Havertys Furniture Companies, Inc. — FY2014 Form 10-K Summary
Business context and reporting period
Havertys is a specialty retailer of residential furniture and accessories serving primarily middle- to upper-middle-income customers. At December 31, 2014, it operated 119 company-owned stores in 16 Southern and Midwestern states, representing approximately 4.3 million retail square feet. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are also disclosed.
Revenue is recognized when merchandise is delivered. The company operates one reportable segment and relies on a combination of stores, e-commerce, in-home design services and company-operated delivery operations.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $768.4 million | $746.1 million | +3.0% |
| Comparable-store sales | +3.6% in 2014 versus +11.0% in 2013 | ||
| Gross profit | $412.4 million | $401.5 million | +2.7% |
| Gross margin | 53.7% | 53.8% | -10 basis points |
| SG&A expense | $364.7 million | $348.6 million | +4.6% |
| SG&A as a percentage of sales | 47.5% | 46.7% | +80 basis points |
| Income before income taxes | $25.3 million | $52.5 million | Decrease primarily from pension charge |
| Net income | $8.6 million | $32.3 million | Decrease primarily from pension charge |
| Diluted EPS, common stock | $0.37 | $1.41 | Decrease primarily from pension charge |
| Adjusted diluted EPS, common stock | $1.28 | $1.39 | Non-GAAP measure |
| Net cash from operating activities | $55.5 million | $55.9 million | Approximately flat |
| Capital expenditures | $30.9 million | $20.2 million | +$10.7 million |
Adjusted EBIT was $47.9 million, or 6.2% of sales, compared with $52.8 million, or 7.1%, in 2013. Adjusted net income was $29.3 million versus $31.7 million in 2013. Management excludes the pension settlement and a 2013 out-of-period vendor allowance adjustment from these non-GAAP measures.
Fourth-quarter 2014
- Net sales were $213.0 million, up 8.6% from $196.2 million in the fourth quarter of 2013.
- Comparable-store sales increased 8.3%.
- Income before taxes was a loss of $5.0 million, compared with income before taxes of $15.8 million in the prior-year quarter.
- Net loss was $10.2 million, or $0.45 diluted loss per common share.
- The quarter included a $21.6 million pretax pension settlement expense, with an after-tax impact of approximately $20.7 million, or $0.90 per diluted share. Excluding the pension charge, fourth-quarter pretax income was $16.6 million, up 5.5% year over year.
Cash flow, liquidity, debt and capital structure
- Operating cash flow was $55.5 million; reported free cash flow, defined by the company as operating cash flow less capital expenditures, was $24.6 million.
- Cash and cash equivalents were $65.5 million at year-end, down from $83.2 million in 2013. The decline reflected capital expenditures, special dividends, purchases of certificates of deposit and working-capital investment.
- Inventories increased to $107.1 million from $91.5 million, principally to improve stocking and replenishment levels.
- Total debt was $49.1 million, consisting entirely of lease obligations; debt-to-total-capital was 14.4%, versus 5.4% in 2013.
- No borrowings were outstanding under the $50.0 million revolving credit facility. Net availability was $43.8 million at December 31, 2014, after borrowing-base and covenant-related reductions.
- Capital expenditures were $30.9 million in 2014. Management anticipated approximately $31 million of capital expenditures in 2015.
- Contractual obligations totaled $361.8 million, including $202.8 million of operating leases, $68.2 million of recorded lease obligations and $90.8 million of purchase orders.
Material changes versus the prior comparable period
- Sales growth slowed to 3.0% from 11.3%, while comparable-store sales growth slowed to 3.6% from 11.0%.
- Gross margin remained broadly stable, but SG&A increased faster than sales, reducing operating leverage.
- Import vendor and supply-chain disruptions affected case-goods availability and store presentation through much of 2014. Weather also negatively affected first-quarter sales.
- Upholstery remained a relative strength: specialty upholstery sales increased 10.8%, including 19.3% growth in the fourth quarter.
- The defined benefit pension plan was terminated and settled in the fourth quarter. The company made no 2014 contribution, settled approximately $83.5 million of plan obligations, and stated that it had no future obligations under the terminated plan. The unfunded supplemental executive retirement plan remains, with a $7.3 million obligation at year-end.
- Capital expenditures increased substantially, and property and equipment rose to $225.2 million from $189.2 million, partly reflecting store development and lease-related accounting.
- The company paid approximately $29.8 million in dividends, including a special dividend, compared with $5.4 million in 2013, and repurchased 37,076 shares for approximately $0.8 million.
Guidance, outlook, risks and unusual items
- Management expected 2015 weighted-average retail square footage to increase approximately 3.4%, with planned store openings and closures expected to produce approximately 3.8% net growth in selling space.
- Management projected 2015 gross margin of approximately 53.3%, reflecting higher import costs and increased competition.
- 2015 fixed and discretionary SG&A was expected to be approximately $239 million to $241 million; variable SG&A was expected to be 17.3% to 17.5% of sales.
- Management expected 2015 interest expense related to lease obligations of approximately $2.7 million.
- Key risks include discretionary consumer demand, housing and employment conditions, intense retail competition, changes in consumer preferences, foreign sourcing, tariffs and currency-related vendor pricing, raw-material costs, supply-chain disruption, transportation costs, dependence on distribution centers, cybersecurity and payment-card risks.
- Approximately 60% of 2014 furniture product costs related to goods not produced domestically. The largest ten suppliers represented approximately 53% of product purchases.
- The company uses LIFO inventory accounting. The 2014 LIFO effect increased cost of goods sold by approximately $0.2 million.
- The effective tax rate was unusually high at 66.0%, including a $6.9 million tax expense from reversing a valuation allowance amount associated with the settled pension obligations.
- Management reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile GAAP 2014 earnings with adjusted earnings, particularly the $21.6 million pension settlement charge and the related tax effects.
- Assess whether the 2015 margin outlook of approximately 53.3% adequately reflects import costs, tariffs, competition and potential supply-chain disruptions.
- Monitor inventory growth, delivery performance and working-capital requirements following the 2014 import and vendor disruptions.
- Verify the execution and returns of planned store openings, relocations, closures, remodels and the projected 2015 square-footage expansion.
- Review liquidity after dividends, capital expenditures and lease obligations, including the $43.8 million of stated revolving-credit availability.
- Evaluate exposure to discretionary consumer spending, housing-market conditions, competition and payment-card or information-security incidents.