HAVERTY FURNITURE COMPANIES INC quarterly report, Q2 FY2019

Havertys Furniture Companies, Inc. — 2019 Q2 Form 10-Q

Business context and reporting period

Havertys is a single-segment retailer of residential furniture in the middle- to upper-middle price ranges. The filing covers the quarter and six months ended June 30, 2019; financial statements are unaudited.

Key financial metrics

MetricQ2 2019Q2 2018Six months 2019Six months 2018
Net sales$191.9 million$198.8 million$379.1 million$398.2 million
Gross profit$103.6 million$107.8 million$206.7 million$216.8 million
Gross margin54.0%54.2%54.5%54.4%
Income before interest and taxes$7.9 million$8.9 million$12.3 million$17.8 million
Net income$6.0 million$6.2 million$9.7 million$12.5 million
Common diluted EPS$0.29$0.29$0.47$0.58
Operating cash flowNot separately providedNot separately provided$14.8 million$28.9 million

Q2 net margin was approximately 3.2%, compared with approximately 3.1% in the prior-year quarter. Six-month net margin was approximately 2.6%, compared with approximately 3.1% in 2018. SG&A was 49.9% of sales in Q2 and 51.3% for the first half, versus 49.7% and 50.2%, respectively, in the comparable periods.

At June 30, 2019, cash and cash equivalents were $56.1 million, restricted cash was $6.6 million, and total current assets were $193.8 million. The company had no funded debt and no borrowings under its $60.0 million revolving credit facility; net availability was $49.6 million. Lease liabilities totaled $187.6 million, primarily reflecting the adoption of the new lease accounting standard.

Six-month investing cash use was $5.5 million, including $7.8 million of capital expenditures. Financing cash use was $26.5 million, including $7.3 million of dividends and $17.8 million of common stock repurchases. Cash, cash equivalents, and restricted cash decreased by $17.1 million to $62.7 million.

Material changes versus the prior comparable period

  • Q2 sales declined 3.5% and comparable-store sales declined 2.3%. First-half sales declined 4.8% and comparable-store sales declined 3.5%.
  • Management attributed the sequential improvement from Q1 to supply-chain recovery from tariff-related disruption. Q2 average written ticket increased 5.3%, and custom-order upholstery sales increased 7.6% year over year.
  • Gross margin declined 20 basis points in Q2 because of merchandise pricing and mix, more aggressive promotions, and higher product, freight, warehouse, and handling costs. First-half gross margin increased 10 basis points.
  • Q2 SG&A decreased $3.0 million and first-half SG&A decreased $5.1 million, but SG&A as a percentage of sales increased for the first half.
  • Net income declined 2.7% in Q2 and 22.8% for the first half. Six-month operating cash flow declined $14.0 million, primarily because of lower earnings and less favorable changes in payables, accrued liabilities, and other assets and liabilities.
  • The company repurchased $17.8 million of stock in the first half, versus $9.3 million in the prior-year period.

Guidance, outlook, risks, contingencies, and unusual items

  • Management expected 2019 gross margin of approximately 54.1%, compared with 54.6% in 2018, due to increased costs, LIFO effects, and promotions.
  • Full-year fixed and discretionary SG&A was expected to be approximately $256.0 million to $258.0 million, compared with $254.9 million in 2018. Variable SG&A was expected to be approximately 18.0% of sales, compared with 18.3% in 2018.
  • 2019 capital expenditures were estimated at approximately $19.0 million. Planned projects included a new store in Newnan, Georgia, a new market in St. Louis, Missouri, and a relocation in Baton Rouge, Louisiana; net selling space was expected to increase approximately 1.4%.
  • Effective January 1, 2019, adoption of ASC 842 added $187.2 million of right-of-use assets and $187.6 million of lease liabilities at June 30, 2019. The company stated that adoption had an immaterial effect on six-month income and cash flow, but 2019 results are not directly comparable with pre-2019 periods.
  • Interim LIFO calculations rely on management estimates and may change following year-end inventory valuation.
  • The company is subject to ordinary-course claims and legal proceedings and believes any resulting liability will not materially affect its financial condition, results of operations, or cash flows.
  • Principal disclosed risks include economic and housing-market conditions, competition, consumer spending and preferences, merchandise and energy costs, supplier disruptions, tariffs and retaliatory measures, and the timing of capital expenditures.
  • Management stated that expected operating cash generation, cash balances, and credit availability should fund obligations, dividends, repurchases, and planned capital projects.

Important facts for investors to verify

  • Whether sales and comparable-store trends recover after tariff-related supply-chain disruption.
  • Whether promotional activity, freight, product, warehouse, and handling costs pressure the projected 54.1% annual gross margin.
  • Cash generation relative to dividends, share repurchases, capital expenditures, and lease payments.
  • The effect of ASC 842 lease capitalization when comparing 2019 balance-sheet leverage and operating metrics with prior periods.
  • Compliance with the revolving-credit facility’s availability and dividend covenants.
  • Execution and return potential of the planned store openings, new market entry, relocation, and approximately 1.4% selling-space expansion.