Havertys Furniture Companies, Inc. — Q3 2011 Form 10-Q Summary
Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture under the Havertys brand, serving middle- to upper-middle-income customers. The unaudited quarterly report covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $155.4 million | $157.1 million | $452.6 million | $458.2 million |
| Gross profit | $80.4 million | $80.6 million | $232.8 million | $236.1 million |
| Gross margin | 51.8% | 51.3% | 51.4% | 51.5% |
| Income before taxes | $0.1 million | $1.2 million | $(1.5) million | $3.0 million |
| Net income (loss) | $0.1 million | $1.2 million | $(1.5) million | $2.9 million |
| Basic EPS, Common Stock | $0.01 | $0.05 | $(0.07) | $0.14 |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $30.1 million | $26.8 million |
Third-quarter sales declined 1.1%, while comparable-store sales declined 0.6%. Nine-month sales declined 1.2%, and comparable-store sales declined 0.9%. SG&A increased $1.2 million in the quarter and $1.3 million year to date, resulting in higher SG&A as a percentage of sales.
Cash and cash equivalents were $66.5 million at September 30, 2011, compared with $58.0 million at December 31, 2010. Restricted cash totaled $6.8 million, representing collateral for workers’ compensation obligations. Inventories declined to $81.6 million from $91.9 million at year-end 2010. Customer deposits increased to $19.9 million from $13.6 million.
The company had no borrowings under its revolving credit facility at September 30, 2011. The amended facility has $50.0 million of aggregate commitments, a $46.0 million borrowing base, and $39.8 million of net availability after a $6.2 million reduction related to a fixed-charge coverage ratio test. Lease obligations totaled $8.7 million, including $0.6 million current.
Year-to-date investing cash outflows were $21.1 million, including $14.5 million of capital expenditures and $6.8 million transferred to restricted cash. Year-to-date financing activities used $0.5 million. Capital expenditures were $19.0 million for 2011, including planned store investments, store purchases, and information technology.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $1.8 million in the third quarter and $5.6 million for the first nine months.
- Gross margin improved to 51.8% in the third quarter, aided by higher-price-point products, pricing discipline, and a $0.4 million lower LIFO impact; nine-month gross margin was slightly lower at 51.4%.
- Net income declined from $1.2 million to $0.1 million in the quarter, and the nine-month result shifted from $2.9 million of income to a $1.5 million loss.
- Operating cash flow increased $3.3 million year to date, primarily from greater inventory reductions and higher customer deposits.
- The company amended and restated its credit agreement, reducing commitments from $60.0 million to $50.0 million, extending maturity from December 22, 2011 to September 1, 2016, and lowering certain fees and borrowing margins.
- Capital expenditures more than doubled year to date versus 2010, increasing from $6.9 million to $14.5 million through September.
- Accounts receivable decreased to $12.1 million from $15.1 million a year earlier, and the allowance for doubtful accounts decreased to $0.6 million from $0.8 million.
Guidance, Outlook, Risks, and Unusual Items
Management expected fourth-quarter gross margin to be approximately 1.0 percentage point above the 51.0% reported in the fourth quarter of 2010, supported by newer merchandise and an estimated $0.5 million lower LIFO impact. Planned 2012 capital expenditures were estimated at $18.5 million.
Store expansion plans included a new Boca Raton location opened in late October 2011, a relocated Asheville store expected in the fourth quarter, and additional openings or replacement stores in 2012. Management expected 2011 net selling space to increase less than 1% and 2012 selling square footage to increase 2.4%.
Management cited persistent unemployment, higher fuel and food prices, weak consumer confidence, falling home values, and a very weak housing market as pressures on demand. Other identified risks include competition, merchandise and energy costs, capital-expenditure timing, new-product performance, and operational changes.
The nine-month tax expense included a $155,000 reduction in income tax receivables. Deferred tax valuation allowances of $13.3 million could be reduced depending on income generated in 2011. The company also expected to contribute an additional $1.0 million to its qualified pension plan during 2011.
The workers’ compensation collateral arrangement changed from a letter of credit to an escrow account, creating the $6.8 million restricted-cash balance. The agreement governing those funds expires December 31, 2011. The company stated that ordinary-course claims and legal proceedings were not expected to have a material adverse effect.
Key Facts Investors Should Verify
- Whether comparable-store sales and consumer demand improve amid weak housing and employment conditions.
- Whether fourth-quarter gross-margin guidance is achieved and whether LIFO effects develop as estimated.
- Compliance with the fixed-charge coverage requirements and the resulting $39.8 million net credit availability.
- The renewal or replacement of the workers’ compensation collateral arrangement after December 31, 2011.
- The realizability of the $13.3 million deferred-tax valuation allowance and the effect of future taxable income.
- Execution and returns from planned store openings, relocations, store purchases, and the $18.5 million 2012 capital-expenditure program.
- Whether higher delivery, fuel, insurance, utility, advertising, and administrative costs continue to pressure operating margins.