Haverty Furniture Companies, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Havertys is a specialty retailer of residential furniture and accessories operating 120 company-owned stores in 16 Southern and Midwestern states, with approximately 4.4 million retail square feet at December 31, 2018. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. The company also sells through havertys.com, although online sales represented approximately 2% of 2018 sales.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $817.7 million | $819.9 million | (0.3%) |
| Comparable-store sales | 0.3% increase | 1.3% decrease | Improved |
| Gross profit | $446.5 million | $444.9 million | 0.4% increase |
| Gross margin | 54.6% | 54.3% | Up 30 basis points |
| SG&A expense | $404.9 million | $402.9 million | 0.5% increase |
| SG&A as a percentage of sales | 49.5% | 49.1% | Up 40 basis points |
| Income before taxes | $40.4 million | $43.2 million | Down 6.5% |
| Net income | $30.3 million | $21.1 million | Up 43.8% |
| Diluted EPS — Common Stock | $1.42 | $0.98 | Up 44.9% |
| Operating cash flow | $70.4 million | $52.5 million | Up $17.9 million |
| Capital expenditures | $21.5 million | $24.5 million | Down $3.0 million |
| Free cash flow | $48.9 million | $28.0 million | Up $20.9 million |
Fourth-quarter 2018 sales were $209.0 million, compared with $215.0 million in the prior-year quarter. Fourth-quarter income before taxes was $12.3 million versus $14.1 million, while net income was $9.4 million versus $2.9 million. The fourth quarter of 2017 included a $5.9 million tax expense related to the Tax Cuts and Jobs Act and approximately $1.9 million of other income, primarily insurance recoveries.
The average sale per written ticket increased 4.4% to $2,184, partially offsetting a mid-single-digit decline in store traffic. In-home designers participated in 21.5% of 2018 sales, with an average ticket of $4,466.
Liquidity, debt and capital allocation
- Cash, cash equivalents and restricted cash equivalents totaled $79.8 million at December 31, 2018, down from $87.6 million.
- Total debt was $50.8 million, consisting entirely of lease obligations; no revolving credit borrowings were outstanding.
- The company had $51.5 million of net availability under its $60.0 million revolving credit facility, which matures March 31, 2021.
- Total debt to total capital was 15.6%, compared with 15.7% in 2017.
- 2018 financing cash outflows included $35.5 million of dividends, including a special dividend, and $18.7 million of common-stock repurchases.
- At December 31, 2018, contractual obligations totaled $310.2 million, including $168.1 million of operating lease commitments and $78.3 million of purchase orders.
Material changes versus the prior comparable period
- Sales declined modestly, primarily because business slowed sharply around the Thanksgiving and Christmas periods; comparable-store sales nevertheless increased 0.3%.
- Gross margin improved through product mix, pricing execution and increased custom upholstery and accessory sales.
- SG&A increased faster than sales, reducing operating leverage. Higher medical, advertising, warehouse, occupancy and transportation costs were partially offset by lower depreciation and rent expense.
- Pre-tax income declined despite the improved gross margin, while net income and EPS increased substantially because 2017 included the Tax Act remeasurement charge.
- Operating cash flow and free cash flow improved materially, while capital expenditures declined.
- The company closed five stores and opened one during 2018, ending the year with 120 stores and approximately 4.4 million retail square feet.
- Tariffs on certain China-origin goods began at 10% in September 2018. Approximately 35% of total furniture purchases were produced in China and approximately 70% were produced outside the United States, excluding mattresses.
Guidance, outlook, risks and unusual items
- Management expected 2019 gross margin of approximately 54.6%, assuming no additional increases in China tariffs, and did not plan to increase promotional pricing.
- 2019 fixed and discretionary SG&A was expected to be $260 million to $262 million, with variable SG&A expected to be approximately 18.2% of sales.
- 2019 capital expenditures were expected to be approximately $18.5 million, and retail square footage was expected to increase approximately 2.0% in the second half of 2019.
- Management expected sales to benefit from stabilized economic conditions, stronger consumer spending and housing activity, upgraded stores, online capabilities, special-order merchandise and in-home design services.
- Key risks include discretionary consumer demand, housing and credit conditions, intense retail and e-commerce competition, changing consumer preferences, foreign sourcing and tariffs, supplier and transportation disruptions, fuel costs, dependence on distribution centers, cybersecurity and information-technology failures, product safety, self-insurance estimates and execution of store and technology investments.
- Effective January 1, 2019, the company adopted the new lease accounting standard. It expected to recognize approximately $176 million of lease liabilities and $178 million of right-of-use assets, with no material effect on income or cash flow. A cumulative increase to retained earnings of approximately $7 million was expected from transition adjustments.
- The company reported no material pending legal proceedings, no material cybersecurity breach known to management, and effective internal control over financial reporting. Grant Thornton issued unqualified audit opinions.
Important facts for investors to verify
- Whether the 2019 sales outlook was achieved amid weak fourth-quarter 2018 traffic and discretionary demand trends.
- The actual effect of China tariffs, sourcing changes and vendor price increases on gross margin and retail pricing.
- The impact of the new lease standard on reported assets, liabilities, leverage and operating metrics.
- Whether planned store openings, relocations and approximately 2.0% square-footage growth generated adequate sales productivity.
- The sustainability of cash returns, including the regular and special dividends and share repurchases, relative to operating cash flow and liquidity.
- Exposure to the $310.2 million of disclosed contractual obligations, including operating leases and purchase commitments.