Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2000, for Haverty Furniture Companies, Inc., a retailer of furniture and home furnishings. The company operates primarily in the southeastern United States, with significant markets in Dallas, Atlanta, Florida, and Texas. The reporting period includes a material change in accounting principles regarding revenue recognition effective January 1, 2000.
Key Financial Metrics
| Metric | Quarter Ended June 30, 2000 | Six Months Ended June 30, 2000 |
|---|---|---|
| Net Sales | $164,413,000 | $328,154,000 |
| Gross Profit | $77,470,000 | $156,098,000 |
| Gross Margin | 47.1% | 47.6% |
| Net Income | $5,783,000 | $8,936,000 |
| Diluted EPS | $0.28 | $0.42 |
| Cash and Equivalents | $1,186,000 | $1,186,000 (Ending Balance) |
| Total Debt (Current + Long-term) | $178,025,000 | $178,025,000 (Ending Balance) |
| Operating Cash Flow (6 months) | $1,705,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16.0% for the quarter and 14.2% for the six months ended June 30, 2000, compared to pro forma 1999 results. Comparable-store sales (calculated on a billed basis) increased 9.6%.
- Accounting Change: The company adopted a new revenue recognition method (delivery basis) effective January 1, 2000, per SEC Staff Accounting Bulletin No. 101. This resulted in a cumulative effect charge of $3,356,000 recorded in the first quarter of 2000, reducing net income for the six-month period.
- Profitability: Diluted earnings per share before the accounting change were $0.28 for the quarter and $0.58 for the six months, compared to pro forma 1999 results of $0.21 and $0.45, respectively.
- Expense Management: Selling, general, and administrative (SG&A) expenses as a percentage of net sales decreased to 41.1% for the quarter and 41.3% for the six months, down from 41.7% and 41.5% in the prior year pro forma periods.
- Inventory Levels: Inventory increased by $13.8 million during the first six months of 2000. Management noted this increase was higher than expected and is under review.
Guidance, Outlook, and Risks
- Outlook: Management anticipates margins will improve in the second half of the year, which is historically stronger. Inventory levels are expected to stabilize and not increase further in the second half.
- Capital Expenditures: Preliminary estimates for 2000 capital expenditures are approximately $30 million, including construction of new stores and corporate office relocation.
- Liquidity: The company relies on internally generated funds, bank borrowings, and private placements. As of June 30, 2000, 58.3% of total debt was fixed or interest rate protected. The average effective interest rate was 7.0%.
- Risks: Key risks include the ability to maintain supplier relationships, availability of retail real estate, consumer confidence affecting big-ticket spending, and competition. The company also faces risks related to the accuracy of interim LIFO inventory calculations.
- Unusual Items: Other expense, net, of $0.99 million for the quarter was primarily related to costs of closing or replacing retail stores, largely offset by a gain on the sale of former corporate offices.
Investor Verification Checklist
- Verify the impact of the new revenue recognition method on future comparability of sales figures.
- Monitor the resolution of the inventory buildup, which exceeded management's expectations in the first half of the year.
- Review the progress of the $30 million capital expenditure plan and its effect on cash flow.
- Assess the sustainability of the improved SG&A expense ratios amidst rising warehouse and delivery costs.
- Confirm the status of the stock repurchase program, which utilized $11.6 million in the first six months.