Haverty Furniture Companies, Inc. - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for the period ended September 30, 2010. Haverty Furniture Companies, Inc. operates as a retailer of residential furniture in the middle to upper-middle price ranges under the Havertys brand. The company operates in a single reportable segment: home furnishings retailing.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Net Sales | $157.1 million | $458.2 million |
| Gross Profit | $80.6 million (51.3% margin) | $236.1 million (51.5% margin) |
| Net Income | $1.2 million | $2.9 million |
| Operating Cash Flow | N/A | $26.8 million |
| Cash and Equivalents | $67.1 million (Sep 30, 2010) | N/A |
| Debt | $0 outstanding on revolving credit facility | N/A |
| Available Liquidity | $34.1 million (net availability) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.4% ($5.2 million) in Q3 2010 and 7.6% ($32.4 million) for the nine-month period compared to 2009. Comparable store sales rose 4.3% in Q3 and 9.0% for the nine months.
- Profitability Turnaround: The company returned to profitability, reporting net income of $2.9 million for the nine months ended September 30, 2010, compared to a net loss of $13.3 million in the same period in 2009.
- Margin Pressure: Gross profit margin decreased slightly to 51.3% in Q3 2010 from 52.1% in Q3 2009, primarily due to a $0.4 million increase in the LIFO reserve and higher cargo freight expenses.
- Expense Management: Selling, General, and Administrative (SG&A) expenses as a percentage of sales decreased to 50.4% in Q3 2010 from 51.5% in the prior year, driven by reductions in administrative costs and depreciation.
- Balance Sheet: Cash and cash equivalents increased by $22.6 million to $67.1 million. Inventories decreased by $5.1 million as the company adjusted purchasing levels.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that while the company has achieved four consecutive quarters of positive comparable store sales, the environment remains difficult due to lower consumer confidence, a modest economic recovery, and a weak housing market.
- Store Strategy: The company closed stores in Albany, GA; Fredericksburg, VA; and Bowling Green, KY. A new store opened in Columbus, GA in October 2010, and the Abilene, TX store is scheduled to close in Q4 2010. Net selling space is expected to decrease by 1.6% in 2010.
- Capital Expenditures: Planned annual expenditures for 2010 are $13.5 million, including $5.0 million for new stores/improvements and $7.2 million for IT.
- Liquidity Constraints: While the company has a $60 million revolving credit facility, net availability is reduced to $34.1 million due to a failure to meet a fixed charge coverage ratio test for the preceding twelve months and outstanding letters of credit. No borrowings were outstanding as of September 30, 2010.
- Tax Position: The effective tax rate was 2.8% for the nine months ended September 30, 2010. The tax expense is primarily for Texas state taxes based on gross profit, as federal income tax benefits were offset by changes in the valuation allowance for deferred taxes.
Investor Verification Checklist
- Verify the impact of the LIFO reserve increase on future gross margins and the ability to pass freight cost increases to consumers.
- Monitor the fixed charge coverage ratio to ensure the company regains full access to its $60 million credit facility.
- Assess the sustainability of comparable store sales growth given the cited weak housing market and consumer confidence trends.
- Review the valuation allowance for deferred taxes to understand the company's long-term tax liability and potential future earnings impact.
- Confirm the execution of the store rationalization plan (closures vs. new openings) and its effect on net selling space and occupancy costs.