Business Context and Reporting Period
Haverty Furniture Companies, Inc. is a full-service home furnishings retailer operating under the Havertys brand. This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine-month period ended on the same date. The company operates retail stores and began offering sales via its website in March 2008.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Sales | $175.6 million | $529.2 million |
| Gross Profit | $90.5 million (51.5% margin) | $273.2 million (51.6% margin) |
| Net Income (Loss) | $(1.5) million | $(2.8) million |
| Earnings Per Share (Basic) | $(0.07) | $(0.13) |
| Cash and Equivalents | $18.7 million | $18.7 million (Ending Balance) |
| Operating Cash Flow (9mo) | $38.6 million | |
| Total Debt (Current + Long-term) | $22.5 million | |
| Unused Credit Capacity | $54.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 12.5% ($25.1 million) in Q3 2008 and 8.6% ($49.6 million) for the nine-month period compared to 2007. Comparable store sales dropped 14.9% in Q3 and 11.3% year-to-date.
- Profitability Shift: The company reported a net loss of $1.5 million in Q3 2008, compared to a net income of $0.6 million in Q3 2007. For the nine months, the loss was $2.8 million versus income of $0.1 million in 2007.
- Margin Expansion: Despite lower sales, gross profit margins improved to 51.5% in Q3 (up 193 basis points) and 51.6% year-to-date (up from 49.4% in 2007) due to better inventory management and a shift of long-term financing to third-party providers.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased by $6.9 million in Q3 and $10.5 million year-to-date, driven by reduced advertising, lower promotional credit costs, and headcount reductions.
- Balance Sheet: Cash increased by $18.6 million to $18.7 million. Accounts receivable decreased by $32.9 million as the company shifted credit risk to third-party lenders.
Outlook, Risks, and Management Commentary
- Market Conditions: Management cites historically low housing sales, declining home values, tightened mortgage lending, and high gasoline/food prices as primary drivers of reduced consumer spending. Financial market turmoil has further dampened demand.
- Guidance: The company does not anticipate a significant rebound in demand for the remainder of 2008 or well into 2009. Gross profit margins are expected to remain similar to the first nine months of 2008.
- Strategic Actions: Havertys is promoting longer-term no-interest financing via third-party providers to stimulate sales while protecting margins. The company is evaluating store locations for potential closures or lease renegotiations and has increased reserves for store closing costs by $1.1 million.
- Liquidity: The company maintains a $60.0 million revolving credit facility with $54.3 million in unused capacity. Management is exploring other financing alternatives due to economic uncertainty.
- Risks: Key risks include continued volatility in capital and credit markets, potential increased borrowing costs, and the possibility of higher future pension plan contributions due to declines in plan asset fair values.
Investor Verification Checklist
- Credit Risk Transfer: Verify the extent of the shift from in-house to third-party financing and the associated impact on future credit service charge revenue.
- Store Rationalization: Monitor the execution of planned store closures and the associated costs, including the $1.1 million reserve increase.
- Pension Obligations: Assess the potential for increased pension contributions in 2009 given the decline in plan asset values noted in the filing.
- Inventory Levels: Confirm that inventory reductions align with sales demand to prevent future write-downs or obsolescence.
- Debt Covenants: Review the fixed-charge coverage ratio requirements on the revolving credit facility to ensure compliance given the current loss position.