Havertys Furniture Companies, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Havertys is a specialty retailer of residential furniture and accessories serving middle- to upper-middle-income customers. As of December 31, 2020, it operated 120 company-owned stores in 16 Southern and Midwestern states, representing approximately 4.4 million retail square feet. The company also sells through havertys.com and operates a single reportable segment.
This filing covers the fiscal year ended December 31, 2020. Fourth-quarter results were included in the annual filing; fourth-quarter net sales were $241.3 million.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $748.3 million | $802.3 million | (6.7%) |
| Comparable-store sales | +5.0% | (1.4%) | Improved |
| Gross profit | $419.0 million | $434.5 million | (3.6%) |
| Gross margin | 56.0% | 54.2% | +180 bps |
| SG&A expense | $377.3 million | $407.5 million | (7.4%) |
| SG&A as a percentage of sales | 50.4% | 50.8% | (40 bps) |
| Income before taxes | $76.7 million | $28.7 million | +167.2% |
| Net income | $59.1 million | $21.9 million | +170.5% |
| Diluted EPS, Common Stock | $3.12 | $1.08 | +189% |
| Cash flow from operations | $130.2 million | $63.4 million | +105.3% |
Fourth-quarter 2020 net sales increased 12.9% year over year to $241.3 million, while comparable-store sales increased 13.7%. Fourth-quarter net income was $25.4 million, compared with $6.1 million in the prior-year quarter.
Cash and cash equivalents were $200.1 million at year-end, with an additional $6.7 million of restricted cash. Total assets were $680.4 million and stockholders’ equity was $253.0 million. The company reported no outstanding revolver borrowings at year-end. Its revolving credit facility provides $60.0 million of capacity and matures in September 2024; borrowing-base availability was $15.3 million at December 31, 2020.
Operating lease liabilities totaled $233.7 million, and undiscounted operating lease obligations totaled $305.2 million. Capital expenditures were $10.9 million in 2020, and management expected approximately $23.0 million of capital expenditures in 2021.
Material changes versus the prior comparable period
- COVID-19 caused all stores to close on March 19 and deliveries to stop on March 21. Stores reopened progressively beginning May 1, with all stores reopened by June 20; deliveries resumed May 5.
- The company furloughed approximately 3,033 employees and permanently reduced its workforce by approximately 1,200 positions. Year-end employees declined to 2,766 from 3,425 in 2019.
- Annual sales declined because of the approximately six-week operational pause and non-comparable store effects, despite strong demand after reopening. Written sales increased 16.7% in the fourth quarter and 22.8% in the third quarter.
- Online sales increased 65% and represented approximately 4.4% of total 2020 sales.
- Gross margin improved primarily from lower discounting and promotional activity and favorable product mix. Upholstery and home-office demand benefited from consumers spending more time at home, while mattress sales declined because of supply-chain disruption.
- SG&A declined because of lower advertising, rent abatements, reduced occupancy costs, workforce reductions, and lower third-party financing costs.
- Havertys completed a $70.0 million sale-leaseback of three distribution facilities in May 2020, recognizing a $31.6 million gain. The transaction materially increased cash and lease liabilities.
- The company temporarily borrowed $43.8 million under its revolving facility in March 2020 and repaid the amount in June 2020.
- Cash dividends paid increased to $50.5 million, including special dividends of $2.00 per Common Stock share and $1.90 per Class A share. The company repurchased $19.7 million of stock during 2020.
Guidance, outlook, risks and unusual items
Management did not provide a sales or earnings forecast because the duration and post-pandemic effects on consumer spending could not be reliably predicted. Management cited a strengthening housing market, favorable store locations, online capabilities, on-trend merchandise, design services and special-order capabilities as potential growth supports.
- Expected 2021 gross margin: approximately 55.3% to 55.8%.
- Expected 2021 fixed and discretionary SG&A: $261.0 million to $263.0 million.
- Expected 2021 variable SG&A: 18.2% to 18.4% of sales.
- Expected 2021 capital expenditures: approximately $23.0 million.
- Management expected approximately 1% growth in net selling space in 2021, assuming planned store openings and closures occur.
- Management expected supply-chain volatility to improve by the third quarter of 2021, but delivery times for certain merchandise could reach 12 weeks.
Key risks include renewed or prolonged COVID-19 effects, changes in discretionary consumer spending, intense competition including e-commerce competitors, dependence on foreign and third-party suppliers, tariffs and raw-material costs, shipping and transportation constraints, product-safety and vendor-compliance issues, fuel costs, distribution-center concentration, cybersecurity, information-technology failures, and adverse economic or housing-market conditions.
Unusual 2020 items included the $31.6 million sale-leaseback gain, approximately $2.3 million of employee-retention credits that reduced SG&A, and $1.5 million of state quality-jobs tax credits recognized in the fourth quarter. No 2020 impairment charge was recorded; a $2.4 million retail-store impairment was recorded in the fourth quarter of 2019.
Important facts for investors to verify
- Whether post-pandemic demand remains strong after consumers resume spending on travel and other discretionary categories.
- The effect of supply shortages, freight capacity, tariffs, raw-material costs and extended delivery times on sales conversion and gross margin.
- The sustainability of the 2020 gross-margin improvement excluding the sale-leaseback gain and tax credits.
- Cash generation after dividends, share repurchases, capital expenditures and required lease payments.
- The company’s substantial operating lease commitments and the limited $15.3 million borrowing-base availability reported at year-end.
- Execution of planned 2021 store openings, closures, relocations and approximately $23.0 million of capital expenditures.
- Customer deposits of $86.2 million at year-end and the company’s ability to fulfill related orders on a timely basis.
- COVID-19 developments, including renewed restrictions, employee availability, consumer behavior changes and supply-chain disruptions.
The financial statements received an unqualified audit opinion, and management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2020.