Havertys Furniture Companies, Inc. — 2012 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 6, 2012. Havertys operates a single reportable segment: home furnishings retailing, with stores operating under the Havertys brand in 17 states.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $151.5 million | $143.1 million | $315.1 million | $297.3 million |
| Sales growth | 5.9% | (1.4)% | 6.0% | (1.3)% |
| Comparable-store sales growth | 5.6% | (1.4)% | 5.7% | (1.0)% |
| Gross margin | 52.6% | 51.3% | 52.4% | 51.3% |
| Income before taxes | $3.8 million | $(1.0) million | $7.8 million | $(1.5) million |
| Net income (loss) | $2.4 million | $(0.9) million | $4.8 million | $(1.6) million |
| Basic EPS — Common Stock | $0.11 | $(0.04) | $0.22 | $(0.07) |
- Q2 SG&A was $76.4 million, or 50.4% of sales, versus 52.0% in the prior-year quarter. Six-month SG&A was $157.6 million, or 50.0% of sales, versus 51.8%.
- Net cash provided by operating activities was $20.5 million for the first six months, compared with $15.2 million in 2011.
- Capital expenditures were $12.8 million, compared with $4.0 million in the prior-year period. Investing cash outflow was $12.6 million.
- Financing cash outflow was $1.8 million, including $0.9 million of dividends. Cash and cash equivalents increased to $55.7 million from $49.6 million at December 31, 2011.
- At June 30, 2012, total assets were $392.2 million, total liabilities were $123.2 million, and stockholders’ equity was $269.0 million.
- Havertys had no funded debt and no borrowings outstanding under its $50.0 million revolving credit facility. Net availability was $43.8 million after a $6.2 million reduction related to a fixed-charge coverage ratio test.
- Lease obligations totaled $12.7 million, including $0.8 million classified as current. Restricted cash was $7.0 million.
Material changes versus the prior comparable period
- Sales and comparable-store sales returned to growth, supported by a 10.1% increase in average ticket in Q2 and strong upholstery sales, which increased 16.0% in Q2 and 14.6% for the first half.
- Gross margin expanded by 130 basis points in Q2 and 110 basis points for the first half, primarily from a greater mix of upper-middle price-point merchandise and pricing discipline.
- The company moved from losses to profitability: six-month net income was $4.8 million versus a $1.6 million loss in 2011.
- Operating cash flow improved by $5.4 million, while capital expenditures increased by $8.8 million.
- Employee health benefit costs declined by $1.3 million in Q2, partly offsetting higher selling costs and $0.8 million of higher incentive compensation accruals.
- The company paid dividends of $0.0400 per Common Stock share and $0.0375 per Class A share; no dividends were paid in the first half of 2011.
Guidance, outlook, risks, and unusual items
- Management expects second-half 2012 gross margins of approximately 52.0%.
- Full-year fixed and discretionary SG&A expenses are expected to be approximately $213 million to $214 million, with variable costs of 17.0% to 17.5% of sales. Second-half fixed and discretionary expenses are expected to be approximately $6.0 million higher than in the first half.
- Planned 2012 capital expenditures are $23.5 million, including $18.3 million for new stores and improvements and $4.0 million for information technology.
- A new Baltimore store opened during Q2. Planned openings include Midland, Texas, Dallas, Texas, and a replacement store in Atlanta, potentially increasing net selling square footage by approximately 2.5%.
- A $0.5 million gain from insurance settlement proceeds related to a March 2012 store sprinkler-system flood was recognized in Q2.
- Second-quarter state tax audit settlements reduced uncertain tax positions to approximately $0.6 million from $1.1 million at year-end and reduced tax expense by approximately $70,000.
- The company contributed $1.0 million to its qualified pension plan in Q2 and expects an additional $2.0 million contribution in the second half of 2012.
- Key risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new-product execution, store rationalization, and lease renewals. Ordinary-course legal claims are not expected to have a material adverse effect.
- The company reported no off-balance-sheet arrangements and no material changes in market risk. Management concluded that disclosure controls and procedures were effective.
Investor verification points
- Verify whether sales growth, comparable-store performance, average ticket trends, and the upholstery-category strength continued after June 30, 2012.
- Reconcile the projected $23.5 million of 2012 capital expenditures with actual store openings, replacement projects, and cash generation.
- Monitor gross margin performance against the approximately 52.0% second-half expectation and assess the sustainability of pricing and product-mix benefits.
- Review compliance with the revolving-credit facility, particularly the fixed-charge coverage ratio condition and $43.8 million of stated net availability.
- Assess pension funding requirements, the expected additional $2.0 million contribution, and the effect of higher actuarial-loss amortization.
- Confirm the resolution of remaining uncertain tax positions and the effect of the $0.5 million insurance settlement on comparability.