Havertys 2017 Form 10-K Summary
Business Context and Reporting Period
Haverty Furniture Companies, Inc. is a specialty retailer of residential furniture and accessories serving middle- to upper-middle-income customers. At December 31, 2017, it operated 124 company-owned stores in 16 Southern and Midwestern states, representing approximately 4.5 million retail square feet, plus an e-commerce channel. The filing covers the fiscal year ended December 31, 2017; fourth-quarter results are also presented.
- Revenue is recognized when merchandise is delivered to customers.
- Sales are generated primarily through stores, with website sales increasing 10.0% in 2017.
- Third-party financing represented 30.8% of customer amounts due, while Havertys-financed sales represented 0.6%.
Financial Results and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $819.9 million | $821.6 million | Down 0.2% |
| Comparable-store sales | Down 1.3% | Up 2.1% | Declined |
| Gross profit | $444.9 million | $443.3 million | Up $1.6 million |
| Gross margin | 54.3% | 54.0% | Up 30 basis points |
| SG&A expense | $402.9 million | $399.2 million | Up 0.9% |
| SG&A as a percentage of sales | 49.1% | 48.6% | Up 50 basis points |
| Income before taxes | $43.2 million | $45.8 million | Down 5.7% |
| Net income | $21.1 million | $28.4 million | Down 25.7% |
| Diluted EPS, common stock | $0.98 | $1.30 | Down $0.32 |
| Operating cash flow | $52.5 million | $60.1 million | Down $7.6 million |
| Capital expenditures | $24.5 million | $29.8 million | Down $5.4 million |
| Free cash flow | $28.0 million | $30.2 million | Down $2.2 million |
- Average ticket increased approximately 2.1%, but store traffic declined by mid-single digits.
- Gross margin benefited from product mix, pricing and higher custom upholstery and accessories sales, offsetting a $2.7 million negative LIFO impact.
- Net income included approximately $5.9 million of additional tax expense related to the Tax Cuts and Jobs Act.
- Cash and cash equivalents were $79.5 million at year-end, compared with $63.5 million in 2016.
- Inventories were $103.4 million, compared with $102.0 million in 2016.
- Total assets were $461.3 million and stockholders’ equity was $294.1 million at December 31, 2017.
Fourth-Quarter Results
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Net sales | $215.0 million | $220.6 million |
| Comparable-store sales | Down 3.5% | Up 2.5% |
| Gross profit | $116.2 million | $121.0 million |
| Income before taxes | $14.1 million | $17.3 million |
| Net income | $2.9 million | $10.9 million |
Fourth-quarter net income was materially reduced by approximately $5.9 million of Tax Act-related expense. The quarter also included approximately $1.9 million of other income, primarily insurance recovery gains.
Debt, Liquidity and Capital Allocation
- Balance-sheet debt consisted entirely of lease obligations totaling $54.6 million, down from $55.5 million.
- No borrowings were outstanding under the $60.0 million revolving credit facility; net availability was $47.4 million at year-end.
- Management stated that operating cash flow, cash on hand and available credit were sufficient for foreseeable obligations and planned projects.
- The company paid $11.4 million in dividends in 2017 and made no common-stock repurchases during the year.
- Contractual obligations totaled $311.8 million, including $153.5 million of operating lease commitments and $88.4 million of purchase orders.
Material Changes Versus the Prior Comparable Period
- Sales were essentially flat, but comparable-store sales declined 1.3% after increasing 2.1% in 2016.
- Traffic weakened while average ticket size increased, partially offsetting the traffic decline.
- Gross margin improved 30 basis points, but SG&A deleveraged by 50 basis points because expenses grew faster than sales.
- Pre-tax income declined 5.7%; net income declined more sharply because of the Tax Act charge.
- Operating cash flow decreased 12.7%, primarily reflecting working-capital changes, including higher inventory and lower accounts payable and accrued liabilities.
- Cash increased $16.0 million, despite $24.5 million of capital expenditures and $11.4 million of dividends.
- The company opened three stores and closed three stores in 2017, ending with 124 stores, versus 124 at year-end 2016.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2018 retail square footage to decline approximately 1.4% and remain relatively flat overall.
- Planned 2018 capital expenditures were approximately $20.0 million.
- Management projected 2018 gross margin of approximately 54.7%, based on product mix and lower markdowns, without an intended increase in promotional pricing.
- 2018 fixed and discretionary SG&A was expected to be $258 million to $260 million, while variable SG&A was expected to be approximately 18.5% of sales.
- Interest expense related to lease obligations was expected to be approximately $2.3 million in 2018.
- The accounting for portions of the Tax Act remained provisional under SAB 118 and could be adjusted during the measurement period.
- Key risks include discretionary consumer demand, housing and economic conditions, intense retail and e-commerce competition, changing consumer preferences, imported merchandise and potential tariffs, supplier and transportation disruptions, fuel costs, dependence on distribution centers, cybersecurity and information-technology failures, product safety, and self-insurance claims.
- The company had no material pending legal proceedings and reported effective disclosure controls and internal control over financial reporting.
- The company’s adoption of the new revenue-recognition standard was not expected to materially affect results; adoption was expected to increase retained earnings by approximately $130,000. The new lease standard, effective in the first quarter of 2019, was expected to add operating lease assets and liabilities, but its financial impact had not yet been determined.
Investor Verification Points
- Verify whether the 2018 gross-margin target of approximately 54.7% was achieved and whether traffic and comparable-store sales recovered.
- Reconcile reported earnings growth with the nonrecurring Tax Act charge and any subsequent adjustments to the provisional tax accounting.
- Monitor SG&A leverage, advertising and occupancy costs, personnel expenses, and delivery costs relative to sales.
- Assess the effect of store closures, relocations, reduced square footage and planned capital expenditures on sales productivity.
- Review inventory levels, LIFO effects, supply-chain performance and exposure to tariffs or imported-product cost inflation.
- Evaluate lease commitments and the eventual balance-sheet impact of the new lease-accounting standard.