Haverty Furniture Companies, Inc. - Q1 2011 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Haverty Furniture Companies, Inc., a retailer of residential furniture in the middle to upper-middle price ranges. The report covers the three-month period ended March 31, 2011. The company operates in a single reportable segment: home furnishings retailing.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $154.2 million | $156.0 million |
| Gross Profit | $79.1 million | $81.5 million |
| Gross Margin | 51.2% | 52.1% |
| Net Income (Loss) | $(0.7) million | $2.4 million |
| Diluted EPS (Common) | $(0.03) | $0.10 |
| Operating Cash Flow | $9.6 million | $7.6 million |
| Cash and Equivalents (End of Period) | $66.1 million | $52.4 million |
| Debt Outstanding | $0 | $0 |
| Credit Facility Availability | $37.0 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 1.2% ($1.9 million) year-over-year. Comparable store sales declined 0.6%, ending a streak of five consecutive quarters of positive performance.
- Profitability Shift: The company reported a net loss of $0.7 million compared to a net income of $2.4 million in Q1 2010. This was driven by a decrease in gross profit margin (51.2% vs. 52.1%) and an increase in Selling, General, and Administrative (SG&A) expenses to 51.5% of sales.
- Margin Pressure: Gross margins were pressured by rising inbound freight costs. SG&A increased due to higher fixed costs for wages and insurance, as well as increased delivery and warehousing costs driven by fuel prices.
- Cash Flow Improvement: Despite the net loss, operating cash flow improved to $9.6 million from $7.6 million, primarily due to a $3.9 million reduction in inventory levels.
- Balance Sheet: Cash increased by $8.1 million. Inventory decreased by $3.9 million as the company adjusted purchasing levels. Customer deposits increased by $2.6 million.
Outlook, Risks, and Management Commentary
- Guidance: Management expects the full-year gross profit margin to be at or near the first-quarter level (51.2%). They plan to remain competitive but not overly aggressive with pricing.
- Capital Expenditures: Planned annual expenditures for 2011 are $15.2 million, including $12.1 million for new stores and improvements, and $2.6 million for IT. Plans include opening one new store and relocating two existing stores.
- Liquidity: The company has a $60 million revolving credit facility. While the borrowing base was $54.6 million, net availability was $37.0 million due to a fixed charge coverage ratio test failure and outstanding letters of credit. No borrowings were outstanding as of March 31, 2011.
- Risks: Management cites persistent high unemployment, rising fuel and food prices, falling home values, and a weak housing market as creating a difficult environment. The company is also subject to floating interest rate risk via its credit facility.
- Tax Position: The company maintains a valuation allowance of $13.3 million on deferred tax assets, which could be reduced in 2011 depending on future taxable income generation.
Investor Verification Checklist
- Verify the sustainability of the inventory reduction strategy and its impact on future sales availability.
- Monitor the fixed charge coverage ratio to ensure the $10 million reduction in credit facility availability is resolved.
- Assess the impact of rising freight and fuel costs on the ability to maintain the projected 51.2% gross margin for the full year.
- Review the realization of the $13.3 million deferred tax asset valuation allowance based on future profitability.
- Confirm the execution of the planned store openings and relocations against the $15.2 million capital expenditure budget.