Haverty Furniture Companies, Inc. — 2012 First-Quarter Form 10-Q
Business context and reporting period
Havertys is a retailer of residential furniture in the middle- to upper-middle price ranges, operating one reportable segment through company-owned stores under the Havertys brand. This unaudited report covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $163.6 million | $154.2 million | Up 6.1% |
| Comparable-store sales | — | — | Up 5.7% |
| Gross profit | $85.3 million | $79.0 million | Up 8.1% |
| Gross margin | 52.2% | 51.2% | Up 100 basis points |
| SG&A expense | $81.2 million | $79.5 million | Up $1.8 million |
| SG&A as a percentage of sales | 49.7% | 51.6% | Down 190 basis points |
| Income before taxes | $4.0 million | $(0.5) million | Improved |
| Net income (loss) | $2.5 million | $(0.7) million | Improved |
| Diluted EPS | $0.11 | $(0.03) | Improved |
| Cash flow from operations | $11.2 million | $9.6 million | Up $1.6 million |
Upholstery sales increased 13.3%, and the average ticket increased approximately 1.5%. The effective tax rate was 38.9% in Q1 2012 versus negative 27.3% in Q1 2011; the prior-year tax expense included a $155,000 discrete adjustment related to income tax receivables.
Cash and cash equivalents were $56.7 million at March 31, 2012, compared with $49.6 million at December 31, 2011. Restricted cash was $7.0 million. Total assets were $387.5 million and total liabilities were $121.1 million. Inventory declined to $91.6 million from $93.7 million at year-end.
Capital expenditures were $3.7 million, compared with $2.0 million in the prior-year quarter. Investing activities used $3.9 million, while financing activities used $0.2 million. The company reported no funded debt and $12.9 million of lease obligations. No off-balance-sheet arrangements were reported.
The amended revolving credit facility has commitments of $50.0 million and matures September 1, 2016. There were no borrowings or outstanding letters of credit at March 31, 2012. Net availability was $43.8 million after a $6.2 million reduction because the fixed-charge coverage ratio test was not met for the preceding twelve months. The company stated that it was in compliance with the agreement and had no default.
Material changes versus the prior comparable period
- Sales increased $9.4 million, supported by a 5.7% increase in comparable-store sales.
- Gross margin expanded to 52.2% from 51.2%, primarily due to higher price-point products and pricing discipline.
- SG&A increased in dollars but declined as a percentage of sales, reflecting operating leverage. Selling expenses increased $1.2 million and administrative expenses increased approximately $0.5 million due mainly to higher incentive compensation accruals.
- The company moved from a net loss to net income, and operating cash flow increased by $1.6 million.
- Capital expenditures increased by approximately $1.7 million, and restricted cash increased by $0.2 million.
Guidance, outlook, risks and unusual items
Management expects 2012 gross margin to be approximately 52.0%. Planned 2012 capital expenditures are $23.0 million, including $18.0 million for new stores and store improvements and $4.0 million for information technology. Planned expansion includes stores in Baltimore, Midland, Dallas and a replacement store in Atlanta, potentially increasing net selling square footage by approximately 2.5%.
Management expects cash generated from operations and available cash to fund working capital, contractual obligations, benefit-plan contributions, taxes, dividends, stock repurchases and planned capital projects. The company expects approximately $3.0 million of contributions to its qualified pension plan during 2012.
A store was damaged by a faulty fire sprinkler system in March 2012. Management expected insurance proceeds to exceed the loss and anticipated recognizing an approximately $0.4 million gain in the second quarter, subject to resolution of contingencies.
Key risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new-product execution and operational rationalization. The company stated that ordinary-course legal claims are not expected to have a material adverse effect. Interim LIFO inventory values are estimated and subject to final year-end valuation.
Investor verification points
- Verify whether the expected approximately $0.4 million insurance gain was recognized in the second quarter.
- Assess the effect of the $6.2 million fixed-charge coverage reduction on future revolver availability and covenant compliance.
- Compare actual 2012 gross margin and capital expenditures with management’s 52.0% margin and $23.0 million spending expectations.
- Monitor execution of the planned store openings, replacement store and projected 2.5% selling-square-footage increase.
- Review pension funding requirements, including the expected $3.0 million 2012 contribution.
- Evaluate sales and margin sensitivity to housing conditions, consumer demand, competition and merchandise costs.