Haverty Furniture Companies, Inc. - 10-Q Summary (Period Ended June 30, 2010)
Business Context and Reporting Period
This 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 and six-month periods ended June 30, 2010. The company operates in one reportable segment: home furnishings retailing.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $301.1 million | $273.9 million |
| Gross Profit | $155.5 million (51.7% margin) | $140.4 million (51.3% margin) |
| Net Income (Loss) | $1.7 million | ($13.8 million) |
| Diluted EPS (Common Stock) | $0.08 | ($0.65) |
| Operating Cash Flow | $18.0 million | $13.8 million |
| Cash and Equivalents (End of Period) | $62.1 million | $22.4 million |
| Total Debt (Lease Obligations) | $7.0 million | $7.2 million |
| Revolving Credit Facility Availability | $34.5 million | Not disclosed |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.9% year-over-year for the six-month period, driven by an 11.6% increase in comparable store sales. This marks the third consecutive quarter of positive comparable store sales.
- Profitability Turnaround: The company returned to profitability with $1.7 million in net income, compared to a $13.8 million net loss in the prior year period. This was aided by a significant reduction in the provision for doubtful accounts ($206k vs $662k) and improved gross margins.
- Expense Management: Selling, General, and Administrative (SG&A) expenses as a percentage of sales decreased to 51.1% from 56.1% in the prior year, largely due to reduced compensation costs and lower depreciation.
- Liquidity Improvement: Cash and cash equivalents increased by $17.7 million to $62.1 million, supported by strong operating cash flows and proceeds from stock option exercises ($3.3 million).
Guidance, Outlook, and Risks
- Outlook: Management anticipates maintaining a gross profit margin near 51.2% for the full year despite potential pressure from increasing freight, material, and labor costs. SG&A expenses are expected to increase in the second half of 2010 due to new store openings and remodeling costs.
- Store Strategy: The company plans to open a new store in Columbus, Georgia, and close two locations (Bowling Green, KY and Abilene, TX) in the fourth quarter. Net selling space is expected to decrease by 1% to 2% in 2010.
- Capital Expenditures: Planned annual capital expenditures for 2010 are $13.5 million, including $5.0 million for new stores/improvements and $6.3 million for IT.
- Risks and Contingencies:
- Credit Facility Covenants: While in compliance, the company's borrowing base availability is reduced by $10.0 million because a fixed charge coverage ratio test was not met for the preceding twelve-month period.
- Economic Environment: Consumer confidence has trended lower, and the housing market remains weak, creating a difficult environment for the retail home furnishings industry.
- Inventory Valuation: Interim LIFO calculations are estimates and subject to final year-end valuation.
Investor Verification Checklist
- Verify the sustainability of the 11.6% comparable store sales growth given the noted decline in consumer confidence and weak housing market.
- Monitor the fixed charge coverage ratio to ensure the $10.0 million reduction in credit facility availability does not expand or impact liquidity.
- Confirm the impact of rising freight and material costs on the ability to maintain the targeted 51.2% gross margin for the full year.
- Review the execution of the store rationalization plan (closing two stores, opening one) and its effect on net selling space and operating leverage.
- Assess the adequacy of the allowance for doubtful accounts (5.6% of receivables) given the mix of in-house and third-party financing.