Havertys Furniture Companies, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 5, 2015. Havertys operates one reportable segment: retailing residential furniture under the Havertys brand. The financial statements are unaudited and prepared under interim U.S. GAAP requirements.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $191.3 million | $181.7 million | +5.3% |
| Comparable-store sales | — | — | +3.8% |
| Gross profit | $102.6 million | $97.9 million | +4.9% |
| Gross margin | 53.6% | 53.8% | Down 20 basis points |
| Income before interest and taxes | $10.4 million | $10.2 million | +1.9% |
| Net income | $6.1 million | $6.1 million | Approximately flat |
| Basic EPS — Common Stock | $0.27 | $0.27 | Flat |
| Net cash from operations | $13.6 million | $8.4 million | +$5.1 million |
| Capital expenditures | $6.7 million | $4.5 million | +$2.2 million |
Gross profit and other revenue totaled $102.7 million. Selling, general and administrative expense increased to $92.3 million from $87.7 million, while SG&A remained 48.2% of sales. Interest expense increased to $0.5 million from $0.3 million. The effective income tax rate was 38.4% in both periods. Net income margin was approximately 3.2%, compared with approximately 3.4% in Q1 2014.
Cash and cash equivalents were $74.1 million at March 31, 2015, compared with $65.5 million at December 31, 2014. Total current assets were $213.5 million versus current liabilities of $96.7 million. Total assets were $469.6 million and total liabilities were $172.2 million. The company had no funded debt; reported lease obligations totaled $51.6 million, including $2.8 million current and $48.9 million long term.
The company had a $50.0 million revolving credit facility with no borrowings and no outstanding letters of credit. Net availability was $43.8 million after a $6.2 million reduction related to the fixed charge coverage ratio test. Restricted cash of $8.0 million primarily collateralized workers’ compensation obligations.
Material Changes Versus the Prior Comparable Period
- Sales increased 5.3%, including a 3.8% comparable-store sales increase, reversing the prior-year Q1 declines of 2.3% in total sales and 0.9% in comparable-store sales.
- All product categories recorded sales growth. The average written ticket increased 4.8%, and written custom upholstery business increased 11.1%.
- Gross margin declined 20 basis points because of lower delivery fee revenue, port-related freight costs, and closeout sales associated with new merchandise introductions.
- SG&A increased $4.6 million, primarily from higher commissions, new-store staffing and training, expanded in-home design activity, occupancy and depreciation, warehouse and delivery costs, and administrative expenses. Advertising and marketing expense declined $0.5 million.
- Operating cash flow increased $5.1 million, primarily because inventory was relatively flat versus a $4.5 million inventory increase in Q1 2014 and the reduction in accounts payable and accrued liabilities was smaller.
- Financing activities provided $0.8 million versus a $2.0 million use of cash in the prior year, mainly because of $3.3 million in landlord construction allowance receipts.
- Customer deposits increased $5.9 million from year-end, reflecting higher special-order and undelivered sales. Property and equipment increased $3.8 million, and lease obligations increased $2.6 million.
Guidance, Outlook, Risks and Unusual Items
- Management maintained its 2015 gross margin expectation at approximately 53.3%.
- Management expects full-year fixed and discretionary SG&A expenses of approximately $239.0 million to $241.0 million, compared with $230.5 million in 2014. Remaining quarterly fixed and discretionary expenses were expected to average approximately $60.0 million to $61.5 million.
- Variable SG&A was 18.0% of sales in Q1 and was expected to be approximately 17.5% to 17.7% of sales for the full year.
- Imported-product availability and delivery throughput were affected by the West Coast port slowdown. Management expected lead times to stabilize during the remainder of Q2.
- Closeout sales from replaced merchandise were expected to pressure margins during the next two quarters. Increased competition in the Dallas market was expected to create additional margin pressure beginning in Q2.
- 2015 plans called for four store openings and one closure, increasing net selling square footage by 3.2% and the store count to 122. Planned capital expenditures were $32 million to $35 million.
- The company stated that cash generated from operations and available cash were expected to fund obligations, dividends, stock repurchases, and planned capital projects.
- Key risks include economic and housing-market conditions, competition, merchandise and energy costs, supply-chain disruptions, capital-expenditure timing, new-product execution, and operational rationalization. Legal claims arising in the ordinary course were not expected to have a material adverse effect.
- The defined benefit pension plan was terminated in 2014 and fully settled; Q1 2015 pension expense related primarily to the unfunded supplemental executive retirement plan.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether sales growth and the 3.8% comparable-store increase continued after Q1, particularly amid Dallas competition and supply-chain normalization.
- Whether the approximately 53.3% full-year gross-margin expectation was achieved despite closeouts, freight costs, and promotional pressure.
- Execution of the planned store openings, one closure, and $32 million to $35 million capital-expenditure program.
- Actual SG&A spending relative to the $239 million to $241 million full-year expectation and the effect of new-store investments on operating leverage.
- Availability and covenant effects under the revolving credit facility, including the $6.2 million reduction caused by the fixed charge coverage ratio test.
- Final year-end inventory valuation, since interim LIFO calculations are based on management estimates and may change at year-end.
- Potential effects of supply-chain disruptions, housing and economic conditions, merchandise costs, and competition on margins and delivery performance.