Haverty Furniture Companies, Inc. - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2005, and the six months ended on that date. Haverty Furniture Companies, Inc. is a full-service home furnishings retailer operating exclusively under the Havertys brand without franchising. The financial statements have been restated for prior periods to correct lease accounting errors regarding rent holidays and option periods.
Key Financial Metrics
| Metric | Q2 2005 | Q2 2004 (Restated) | 6 Months 2005 | 6 Months 2004 (Restated) |
|---|---|---|---|---|
| Net Sales | $192.4 million | $179.6 million | $400.0 million | $396.9 million |
| Gross Profit | $97.1 million | $90.7 million | $201.7 million | $188.6 million |
| Net Income | $1.3 million | $3.6 million | $4.5 million | $9.7 million |
| Diluted EPS (Common) | $0.06 | $0.16 | $0.20 | $0.42 |
| Cash from Operations | N/A | N/A | $4.9 million | $5.6 million |
| Cash & Equivalents | $0.9 million | $6.8 million | $0.9 million | $6.8 million |
| Total Debt (Current + Long-term) | $52.2 million | N/A | $52.2 million | N/A |
Note: Debt figures represent the sum of notes payable, current portion of long-term debt, and long-term debt/capital leases as of June 30, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7.1% in Q2 and 8.1% for the six-month period compared to 2004. Comparable store sales rose 2.3% in Q2 and 3.5% for the six months.
- Profitability Decline: Net income dropped significantly, down 64% in Q2 and 54% for the six months. This was driven by higher SG&A expenses and lower gross margins.
- Margin Pressure: Gross profit margins decreased by approximately 55 basis points for the six months ended June 30, 2005, due to higher markdowns from closing five warehouses and pricing pressure.
- Expense Increases: SG&A expenses rose 170 basis points as a percent of sales for the first half. Key drivers included a $1.9 million cost for consolidating distribution centers, a $1.9 million increase in insurance costs, and a 21% rise in utility costs.
- Liquidity: Cash and cash equivalents decreased by $9.3 million to $0.9 million, primarily due to capital expenditures of $15.9 million and the utilization of cash for operations.
Guidance, Outlook, and Risks
- Outlook: Management expects gross profit margins to improve by 25 to 50 basis points in the third and fourth quarters of 2005 due to distribution network consolidation and improved supply chain management.
- Expansion: The company plans to add approximately 1.9% retail square footage in 2005, including new stores in Indianapolis and Columbus, and expansions in existing markets. Planned capital expenditures for 2005 are $40.0 million.
- Restatement Impact: The company restated prior financials (2002-2004) to correct lease accounting. The cumulative pre-tax adjustment was $2.8 million. This does not affect current cash flows but impacts historical comparability.
- Risks: Key risks include disruptions in imported merchandise flow, rising fuel costs impacting transportation, consumer confidence affecting big-ticket spending, and the ability to maintain supplier relationships.
- Financing: The company has $80.0 million in revolving credit facilities, with $11.4 million outstanding and $63.9 million unused capacity as of June 30, 2005.
Investor Verification Checklist
- Verify the impact of the lease accounting restatement on historical trend analysis.
- Monitor the realization of the projected 25-50 basis point gross margin improvement in Q3 and Q4.
- Assess the effectiveness of the new Florida Distribution Center in reducing markdowns and handling costs.
- Review the sustainability of cash flow given the low cash balance ($0.9 million) and high capital expenditure plans ($40.0 million).
- Track the performance of new markets (Indianapolis, Columbus) and the impact of hurricane recovery sales in Florida.