Havertys Furniture Companies, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income consumers through company-operated stores and its website. This unaudited quarterly report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Amounts are in thousands unless otherwise noted.
COVID-19 materially affected the quarter. The company closed all 120 stores on March 19 and halted deliveries on March 21. Stores remained closed through April; 103 reopened on May 1 and 116 of 120 were open as of May 20.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $179.4 million | $187.2 million | Down 4.2% |
| Gross profit | $99.6 million | $103.1 million | Down 3.4% |
| Gross margin | 55.5% | 55.1% | Up 40 basis points |
| Income before interest and taxes | $2.1 million | $4.4 million | Down 52.3% |
| Net income | $1.8 million | $3.6 million | Down 49.8% |
| Net margin | 1.0% | 1.9% | Down approximately 90 basis points |
| Diluted EPS, Common Stock | $0.09 | $0.17 | Down $0.08 |
| Cash flow from operations | $(21.6) million | $5.4 million | Decline of $27.0 million |
| Capital expenditures | $2.5 million | $3.8 million | Down $1.3 million |
SG&A declined to $97.5 million from $98.9 million, but increased to 54.4% of sales from 52.8%. The company incurred approximately $4.3 million of wages for idled team members during the latter part of March. Income tax expense was $0.5 million, with an effective tax rate of 20.9% versus 23.4% in the prior-year quarter.
At March 31, 2020, cash and cash equivalents were $84.6 million, restricted cash was $6.7 million, inventories were $110.5 million, and total assets were $574.9 million. Current liabilities were $146.8 million and total stockholders’ equity was $252.4 million.
Debt, Liquidity, and Cash Flow
- The company borrowed $43.8 million in March under its $60.0 million revolving credit facility, its first borrowing under the facility since its 2008 origination.
- The borrowing base was $58.4 million, with no outstanding letters of credit and net availability of $14.6 million at March 31, 2020.
- The debt carried a weighted-average interest rate of approximately 2.37% at quarter-end and matures in September 2024. A hypothetical 100-basis-point LIBOR change would affect annual interest expense by approximately $0.4 million.
- Cash, cash equivalents, and restricted cash increased by $8.9 million during the quarter to $91.3 million, primarily because of the credit-facility draw.
- Operating cash flow was negative primarily because of a $20.2 million decrease in accounts payable and accrued liabilities, a $5.7 million inventory increase, and a $3.9 million decrease in customer deposits.
- The company paid $3.8 million in dividends and repurchased $6.8 million of common stock during the quarter. Share repurchases were subsequently suspended.
- On May 18, 2020, the company completed a sale-leaseback of three properties for $70.0 million in gross proceeds. The properties were leased back under 15-year operating leases with total future minimum payments of $75.8 million.
- Management stated that it believes liquidity is sufficient to finance operations and expected capital requirements for at least 12 months, including if the business continuity plan must be reinstated.
Material Changes Versus the Prior Comparable Period
- Sales decreased $7.8 million, although sales increased 12.8% and comparable-store sales increased 11.6% during January and February before the pandemic-related closures. First-quarter comparable-store sales were not meaningful because all stores were closed for part of the quarter.
- Upholstery sales increased 0.8%, while case goods, mattresses, and accessories and other sales declined. Bedroom furniture declined 9.4% and mattress sales declined 11.5%.
- Gross margin improved because of merchandise pricing and mix and reduced inventory markdowns, but operating leverage deteriorated as SG&A grew as a percentage of sales.
- Net income declined by $1.8 million, reflecting lower sales, reduced operating income, and lower interest income.
- Operating cash flow changed from $5.4 million provided to $21.6 million used, while financing cash flow changed from $4.2 million used to $32.9 million provided due primarily to the revolving-credit draw.
- Inventories increased $5.7 million from year-end 2019, while accounts payable decreased $11.0 million and accrued liabilities decreased $9.9 million.
- Common-stock weighted-average basic shares declined to 17.5 million from 18.8 million, reflecting share repurchases.
Guidance, Outlook, Risks, and Unusual Items
- The company is not providing guidance for gross margin or SG&A for the remainder of 2020.
- Management expects 2020 net selling space to be slightly below 2019 levels and estimates 2020 capital expenditures of approximately $5.0 million, subject to project timing.
- Approximately 3,033 employees, or 87% of the workforce, were furloughed in April. Approximately 1,200 positions were permanently eliminated effective April 30, with annualized compensation savings estimated at $42.6 million. Approximately 730 employees remained furloughed through the end of May.
- The company reduced inventory orders, extended vendor payment terms, sought rent deferrals, delayed tax payments where permitted, postponed nonessential capital projects, and reduced discretionary spending.
- COVID-19 risks include renewed store closures, weaker consumer demand, supply-chain and foreign-manufacturing disruptions, inventory availability issues, higher freight costs, employee and customer safety costs, covenant compliance, reduced liquidity, and possible impairment or financing costs.
- The company elected to defer the employer-paid portion of Social Security taxes and recorded estimated employee-retention credits and tax benefits related to qualified leasehold improvements under the CARES Act. The potential additional benefit was not clearly quantified in the filing.
- Ordinary-course legal proceedings were not expected to have a material adverse effect on financial condition, results of operations, or cash flows.
- The filing states that there were no off-balance-sheet arrangements at March 31, 2020.
Investor Verification Checklist
- Verify the pace and sustainability of store reopenings, delivery operations, customer traffic, and comparable-store sales following May 2020 reopening activity.
- Assess liquidity after incorporating the $70.0 million sale-leaseback proceeds, the $43.8 million revolver borrowing, leaseback obligations, and any subsequent debt or covenant amendments.
- Monitor operating cash flow, accounts payable normalization, inventory levels, customer deposits, and vendor payment terms.
- Evaluate whether workforce reductions and other cost actions offset lost sales without impairing service levels, distribution capacity, or future growth.
- Review COVID-19 effects on suppliers, imported merchandise, freight costs, inventory availability, and potential markdowns or impairment charges.
- Confirm the treatment and realized amount of CARES Act tax benefits and employee-retention credits.
- Consider the increased fixed lease obligations from the sale-leaseback and the company’s ability to meet debt and lease commitments if demand remains weak.