Havertys Furniture Companies, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 10-K; fourth-quarter results are also disclosed. Havertys operated 121 company-owned stores in 16 Southern and Midwestern states, with approximately 4.4 million retail square feet. The company sells residential furniture, mattresses, accessories and related services through stores and its website.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $802.3 million | $817.7 million | Down 1.9% |
| Comparable-store sales | Down 1.4% | Up 0.3% | Declined |
| Gross profit | $434.5 million | $446.5 million | Down $12.1 million |
| Gross margin | 54.2% | 54.6% | Down 40 basis points |
| SG&A expense | $407.5 million | $404.9 million | Up $2.6 million |
| SG&A as a percentage of sales | 50.8% | 49.5% | Up 130 basis points |
| Income before taxes | $28.7 million | $40.4 million | Down 29.0% |
| Net income | $21.9 million | $30.3 million | Down 27.9% |
| Diluted EPS — Common Stock | $1.08 | $1.42 | Down $0.34 |
| Operating cash flow | $63.4 million | $70.4 million | Down $7.0 million |
| Capital expenditures | $16.8 million | $21.5 million | Down $4.6 million |
| Free cash flow | $46.6 million | $48.9 million | Down $2.3 million |
- Average sale per written ticket increased 6.4% to $2,323, while store traffic declined by mid-single digits.
- Mattress sales increased 6.5% and custom upholstery sales increased 6.8%; case-goods sales declined amid supply-chain disruptions.
- Online sales represented approximately 2.4% of total sales and increased 13.5% from 2018.
- Cash, cash equivalents and restricted cash equivalents totaled $82.4 million at year-end, up from $79.8 million.
- Inventories were $104.8 million, compared with $105.8 million in 2018.
- Stockholders’ equity was $260.5 million, compared with $274.6 million in 2018.
- The company reported no borrowings under its revolving credit facility and $54.3 million of available borrowing capacity.
Fourth-Quarter Results
- Fourth-quarter net sales were $213.8 million, up 2.3% from $209.0 million in the prior-year quarter; comparable-store sales increased 1.4%.
- Fourth-quarter income before taxes was $7.6 million, down from $12.3 million.
- Fourth-quarter net income was $6.1 million, compared with $9.4 million.
- The quarter included a $2.4 million impairment loss related to a retail store, reducing diluted Common Stock EPS by approximately $0.09.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of severe supply-chain disruptions as the company shifted product lines out of China following increased tariffs. Management expected the transition to be substantially resolved in the first quarter of 2020.
- Gross margin declined because of higher product and freight costs, tariffs and a $1.8 million unfavorable LIFO impact, partly offset by stronger sales from in-home designers and higher-margin custom upholstery and accessories.
- SG&A increased as a percentage of sales because fixed costs were spread over lower revenue. The 2019 expense included the $2.4 million store impairment charge and higher advertising and marketing costs.
- Financing presentation changed substantially because the company adopted ASC 842 lease accounting on January 1, 2019. The adoption added $175.5 million of right-of-use assets and $179.0 million of operating lease liabilities at December 31, 2019; prior periods were not restated.
- The company repurchased approximately $29.8 million of stock and paid $15.1 million in dividends in 2019, versus $18.7 million of repurchases and $35.5 million of dividends in 2018, which included special dividends.
- The credit facility maturity was extended to September 27, 2024 from March 31, 2021.
Guidance, Outlook and Management Commentary
- Management expected 2020 gross margin of approximately 54.6%, assuming no changes in tariffs on imported goods.
- Fixed and discretionary SG&A was expected to be $265.0 million to $267.0 million in 2020; variable SG&A was expected to be 18.4% to 18.6% of sales.
- Planned 2020 capital expenditures were approximately $17.0 million.
- No increase in retail square footage was expected in 2020. Planned activity included new or replacement stores, relocations and closures, with net selling space expected to remain approximately unchanged.
- Management believed improving economic conditions, consumer spending and the housing market could support sales, along with upgraded stores, online capabilities, new merchandise, in-home design services and special-order offerings.
Risks, Contingencies and Unusual Items
- Demand is discretionary and sensitive to consumer confidence, housing activity, interest rates, household debt, home values and access to credit.
- The company faces intense competition from furniture chains, independent retailers, mass merchants, manufacturer-owned stores and e-commerce businesses.
- Approximately 59% of furniture purchases were sourced outside the United States, and approximately 15% of those purchases were from China. Tariffs, supplier pricing, foreign sourcing, transportation disruption and geopolitical events may affect margins and product availability.
- The business is dependent on third-party manufacturers and a limited distribution network of three distribution centers; facility damage, supplier failures or logistics disruptions could impair sales and deliveries.
- Fuel costs, cyber threats, information-system failures, product-safety issues, self-insurance claims and changing consumer preferences could adversely affect results.
- Contractual obligations included $236.7 million of undiscounted operating lease payments and $98.6 million of purchase orders at December 31, 2019.
- The unfunded supplemental executive retirement plan obligation was $8.3 million at year-end.
- No material pending legal proceedings were disclosed. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2019.
Most Important Facts for Investors to Verify
- Whether supply-chain changes and tariff exposure were resolved as expected in early 2020 and how they affected product availability and gross margin.
- Whether comparable-store sales, store traffic and average ticket trends improved after year-end.
- Whether the projected 2020 gross margin of approximately 54.6% and SG&A ranges were achieved.
- The sustainability of cash generation while funding approximately $17 million of capital expenditures, dividends and share repurchases.
- The effect of ASC 842 lease liabilities and approximately $236.7 million of future undiscounted operating lease payments on long-term liquidity.
- Exposure to additional tariffs, freight and raw-material cost increases, supplier concentration and foreign sourcing disruptions.