Haverty Furniture Companies, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Havertys is a specialty retailer of residential furniture and accessories serving middle- to upper-middle-income consumers. At December 31, 2015, it operated 121 company-owned stores in 16 Southern and Midwestern states, representing approximately 4.4 million retail square feet, plus an e-commerce channel. The filing covers the fiscal year ended December 31, 2015; the fourth quarter is separately presented in the quarterly financial data.
- Revenue is recognized when merchandise is delivered to customers.
- Approximately 60% of furniture purchases, based on product cost, were sourced from goods not produced domestically.
- Third-party financing represented 32.6% of customer amounts due in 2015; Havertys retained only a small in-house financing program.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $804.9 million | $768.4 million | +4.7% |
| Comparable-store sales | +2.5% | +3.6% | Down 1.1 percentage points |
| Gross profit | $430.8 million | $412.4 million | +4.5% |
| Gross margin | 53.5% | 53.7% | Down 20 basis points |
| SG&A expense | $384.8 million | $364.7 million | +5.5% |
| SG&A as a percentage of sales | 47.8% | 47.5% | Up 30 basis points |
| Income before income taxes | $45.3 million | $25.3 million | Reported increase; 2014 included pension charge |
| Net income | $27.8 million | $8.6 million | Reported increase; 2014 included pension charge |
| Diluted EPS, common stock | $1.22 | $0.37 | Reported increase; 2014 included pension charge |
| Adjusted net income | $27.8 million | $29.3 million | Down 5.2% |
| Adjusted diluted EPS, common stock | $1.22 | $1.28 | Down $0.06 |
| Net cash from operating activities | $52.2 million | $55.5 million | Down $3.2 million |
| Capital expenditures | $27.1 million | $30.9 million | Down $3.7 million |
| Free cash flow | $25.1 million | $24.6 million | Up $0.5 million |
- Fourth-quarter 2015 net sales were $215.9 million, comparable-store sales declined 0.9%, pre-tax income was $15.1 million, and net income was $9.2 million.
- 2015 effective income tax rate was 38.6%, compared with 66.0% in 2014, which was affected by pension-related tax items.
- Cash and cash equivalents were $70.7 million at year-end, versus $65.5 million in 2014.
- Total debt was $53.1 million, consisting entirely of lease obligations. Debt represented 15.0% of total capital, compared with 14.4% in 2014.
- Havertys had no borrowings under its revolving credit facility and reported $43.8 million of net availability.
- Inventories were $108.9 million, compared with $107.1 million in 2014.
- Total assets were $471.3 million and stockholders’ equity was $301.7 million at December 31, 2015.
Material changes versus the prior comparable period
- Sales growth slowed relative to 2014, with comparable-store sales growth declining from 3.6% to 2.5%. Fourth-quarter demand softened, particularly in Texas.
- Gross margin declined modestly because of closeout sales, quality issues involving certain new products, and higher related reserves.
- SG&A grew faster than sales, driven by compensation, new-store costs, depreciation, occupancy, additional sales associates, and expansion of the in-home design program.
- Reported earnings improved substantially because 2014 included a $21.6 million pre-tax pension termination and settlement charge. Excluding that item, 2015 pre-tax income declined 3.4% and adjusted net income declined from $29.3 million to $27.8 million.
- 2015 capital allocation included $27.1 million of capital expenditures, $14.0 million of treasury-stock purchases, and $8.1 million of dividends. The company paid approximately $29.8 million of dividends in 2014, including a special dividend.
- Four stores opened and two closed in 2015, increasing year-end store count from 119 to 121 and retail square footage by approximately 2.3%.
- The Lubbock, Texas store sustained significant blizzard damage in December 2015; management planned to operate temporarily while rebuilding.
- The supplemental executive retirement plan was frozen at December 31, 2015. Its unfunded obligation was $7.7 million.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2016 retail square footage to increase approximately 1.4%, with weighted-average square footage increasing 0.6%, based on planned openings, closures, and a temporary Lubbock location.
- 2016 capital expenditures were projected at approximately $33.0 million, versus $27.1 million in 2015.
- Management expected 2016 gross margin to be approximately 53.5%, reflecting new products, increased competition, and greater markdown merchandise.
- Fixed and discretionary SG&A was expected to be approximately $251.0 million in 2016, an increase of 4.2%, while variable SG&A was expected to remain near 17.9% of sales.
- Management expected 2016 interest expense related to lease obligations of approximately $2.4 million.
- Key risks include discretionary consumer demand, housing and employment conditions, intense competition, changing consumer preferences, import and tariff exposure, currency and raw-material costs, supplier and supply-chain disruptions, transportation costs, distribution-center concentration, cybersecurity and payment-card risks, and dependence on information systems.
- Contractual obligations totaled $321.2 million at year-end, including $70.7 million of recorded lease obligations, $171.6 million of operating leases, and $79.0 million of purchase orders.
- The company reported no material pending legal proceedings, no material off-balance-sheet arrangements, effective disclosure controls and effective internal control over financial reporting, and an unqualified audit opinion from Ernst & Young LLP.
- Other unusual items included an $800,000 credit-card litigation settlement received in 2015 and the $21.6 million pension settlement charge recorded in 2014.
- The company was evaluating the future effects of the new revenue-recognition and lease-accounting standards; the filing does not provide a quantified impact.
Most important facts for investors to verify
- Whether the fourth-quarter sales slowdown, including the 0.9% comparable-store decline, continued into 2016, particularly in Texas.
- Whether gross margin remains near management’s 53.5% 2016 expectation despite competition, markdowns, product-quality issues, and import-cost risks.
- Whether planned store openings, closures, the Lubbock rebuilding process, and approximately $33 million of 2016 capital expenditures are executed as expected.
- Whether operating cash flow can continue to fund capital expenditures, dividends, share repurchases, and contractual lease obligations without use of the revolving facility.
- The effect of the company’s substantial operating-lease commitments and future adoption of lease accounting on reported debt, assets, and leverage.
- Trends in inventory levels, customer deposits, delivery costs, product availability, and merchandise quality reserves.
- The sustainability of adjusted earnings, given that 2015 adjusted net income and adjusted EPS declined from 2014 despite reported GAAP earnings growth.