Havertys Furniture Companies, Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers through company-operated stores and its website. The filing covers the quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $274.5 million | $260.4 million | $766.7 million | $746.9 million |
| Gross profit | $156.7 million | $148.0 million | $444.3 million | $424.5 million |
| Gross margin | 57.1% | 56.8% | Approximately 57.9% | Approximately 56.9% |
| Income before interest and taxes | $32.1 million | $31.8 million | $86.3 million | $86.3 million |
| Net income | $24.6 million | $24.2 million | $65.6 million | $66.5 million |
| Diluted EPS — Common Stock | $1.46 | $1.31 | $3.83 | $3.55 |
- Q3 sales increased 5.4%, while comparable-store sales increased 6.3%. Nine-month sales increased 2.7%.
- Q3 gross margin improved 30 basis points, primarily from pricing discipline and merchandise mix.
- Q3 SG&A increased 7.2% to $124.5 million and rose to 45.4% of sales from 44.6%. Higher selling and delivery compensation, fuel, advertising, administrative, warehouse, and occupancy costs contributed to the increase.
- Net income increased slightly in Q3 but declined 1.3% for the nine-month period. Higher interest income partly offset higher operating expenses and income taxes.
- Operating cash flow was $38.2 million for the first nine months, down from $89.0 million in 2021, primarily because of changes in customer deposits.
- Capital expenditures were $22.1 million for the first nine months versus $28.1 million in 2021. The company expects approximately $30.0 million of capital expenditures for full-year 2022.
- Cash and cash equivalents were $137.2 million at September 30, 2022, with restricted cash of $6.8 million. Total liabilities were $409.3 million, including $231.5 million of lease liabilities. The filing reports no outstanding borrowings under the revolving credit facility.
- Inventory increased to $137.3 million from $112.0 million at December 31, 2021, while customer deposits declined to $79.7 million from $98.9 million.
Material Changes Versus Prior Comparable Period
- Sales growth accelerated in Q3 compared with the first half, but written business declined 7.2% year over year and in-store traffic remained weaker beginning in March 2022.
- Case-goods sales represented 37.1% of Q3 sales versus 35.5% in the prior-year quarter, reflecting improved inventory receipts and some easing of supply-chain disruptions.
- Upholstery remained the largest category at 41.1% of Q3 sales, compared with 42.0% in Q3 2021.
- Cash generation weakened materially because the prior-year period benefited from a $34.0 million increase in customer deposits, whereas deposits declined $19.2 million in the first nine months of 2022.
- The company repurchased approximately $30.0 million of common stock in the first nine months, including approximately $5.0 million in Q3, and paid $13.4 million in dividends.
- Shares outstanding declined as a result of repurchases. Stockholders’ equity increased to $283.6 million from $256.0 million at year-end 2021, primarily reflecting earnings net of repurchases and dividends.
Guidance, Outlook, Risks, and Unusual Items
- Management projected full-year 2022 gross margin of 57.7% to 58.0%, variable SG&A of 18.2% to 18.4% of sales, and fixed and discretionary SG&A of approximately $293.0 million to $295.0 million.
- Management expects fourth-quarter demand to remain affected by inflation, fuel costs, stock-market volatility, higher interest rates, and recessionary concerns affecting discretionary spending.
- Supply-chain disruptions were beginning to abate, but out-of-stock merchandise delivery times remained approximately 8 to 12 weeks. The company also reported rising product, transportation, labor, and other operating costs.
- In October 2022, after quarter-end, the revolving credit facility was increased from $60.0 million to $80.0 million, its maturity was extended from September 2024 to October 2027, and the interest-rate benchmark was changed from LIBOR to SOFR. Availability at September 30 was $55.7 million, with no borrowings outstanding.
- The company authorized an additional $25.0 million for share repurchases in August 2022; approximately $20.0 million remained available at September 30.
- Management reported no pending legal proceedings expected to have a material adverse effect, but ordinary-course product liability and personal injury claims remain possible.
- Interim inventory valuation uses estimated LIFO indices and inflation rates; final year-end LIFO calculations could change reported interim results.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the expected gross-margin improvement is sustained as freight, product, labor, and promotional costs change.
- Trends in written sales, customer deposits, traffic, and delivery times, which may provide earlier indications of future reported revenue.
- Whether operating cash flow improves after the unfavorable customer-deposit comparison and as inventory levels normalize.
- The effect of inflation, interest rates, recessionary conditions, and discretionary-spending trends on demand.
- Compliance with and availability under the amended $80.0 million credit facility, including SOFR-based borrowing costs.
- The pace and valuation of future share repurchases relative to liquidity, capital expenditures, dividends, and lease obligations.