total cash was $157.8 million. Total assets were $651.1 million and stockholders’ equity was $264.4 million.
The company had no outstanding revolver borrowings at June 30, 2020. It temporarily borrowed and repaid $43.8 million during the period. The $60.0 million revolving facility matures September 27, 2024; borrowing-base availability was $42.9 million at quarter-end, with no outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales fell $81.9 million, or 42.7%, in the second quarter and $89.7 million, or 23.7%, for the first half, primarily because of COVID-19 closures and delivery interruptions.
- Gross margin improved 20 basis points in the quarter and 50 basis points for the first half, primarily due to pricing and product mix and lower inventory markdowns.
- Net income increased despite lower sales because SG&A reductions and the $31.6 million property-sale gain more than offset the revenue decline.
- Operating cash flow increased to $24.5 million from $14.8 million, while investing cash flow changed from a $5.5 million use to a $65.1 million source, primarily due to sale-leaseback proceeds.
- Customer deposits increased $27.4 million to $57.5 million, reflecting higher undelivered sales and creating an important working-capital source.
- The company reduced its workforce by approximately 1,200 employees, or approximately 35%, effective April 30, and incurred approximately $1.7 million of severance costs.
- Dividends per share were reduced to $0.15 for Common Stock and $0.14 for Class A Common Stock in the second quarter, from $0.18 and $0.17, respectively, in the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
Management is not providing guidance for remaining-2020 gross margins or SG&A. The company expects 2020 net selling space to be slightly below 2019 levels and estimates total 2020 capital expenditures of approximately $9.2 million, subject to project timing. Management stated that liquidity was sufficient to fund operations and expected capital requirements for at least 12 months, including if business-continuity measures had to be reinstated.
On May 18, 2020, Havertys completed a $70.0 million sale-leaseback of three distribution and office properties, receiving $69.5 million of net proceeds and recognizing a $31.6 million gain. The properties were leased back under 15-year operating leases with total future minimum payments of $75.4 million.
COVID-19 risks include renewed store closures, weaker consumer demand, health and safety costs, supply-chain and merchandise availability disruptions, freight and tariff pressures, labor shortages, delivery constraints, possible liquidity needs, debt-covenant compliance, and potential impairment or financing costs. The company also received rent deferrals and abatements and elected CARES Act tax provisions, including employee-retention credits and tax benefits related to qualified leasehold improvements.
Interim inventory results use estimated LIFO indices and may change following the year-end valuation. The company reported no material change in market-risk exposure, no off-balance-sheet arrangements, and no legal matters expected to have a material adverse effect.
Important Investor Verification Items
- Verify the sustainability of post-reopening written sales growth after delivery capacity and store operations normalize.
- Separate recurring operating earnings from the $31.6 million sale-leaseback gain and assess the resulting long-term lease obligations.
- Monitor COVID-19 developments, potential renewed restrictions, customer demand, supply-chain conditions, and delivery backlogs.
- Review cash conversion, customer-deposit growth, deferred rent, and liquidity after the one-time sale-leaseback proceeds are excluded.
- Confirm compliance with the revolving credit facility’s borrowing-base and dividend covenants, particularly the $12.5 million unused-availability threshold.
- Assess the effects of workforce reductions, severance, furlough-related benefits, and the company’s ability to restore delivery capacity.
- Review future filings for changes in 2020 capital spending, store openings or closures, tax benefits, LIFO adjustments, and margin guidance.