Havertys Furniture Companies, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 4, 2016. Havertys is a single-segment retailer of residential furniture operating exclusively under the Havertys brand.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $194.5 million | $191.3 million | Up 1.7% |
| Comparable-store sales | Up 0.9% in 2016 versus up 3.8% in 2015 | ||
| Gross profit | $104.4 million | $102.7 million | Up $1.8 million |
| Gross margin | 53.7% | 53.7% | Flat |
| Income before interest and taxes | $8.2 million | $10.4 million | Down $2.2 million |
| Net income | $4.7 million | $6.1 million | Down 23.7% |
| Diluted EPS, Common Stock | $0.21 | $0.27 | Down $0.06 |
| Net cash used in operating activities | $4.8 million | Cash provided of $13.6 million | Unfavorable change of $18.3 million |
| Capital expenditures | $9.0 million | $6.7 million | Up $2.3 million |
SG&A increased to $96.4 million from $92.3 million and represented 49.5% of sales versus 48.2% in the prior-year quarter. The increase reflected higher commissions and salaries, occupancy and depreciation costs for new stores, increased advertising and marketing, inflation, and higher health insurance costs. Operating margin was approximately 4.2%, compared with 5.4% in Q1 2015.
At March 31, 2016, cash and cash equivalents were $53.7 million, investments were $12.7 million, and restricted cash was $8.0 million. Total assets were $465.7 million and stockholders’ equity was $305.0 million. The company reported no funded debt and no borrowings under its revolving credit facility; lease obligations totaled $56.3 million, including current and long-term amounts.
Material changes versus the prior comparable period
- Sales growth slowed to 1.7% from 5.3%, while comparable-store sales growth slowed to 0.9% from 3.8%.
- Gross margin remained stable, but discontinued and mismatched products negatively affected margins and were expected to continue affecting the remainder of 2016.
- SG&A rose $4.1 million, causing income before interest and taxes to decline $2.2 million and net income to decline $1.5 million.
- Operating cash flow shifted from $13.6 million provided to $4.8 million used, primarily because of greater inventory growth and larger reductions in accounts payable and accrued liabilities.
- Cash declined $16.9 million during the quarter to $53.7 million, reflecting operating cash use, $9.0 million of capital expenditures, dividends, lease payments, and modest share repurchases.
- Cash dividends increased to $0.100 per Common Stock share and $0.095 per Class A share, compared with $0.080 and $0.075, respectively, in Q1 2015.
Guidance, outlook, risks and unusual items
- Management maintained its 2016 gross margin expectation at approximately 53.5%.
- Full-year fixed and discretionary SG&A expenses were expected to be approximately $251.0 million, compared with $240.9 million in 2015. Variable SG&A costs were expected to be approximately 17.8% to 17.9% of sales.
- Planned 2016 capital expenditures were approximately $33.0 million. Store plans included a temporary Lubbock, Texas location, new markets in College Station, Texas and Charlottesville, Virginia, and a Florida store closure; net selling space was expected to increase approximately 1.4%.
- In March 2016, the revolving credit facility was increased from $50.0 million to $60.0 million and extended to March 31, 2021. Net availability was $54.0 million because a fixed-charge coverage ratio test was not met for the preceding twelve months. No amounts were borrowed.
- The company stated that available cash and expected operating results should fund obligations, dividends, stock repurchases, and planned capital projects. The filing reports no off-balance-sheet arrangements.
- Key risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new-product performance, and operational rationalization. Ordinary-course legal claims were not expected to have a material adverse effect.
- Interim LIFO inventory valuation is based on estimates and may change at year-end. The company was also evaluating the future effects of new lease and revenue-recognition standards.
Important facts for investors to verify
- Whether slower comparable-store sales and the planned store expansion support management’s 2016 sales and margin expectations.
- Whether SG&A growth, especially occupancy, staffing, marketing, and depreciation costs, remains consistent with the full-year outlook.
- Inventory, accounts payable, and accrued-liability trends, given the quarter’s negative operating cash flow.
- The effect of discontinued and mismatched products on gross margin during the remainder of 2016.
- Compliance with the credit agreement’s fixed-charge coverage and other restrictive covenants, and the resulting $54.0 million availability.
- The eventual balance-sheet impact of the new lease accounting standard and any changes from estimated interim LIFO calculations.