HAVERTY FURNITURE COMPANIES INC quarterly report, Q2 FY2014

Haverty Furniture Companies, Inc. — Form 10-Q Summary

Business context and reporting period

Havertys is a home furnishings retailer operating one reportable segment under the Havertys brand. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods.

Financial performance and position

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Net sales	$175.1 million	$171.1 million	$356.9 million	$357.2 million
Gross profit	$94.1 million	$91.3 million	$192.0 million	$191.6 million
Gross margin	53.8%	53.4%¹	53.8%	Not clearly stated
Net income	$4.8 million	$4.8 million	$11.0 million	$13.1 million
Diluted EPS — Common Stock	$0.21	$0.21	$0.48	$0.58
Operating cash flow	Not provided for quarter	Not provided for quarter	$23.1 million	$13.0 million

¹2013 Q2 gross margin excludes the favorable effect of a $0.8 million out-of-period vendor allowance adjustment recorded in Q1 2013.

Q2 comparable-store sales increased 3.2%; first-half comparable-store sales increased 1.1%. Average written ticket rose 3.6% in Q2 and 4.4% in the first half.
SG&A increased to 49.3% of Q2 sales from 48.6% and to 48.7% of first-half sales from 47.6%. Higher warehouse, delivery, advertising, insurance, wage and depreciation costs contributed to the increase.
At June 30, 2014, cash and cash equivalents were $87.8 million, restricted cash was $8.0 million, inventories were $94.8 million and total assets were $440.3 million.
The company had no funded debt and no borrowings under its $50.0 million revolving credit facility. Net availability was $43.4 million after borrowing-base and fixed-charge-coverage adjustments.
Lease obligations totaled $30.9 million, including $1.5 million current and $29.4 million long term.
First-half capital expenditures were $11.7 million. Cash dividends paid were $3.6 million, compared with $1.8 million in the prior-year period.

Material changes versus the prior comparable period

Q2 sales increased 2.4%, but first-half sales declined 0.1%, reflecting severe winter weather that affected approximately 75% of store locations during Q1.
First-half net income declined 16.3%, while diluted Common Stock EPS declined from $0.58 to $0.48.
Gross margin improved, supported by a greater mix of upper-middle-price-point products, pricing discipline and favorable inbound ocean freight costs.
Operating cash flow increased by $10.1 million, primarily because of higher customer deposits and more favorable changes in other operating assets and liabilities.
Property and equipment increased $14.4 million and lease obligations increased $13.7 million, primarily because five additional leased properties were recorded on the balance sheet.
Customer deposits increased $8.3 million, while inventories increased $3.3 million because prior year-end inventory levels were low and vendor delays continued.
The quarterly dividend doubled year over year to $0.0800 per Common Stock share and $0.0750 per Class A share.

Guidance, outlook, risks and unusual items

Management expects full-year 2014 gross margin of approximately 53.8%, subject to the effect of future LIFO changes in landed merchandise costs.
Expected 2014 fixed and discretionary SG&A is approximately $232 million to $233 million, compared with $224 million in 2013. Variable SG&A is expected to be approximately 17.2% of sales.
The company plans approximately $35.0 million of 2014 capital expenditures, including six new locations, one major expansion, three relocations and two store closures at lease expiration. The plans would increase selling square footage by approximately 2.0% and store count to 120.
Management expects wood-product supplier lead times to stabilize during the remainder of 2014. Case-goods sales were the only product category that declined in Q2.
The defined benefit pension plan was terminated effective July 20, 2014. The termination process is expected to take 12 to 18 months, with most obligations expected to be settled by year-end 2014.
The filing identifies risks from economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, product introductions and operational changes. The company also faces ordinary-course legal claims, which management does not expect to have a material adverse effect.
The filing notes a $0.8 million non-cash out-of-period adjustment recorded in Q1 2013 related to vendor pricing allowances; management concluded prior financial statements were not materially misstated.
Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether comparable-store sales and written-ticket growth continue after the weather-affected first quarter.
Whether supplier fulfillment and wood-product lead times stabilize as expected.
Whether the 53.8% gross-margin outlook is achieved without adverse LIFO effects.
The effect of higher SG&A, delivery, wage, insurance, advertising and depreciation costs on future earnings.
The cash requirements and settlement costs associated with terminating the pension plan.
Execution of the planned store openings, relocations, expansion, closures and approximately $35.0 million capital program.
Availability under the revolving credit facility, including the fixed-charge-coverage adjustment that reduced availability to $43.4 million.