Havertys Furniture Companies, Inc. — Q2 2011 Form 10-Q Summary
Business context and reporting period
Havertys is a home furnishings retailer operating under one brand and one reportable segment. The filing covers the three and six months ended June 30, 2011; financial statements are unaudited. The company operated in 17 states and recognized revenue upon delivery to customers.
Financial performance and key metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $143.1 million | $145.1 million | $297.3 million | $301.1 million |
| Gross profit | $73.4 million | $74.3 million | $152.4 million | $155.5 million |
| Gross margin | 51.3% | 51.2% | 51.3% | 51.7% |
| SG&A expense | $74.4 million | $74.9 million | $153.8 million | $153.8 million |
| SG&A as a percentage of sales | 52.0% | 51.6% | 51.8% | 51.1% |
| Net income (loss) | $(0.9) million | $(0.6) million | $(1.6) million | $1.7 million |
| Diluted EPS | $(0.04) | $(0.03) | $(0.07) | $0.08 |
- Second-quarter comparable-store sales decreased 1.4%; first-half comparable-store sales decreased 1.0%.
- Net sales declined 1.4% in the second quarter and 1.3% year to date.
- Six-month operating cash flow was $15.2 million, compared with $18.0 million in the prior-year period.
- Capital expenditures were $4.0 million in the first six months, compared with $3.1 million in 2010.
- Cash used in investing activities was $10.8 million, including $6.8 million placed into restricted cash as collateral for workers’ compensation obligations.
- Cash and cash equivalents totaled $62.0 million at June 30, 2011, compared with $58.0 million at December 31, 2010.
- Total debt was not reported as outstanding under the revolving credit facility; lease obligations totaled $8.8 million, including $0.5 million current and $8.3 million long term.
- The $60.0 million revolving facility had a $51.7 million borrowing base and $41.7 million of net availability after a $10.0 million reduction related to failure to meet the prior-period fixed-charge coverage test. No borrowings were outstanding, and the company reported compliance with the agreement.
- Inventories declined to $84.7 million from $91.9 million at year-end 2010. Customer deposits increased to $16.9 million from $13.6 million.
Material changes versus the prior comparable period
- Sales weakened following strong 2010 comparisons, when housing activity was temporarily supported by first-time homebuyer tax credits. Management cited persistent unemployment, higher fuel and food costs, declining home values and a weak housing market as pressures on consumer confidence.
- Gross margin was stable in the quarter but declined 40 basis points for the first six months. Management attributed stabilization in product costs partly to normalized inbound freight costs.
- SG&A dollars were approximately flat year to date, but increased as a percentage of sales because of lower revenue. Delivery and warehousing costs increased because of fuel, truck costs, wages and insurance premiums.
- Credit service charge revenue declined to $0.3 million for the first half from $0.4 million. Havertys-financed sales represented 5.6% of sales versus 6.0% in the prior-year period; third-party financed sales represented 31.4% versus 31.6%.
- Accounts receivable decreased to $12.7 million from $15.2 million a year earlier, while the allowance for doubtful accounts declined to $0.6 million from $0.9 million.
- The company changed workers’ compensation collateral from a letter of credit to an escrow account, creating $6.8 million of restricted cash.
- Net pension cost decreased to $0.6 million for the first half from $0.7 million. The company contributed $1.0 million to its qualified pension plan during the second quarter and expected an additional $2.0 million contribution in 2011.
Guidance, outlook, risks and unusual items
- Management expected second-half gross margins to approximate 51.1%, the level recorded in the second half of 2010, with a slightly higher estimated LIFO impact.
- Second-half advertising and marketing spending was expected to increase, including an approximately 0.4-percentage-point increase as a percentage of sales, in connection with a new agency and brand initiatives.
- 2011 planned capital expenditures totaled $19.5 million: $11.5 million for new stores and improvements, $4.8 million for purchasing four previously leased stores, and $3.2 million for information technology.
- The company planned to open one store in a new market and relocate another in the fourth quarter, with expected 2011 selling-space growth of less than 1% if completed as scheduled.
- Management stated that available capital resources were adequate for foreseeable working capital, capital expenditures, scheduled payments, taxes, benefit contributions and stock repurchases.
- The revolving credit facility was scheduled to expire in December 2011. Management was negotiating renewal and expected terms at least as favorable as the existing facility.
- Income tax expense included a $155,000 reduction of recorded tax receivables. Deferred tax assets included $13.3 million of valuation allowances that could be reduced depending partly on future income.
- Key identified risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new product introductions and operational changes. Legal claims arising in the ordinary course were not expected to have a material adverse effect, although actual outcomes could differ from estimates.
- The filing states that disclosure controls were effective and that no material changes in market risk had occurred. Floating-rate exposure exists through the credit facility, although management did not expect a 100-basis-point rate change to materially affect results.
Important facts for investors to verify
- Whether comparable-store sales and profitability recover from the negative first-half trend amid weak housing and consumer conditions.
- Renewal terms and availability under the revolving credit facility before its December 2011 expiration, including the fixed-charge coverage restriction.
- Whether planned store openings, relocations, acquisitions and the $19.5 million capital-expenditure program are completed within budget.
- The effect of higher advertising, delivery, fuel, wage and insurance costs on SG&A leverage and operating margins.
- Year-end LIFO valuation effects and the potential impact of changes in the $13.3 million deferred-tax valuation allowance.
- Required pension contributions, restricted cash collateral arrangements and the expiration of the workers’ compensation collateral agreement on December 31, 2011.