Havertys Furniture Companies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers through company-operated stores under the Havertys brand. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial Performance and Position
| Metric | Q2 2016 | Q2 2015 | First Half 2016 | First Half 2015 |
|---|---|---|---|---|
| Net sales | $194.8 million | $187.7 million | $389.3 million | $379.1 million |
| Gross profit | $104.2 million | $100.3 million | $208.7 million | $203.0 million |
| Gross margin | 53.5% | 53.4% | 53.6% | 53.5% |
| Income before interest and taxes | $9.3 million | $8.4 million | $17.5 million | $18.8 million |
| Net income | $5.4 million | $4.8 million | $10.0 million | $11.0 million |
| Diluted EPS — Common Stock | $0.24 | $0.21 | $0.45 | $0.48 |
| Operating cash flow | Not separately provided | Not separately provided | $10.6 million | $18.1 million |
- Q2 net sales increased 3.8%, while comparable-store sales increased 3.8%. First-half net sales rose 2.7% and comparable-store sales rose 2.3%.
- Q2 SG&A expense increased $4.0 million to $96.7 million, and SG&A as a percentage of sales increased to 49.6% from 49.4%. First-half SG&A increased $8.0 million, with the ratio rising to 49.6% from 48.8%.
- Q2 net income increased 11.2%, but first-half net income decreased 8.3%, principally reflecting higher first-half operating expenses and lower operating leverage.
- Cash and cash equivalents were $48.5 million at June 30, 2016, compared with $70.7 million at December 31, 2015. Investments were $1.3 million versus $12.7 million.
- Total assets were $457.0 million and total liabilities were $169.0 million at June 30, 2016. Stockholders’ equity was $287.9 million.
- The company reported no funded debt. Lease obligations totaled $55.5 million, including $3.3 million current and $52.2 million long-term.
- The amended revolving credit facility increased to $60.0 million and matures March 31, 2021. There were no borrowings or outstanding letters of credit; net availability was $51.7 million after borrowing-base and covenant-related reductions.
- First-half capital expenditures were $18.5 million. Financing cash outflows included $21.3 million of common-stock repurchases and $4.4 million of dividends.
Material Changes Versus the Prior Comparable Period
- Sales growth moderated from the 6.2% first-half increase in 2015 to 2.7% in 2016; comparable-store growth moderated from 4.3% to 2.3%.
- First-half operating cash flow declined $7.5 million to $10.6 million, primarily because of larger increases in prepaid expenses and decreases in accrued liabilities.
- First-half SG&A grew faster than sales, driven by new-store staffing and commissions, depreciation and occupancy, warehouse and delivery costs, advertising, medical costs, salaries and inflation.
- Cash decreased $22.1 million during the first half, principally because of stock repurchases, dividends and capital expenditures.
- The company repurchased approximately 1.15 million shares in May 2016 at an average price of $18.32 per share. The remaining authorized repurchase capacity at June 30 was approximately $12,000.
Guidance, Outlook, Risks and Unusual Items
- Management maintained its expectation for approximately 53.5% full-year 2016 gross margin.
- Normal fixed and discretionary SG&A expenses were expected to be approximately $252.0 million in 2016, compared with $240.9 million in 2015. Variable SG&A was expected to remain approximately 17.9% of sales.
- Full-year capital expenditures were estimated at approximately $32.0 million. Planned activity included a new College Station, Texas market, a Charlottesville, Virginia market, a Sunrise, Florida closure and a temporary Lubbock, Texas location. Net selling space was expected to increase approximately 1.4%.
- The Lubbock store was damaged by a December 2015 blizzard. In Q2 2016, the company received $3.3 million of insurance proceeds and recognized a $1.9 million gain. Additional recovery for building replacement value and business interruption was expected but had not been recognized.
- Interim LIFO inventory valuations are based on estimates and remain subject to year-end adjustment.
- Management stated that ordinary-course legal claims are not expected to have a material adverse effect. Principal forward-looking risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new products and operational changes.
- The company adopted deferred-tax balance-sheet classification guidance prospectively and was evaluating the future effects of new credit-loss, share-based-payment, lease and revenue-recognition standards.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify whether sales and comparable-store momentum continued after June 30, particularly given the slowdown from 2015.
- Assess whether SG&A growth, new-store costs, occupancy expense and medical costs are consistent with the full-year outlook.
- Reconcile cash usage with the $21.3 million stock repurchase program, dividends and planned capital expenditures.
- Monitor insurance recoveries and reconstruction costs related to the Lubbock store, including any business-interruption settlement.
- Review lease obligations and the impact of the pending lease-accounting standard on reported assets and liabilities.
- Confirm borrowing-base availability and compliance with the revolving-credit facility’s fixed-charge coverage and other covenants.
- Evaluate the effect of interim LIFO estimates, customer deposits and inventory levels on subsequent quarterly results.