HVT

Haverty Furniture Companies, Inc. - Q1 2008 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2008. Haverty Furniture Companies, Inc. is a full-service home furnishings retailer operating under the Havertys brand. The company does not franchise its concept. As of April 25, 2008, the company had 17,115,803 shares of Common Stock and 4,102,711 shares of Class A Common Stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Decline: Net sales decreased 3.0% ($5.8 million) year-over-year. Comparable store sales declined 6.3% ($11.8 million), attributed to historically low housing sales and rising gasoline and food prices.
• Margin Expansion: Gross profit margin improved by 211 basis points to 52.1%. This was driven by new product mix, better pricing discipline, improved inventory management (reduced damaged goods), and a strategic shift of long-term financing to a third-party provider.
• Expense Management: Selling, General, and Administrative (SG&A) expenses remained flat year-over-year. Advertising spend decreased by $1.3 million due to more targeted methodologies. Delivery costs decreased due to route adjustments, partially offset by higher fuel costs.
• Financing Strategy: The company shifted longer-term no-interest promotions from in-house financing to a third-party provider. Consequently, in-house accounts receivable decreased by $12.2 million, while the allowance for doubtful accounts as a percentage of receivables increased to 3.5% from 2.2% due to higher delinquency rates in remaining in-house accounts.
• Balance Sheet: Cash increased by $2.0 million. Inventory increased by $7.1 million due to early purchasing adjustments for Chinese New Year factory closures. Notes payable to banks increased by $8.3 million.

Outlook, Risks, and Management Commentary

• Outlook: Management does not anticipate a significant rebound in demand for the remainder of 2008. Credit program costs are expected to be higher in Q2 2008 relative to the prior year due to anticipated usage of third-party financing.
• Capital Expenditures: Planned 2008 expenditures are $10.5 million for stores, distribution, and IT. The company plans to open two new stores (one in Orlando, FL; one in an existing market) and close two others, resulting in no net change in selling space.
• Liquidity: The company maintains a $60.0 million revolving credit facility (after eliminating a subsidiary's $20.0 million line). Unused capacity stands at $46.1 million. Management believes cash balances and credit facilities are adequate to finance planned operations.
• Risks: Key risks include changes in industry conditions, competition, merchandise and energy costs, and the timing of capital expenditures. The company noted that forward-looking statements are subject to uncertainties.
• Share Repurchases: The company repurchased 227,200 shares in January 2008 at an average price of $7.95. No repurchases occurred in February or March.

Investor Verification Checklist

• Verify the sustainability of the 211 basis point gross margin improvement given the shift to third-party financing and potential future pricing pressures.
• Monitor the trend in the allowance for doubtful accounts (currently 3.5% of receivables) as the company retains shorter-term, higher-risk in-house financing.
• Assess the impact of rising fuel costs on delivery expenses, which previously offset route optimization savings.
• Confirm the execution of the planned store closures and relocations to ensure no net loss in selling space as projected.
• Review the utilization of the $46.1 million unused credit capacity against the $10.5 million planned capital expenditure budget.