Havertys Furniture Companies, Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Havertys operates a single reportable segment consisting of company-operated stores selling residential furniture in the middle- to upper-middle price ranges. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $199.4 million | $200.4 million | (0.5%) |
| Comparable-store sales | $(2.1) million; (1.1%) | Prior year: +1.6% | |
| Gross profit | $108.9 million | $109.6 million | (0.6%) |
| Gross margin | 54.6% | 54.7% | (10 basis points) |
| Income before interest and taxes | $8.9 million | $10.3 million | (13.5%) |
| Net income | $6.3 million | $6.0 million | +5.5% |
| Net margin | 3.2% | 3.0% | +20 basis points |
| Diluted EPS — Common Stock | $0.29 | $0.28 | +$0.01 |
| Cash flow from operations | $8.3 million | $5.8 million | +$2.5 million |
| Capital expenditures | $7.1 million | $5.2 million | +$1.9 million |
Income tax expense declined to $2.1 million from $3.8 million, and the effective tax rate decreased to 25.4% from 38.5%, primarily reflecting the lower U.S. corporate tax rate enacted by the Tax Cuts and Jobs Act.
At March 31, 2018, cash and cash equivalents were $72.1 million, and restricted cash equivalents were $8.1 million. Total assets were $455.8 million and total liabilities were $161.3 million. The company reported no funded debt and had $49.6 million of availability under its $60.0 million revolving credit facility, with no borrowings outstanding. Lease obligations totaled $53.7 million, including current and noncurrent portions.
Material Changes Versus the Prior Comparable Period
- Sales declined modestly, while the average written ticket increased 1.8% and custom-order upholstery sales increased 15.1%.
- Gross margin declined 10 basis points because of promotions and markdowns related to store closures and remodels, partly offset by operational improvements.
- SG&A increased $0.6 million to $101.0 million, or 50.6% of sales versus 50.1%. Higher selling, delivery, occupancy, utilities, maintenance, employee compensation and benefits costs were partly offset by lower administrative expenses and depreciation.
- Operating income declined despite higher net income because the prior-year comparison included greater other income and the current period benefited from a substantially lower effective tax rate.
- Operating cash flow improved to $8.3 million. Investing cash use increased to $7.1 million, primarily due to higher capital expenditures. Financing cash use increased to $8.6 million, reflecting $3.5 million of share repurchases and $3.8 million of dividends.
- Inventory increased $5.6 million from year-end in preparation for factory shutdowns associated with Chinese New Year. Accrued liabilities decreased $4.6 million, primarily from payments of year-end incentive compensation and real estate tax accruals.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected full-year 2018 gross margin of approximately 54.5%, compared with 54.3% in 2017.
- Normal fixed and discretionary SG&A was expected to be approximately $258.0 million to $260.0 million in 2018 versus $253.2 million in 2017. Variable SG&A was expected to equal approximately 18.5% of sales versus 18.2% in 2017.
- 2018 capital expenditures were estimated at approximately $20 million, including completion of the Western Distribution Center expansion.
- The company planned store closures in Columbia, South Carolina, in the first quarter and Sherman and North Richland Hills, Texas, in the second quarter; a new Chattanooga, Tennessee, market was planned for the fourth quarter. Net selling space was expected to decline approximately 1.6% in 2018.
- Other income included approximately $0.9 million of gains from real estate sales and insurance recoveries, compared with $1.2 million in the prior-year quarter.
- Havertys adopted ASC Topic 606 effective January 1, 2018 using the modified retrospective method. Management expected the ongoing effect on net income to be immaterial. The adoption increased retained earnings by approximately $0.1 million at January 1, 2018 and resulted in separately reported estimated returned inventory and refund liabilities.
- The company adopted the restricted-cash cash-flow standard effective January 1, 2018. Comparative cash-flow amounts were retrospectively presented to include restricted cash.
- Management stated that ordinary-course legal claims were not expected to have a material adverse effect. No off-balance-sheet arrangements were reported.
- Principal forward-looking risks include economic and housing-market conditions, consumer spending and preferences, competition, merchandise and energy costs, capital-expenditure timing, operational rationalization and execution of store plans.
Investor Verification Checklist
- Verify the sustainability of sales trends and whether planned store closures and reduced selling space affect comparable-store performance.
- Assess the effect of promotional activity, remodel markdowns, occupancy costs and labor inflation on gross margin and SG&A leverage.
- Reconcile cash generation with planned approximately $20 million of capital expenditures, dividends and ongoing share repurchases.
- Review the future balance-sheet impact of adopting the lease standard in the first quarter of 2019.
- Monitor inventory levels, supplier disruption risk around factory shutdowns and the final year-end LIFO valuation.
- Evaluate the recurring versus nonrecurring nature of real estate gains and insurance recoveries included in other income.
- Confirm the company’s ability to maintain dividends and repurchases under the revolving-credit facility’s covenants and borrowing-base limitations.