Haverty Furniture Companies, Inc. — Q3 2012 Form 10-Q Summary
Business Context and Reporting Period
Havertys is a retailer of residential furniture serving middle- to upper-middle-income customers under a single brand. The company operates in one reportable segment: home furnishings retailing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $172.7 million | $155.4 million | $487.8 million | $452.6 million |
| Gross profit | $90.7 million | $80.4 million | $255.8 million | $232.8 million |
| Gross margin | 52.5% | 51.8% | 52.4% | 51.4% |
| Income before taxes | $5.6 million | $0.1 million | $13.4 million | $(1.5) million |
| Net income (loss) | $3.3 million | $0.1 million | $8.1 million | $(1.5) million |
| Net margin | 1.9% | 0.1% | 1.7% | (0.3)% |
| Operating cash flow | Not separately provided | Not separately provided | $48.3 million | $30.1 million |
- Q3 net sales increased 11.1%, while comparable-store sales increased 10.0%. Nine-month net sales increased 7.8%, with comparable-store sales up 7.1%.
- Average ticket increased approximately 11.6% in Q3 and 7.5% for the first nine months. Upholstery sales increased 20.9% in Q3 and 16.7% year to date.
- SG&A was $85.1 million in Q3 and $242.7 million for nine months. SG&A declined to 49.3% and 49.8% of sales, respectively, from 51.8% in both comparable 2011 periods.
- At September 30, 2012, cash and cash equivalents were $75.0 million, restricted cash was $7.0 million, and total current assets were $191.4 million. Cash increased $25.4 million from December 31, 2011.
- Inventories declined to $84.5 million from $93.7 million at year-end 2011, while property and equipment increased to $187.0 million from $179.3 million.
- The company reported no funded debt. Lease obligations totaled $13.3 million, including $0.8 million current and $12.4 million long term.
- The $50.0 million revolving credit facility had no borrowings and no outstanding letters of credit. Reported net availability was $38.7 million after borrowing-base and fixed-charge-coverage adjustments.
- Stockholders’ equity was $272.4 million, compared with $262.7 million at December 31, 2011.
Cash Flow, Capital Allocation, and Liquidity
- Operating cash flow of $48.3 million exceeded capital expenditures of $20.2 million, producing strong internally funded liquidity.
- Investing cash outflows were $19.9 million, including capital expenditures; financing cash outflows were $3.0 million, including $1.8 million of dividends, $0.2 million of treasury-stock purchases, and lease payments.
- The company stated that expected operating cash flow and available cash should fund working capital, obligations, dividends, stock repurchases, and planned capital projects.
- 2012 planned capital expenditures were $25.0 million, including $19.8 million for stores and improvements and $4.1 million for information technology. 2013 planned expenditures were estimated at $20.0 million.
Material Changes Versus the Prior Comparable Period
- Profitability improved materially: nine-month net income changed from a $1.5 million loss to $8.1 million of income.
- Gross margin expanded by 70 basis points in Q3 and 100 basis points year to date, attributed primarily to a greater mix of upper-middle price-point products and pricing discipline.
- SG&A leverage improved despite higher absolute expense. Q3 SG&A increased $4.6 million, and nine-month SG&A increased $8.4 million, but both declined as a percentage of sales.
- Operating cash flow increased $18.2 million year over year, primarily because of improved earnings and higher accounts payable and accrued liabilities.
- The company began primarily self-insuring employee group health care claims in 2012, increasing reliance on actuarial estimates for incurred-but-not-reported claims.
- Customer deposits increased $7.1 million and accrued liabilities increased $6.9 million from year-end, reflecting seasonal timing, payment timing, and higher self-insurance reserves.
- The company paid dividends in 2012 after paying none in the comparable 2011 period. Common Stock dividends were $0.0400 per share in Q3 and $0.080 year to date.
Guidance, Outlook, Risks, and Unusual Items
- Management expected Q4 2012 gross margin to approximate the Q3 rate of 52.5%.
- Q4 SG&A was expected to be higher in dollars than Q3 but lower as a percentage of sales. Fixed and discretionary expenses were estimated at approximately $55 million, with variable costs estimated at 17.8% of sales.
- New stores opened in Baltimore and Midland, Texas. A Dallas store and an Atlanta replacement store were planned for Q4. The 2012 plans were expected to increase net selling square footage by approximately 2.5%.
- 2013 plans included one new store and three showroom expansions, although lease expirations could result in closures and an estimated 1.4% decrease in net selling square footage.
- State tax audit settlements reduced gross uncertain tax positions to $0.6 million from $1.1 million at December 31, 2011. Settlements and related tax changes increased nine-month 2012 tax expense by approximately $88,000.
- Interim LIFO inventory valuation is based on estimates and may change at year-end. Pension costs increased to $1.1 million for nine months from $0.8 million in 2011, partly because of higher amortization of actuarial losses.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. The company reported no off-balance-sheet arrangements.
- Key forward-looking risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new products, operational changes, and other risks described in the company’s Form 10-K.
Important Facts for Investors to Verify
- Confirm that comparable-store sales momentum and higher average tickets continue without excessive promotional activity.
- Monitor whether gross-margin expansion is sustained and whether the planned Q4 52.5% margin is achieved.
- Assess the sustainability of improved SG&A leverage amid higher compensation, commissions, delivery, occupancy, and self-insurance costs.
- Review borrowing-base and fixed-charge-coverage provisions that reduced revolver availability to $38.7 million despite no borrowings.
- Track cash conversion, inventory levels, customer deposits, accrued liabilities, and capital spending as store expansion continues.
- Evaluate the assumptions supporting self-insured healthcare reserves, pension obligations, interim LIFO valuation, and uncertain tax positions.