Havertys Furniture Companies, Inc. — 2021 Q1 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 under the Havertys brand. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $236.5 million | $179.4 million | 31.8% increase |
| Gross profit | $135.0 million | $99.6 million | 35.7% increase |
| Gross margin | 57.1% | 55.5% | Up 160 basis points |
| SG&A expense | $109.8 million | $97.5 million | 12.5% increase |
| SG&A as a percentage of sales | 46.4% | 54.4% | Down 800 basis points |
| Income before interest and taxes | $25.3 million | $2.1 million | Material improvement |
| Net income | $19.4 million | $1.8 million | Material improvement |
| Net margin | 8.2% | 1.0% | Improved materially |
| Diluted EPS — Common Stock | $1.04 | $0.09 | Material increase |
| Diluted EPS — Class A Common Stock | $0.98 | $0.09 | Material increase |
| Operating cash flow | $19.6 million | $(21.6) million | Improved by $41.2 million |
| Capital expenditures | $4.7 million | $2.5 million | Increased by $2.3 million |
- Cash and cash equivalents were $210.1 million at March 31, 2021, with restricted cash of $6.7 million; combined cash, cash equivalents and restricted cash totaled $216.8 million.
- Inventory increased to $103.6 million from $89.9 million at December 31, 2020, while customer deposits increased to $104.7 million from $86.2 million.
- The company had no borrowings outstanding under its $60.0 million revolving credit facility. Borrowing-base availability was $15.5 million, and the facility matures September 27, 2024.
- Total lease liabilities were $233.1 million, consisting of $33.8 million current and $199.3 million noncurrent liabilities.
- Dividends paid were $4.0 million. The quarterly dividend was $0.22 per Common Stock share and $0.20 per Class A share.
Material changes versus the prior comparable period
- Sales increased $57.1 million, primarily because stores were closed and deliveries were halted during part of March 2020. Reported comparable-store sales, which excluded March, increased 11.5%; written business for the first two months of 2021 increased 24.9% year over year.
- Demand remained strong after reopening, but product shortages, supplier delays, transportation constraints and delivery-capacity limitations increased the lag between customer orders and delivery.
- Gross margin benefited primarily from merchandise pricing and mix, partly offset by a larger negative LIFO impact.
- SG&A dollars increased because of higher selling, delivery, incentive compensation, health insurance and advertising costs, but SG&A leverage improved substantially as a percentage of sales. Q1 2020 included approximately $4.3 million of wages paid while stores and deliveries were suspended.
- Operating cash flow turned positive, supported by higher earnings and an $18.5 million increase in customer deposits, partly offset by a $13.7 million inventory investment.
- Unlike Q1 2020, the company did not borrow under its revolving facility or repurchase stock. Q1 2020 financing cash flow included $43.8 million of revolver borrowings and $6.8 million of share repurchases.
Guidance, outlook, commentary, risks and unusual items
- Management expects 2021 gross margin of approximately 56.5% to 57.0%.
- Variable SG&A is expected to be approximately 17.5% to 17.8% of sales, and fixed and discretionary SG&A is expected to be approximately $265 million to $269 million for full-year 2021.
- Full-year 2021 capital expenditures are expected to be approximately $23.0 million. Net selling space is expected to be slightly higher than in 2020, with planned openings or changes in Myrtle Beach, The Villages, Dallas and Austin.
- Management stated that cash on hand, operating cash flow, available revolver capacity and access to debt markets should fund operations, capital expenditures, dividends and lease obligations for the next several years.
- COVID-19 remains a significant uncertainty. Potential impacts include renewed restrictions or resurgences, changing consumer demand, labor shortages, supplier and raw-material constraints, transportation disruptions and inadequate distribution or delivery capacity. Management cannot reasonably estimate the duration or ultimate financial effect of the pandemic.
- Interim LIFO inventory calculations rely on estimated inventory levels and inflation rates and may change when the annual year-end LIFO valuation is completed.
- The company reported no off-balance-sheet arrangements and stated that ordinary-course legal proceedings are not expected to have a material adverse effect.
- There were no material changes to the risk factors reported in the 2020 Form 10-K. Management concluded that disclosure controls and procedures were effective as of March 31, 2021.
Important facts for investors to verify
- Whether strong written sales convert into recognized revenue as supply-chain delays and delivery constraints persist.
- Whether gross margin remains within the 56.5% to 57.0% full-year target after LIFO effects, freight costs and merchandise availability changes.
- Whether customer deposits and elevated inventory levels normalize without increasing cancellations, markdowns or working-capital requirements.
- Whether labor shortages, supplier disruptions and transportation limitations constrain sales growth or increase fulfillment costs.
- Actual revolver availability under the borrowing-base calculation and compliance with covenants, including dividend restrictions.
- Execution of the planned store openings, closure and relocation-related projects and the $23.0 million capital-expenditure plan.
- The continuing effects of COVID-19, including variants, vaccination trends, consumer spending patterns and any renewed operating restrictions.