Havertys Furniture Companies, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Havertys is a retailer of residential furniture serving middle- to upper-middle-income customers through company-operated stores under the Havertys brand. The filing covers the quarter and nine months ended September 30, 2015. The company operated in one reportable segment: home furnishings retailing. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $209.9 million | $198.5 million | $589.0 million | $555.4 million |
| Net sales growth | 5.7% | 3.0% | 6.0% | 1.0% |
| Comparable-store sales growth | 3.0% | 3.5% | 3.8% | 1.9% |
| Gross profit | $111.7 million | $106.2 million | $314.6 million | $298.2 million |
| Gross margin | 53.2% | 53.5% | 53.4% | 53.7% |
| Income before interest and taxes | $13.0 million | $12.6 million | $31.8 million | $30.9 million |
| Net income | $7.7 million | $7.8 million | $18.6 million | $18.8 million |
| Diluted EPS — Common Stock | $0.34 | $0.34 | $0.81 | $0.82 |
SG&A expense was $98.7 million, or 47.0% of sales, in the third quarter and $283.8 million, or 48.2% of sales, for the first nine months. Interest expense increased to $0.6 million in the quarter and $1.6 million year to date, primarily because of higher lease obligations. The effective tax rate for the first nine months was 38.3%, compared with 37.9% in 2014.
At September 30, 2015, cash and cash equivalents were $73.3 million, investments were $6.8 million, and restricted cash was $8.0 million. Total assets were $472.5 million, compared with $461.0 million at December 31, 2014. Total liabilities were $178.9 million, including $53.9 million of current and long-term lease obligations. The company reported no funded debt and no borrowings under its $50.0 million revolving credit facility. Net availability under the facility was $42.5 million after borrowing-base and fixed-charge coverage adjustments.
Operating cash flow for the first nine months was $45.8 million, compared with $49.1 million in the prior-year period. Capital expenditures were $22.5 million, and investing cash outflows were $20.0 million. Financing outflows were $18.0 million, including $14.0 million of common-stock repurchases and $5.9 million of dividends, partially offset by $4.8 million of construction allowance receipts. Cash increased by $7.8 million from year-end 2014.
Material changes versus the prior comparable period
- Sales increased 5.7% in the third quarter and 6.0% for the first nine months; comparable-store sales increased 3.0% and 3.8%, respectively.
- Average written ticket increased 6.9% in the quarter and 5.0% year to date. Custom-order upholstery written business increased 10.4% in the quarter and 11.0% year to date.
- Gross margin declined 30 basis points in the quarter and 30 basis points for the first nine months, primarily because of closeout sales associated with new merchandise introductions.
- Net income declined modestly despite higher sales, as SG&A increased $5.1 million in the quarter and $16.3 million year to date. Costs reflected additional stores, expanded in-home design staffing, higher commissions, personnel costs, depreciation, and warehouse and delivery expenses.
- Operating cash flow decreased $3.2 million year to date, while financing outflows declined from $30.9 million to $18.0 million because the prior year included a $22.6 million special dividend.
- The company repurchased $14.0 million of common stock during the first nine months. Treasury stock increased to $90.3 million from $76.4 million at December 31, 2014.
- Customer deposits increased $6.6 million to $30.3 million, reflecting higher undelivered sales and special orders. Lease obligations increased $4.9 million to $53.9 million.
Guidance, outlook, risks, and unusual items
- Management raised its estimated 2015 gross margin to approximately 53.4%, from 53.3%, and did not expect to change its promotional strategy for the fourth quarter.
- Full-year fixed and discretionary SG&A expenses were expected to be approximately $240 million to $241 million, compared with $231 million in 2014. Variable SG&A costs were expected to be approximately 17.8% of sales, versus the prior estimate of 17.7%.
- 2015 capital expenditures were estimated at $32 million to $33 million, with net selling space expected to increase approximately 3.0%. Store openings occurred in Coconut Creek, Rogers, Waco, and Fort Lauderdale; a Memphis closure was planned for the fourth quarter.
- Imported product availability and delivery throughput were disrupted by the West Coast port slowdown during the first half of 2015, although management reported improved stocking and stabilized lead times later in the second quarter.
- New competition entered the Dallas market in March 2015 and pressured sales and gross profit as expected.
- Other income included a $0.8 million payment received in the second quarter from settlement of credit-card antitrust litigation.
- Management stated that ordinary-course claims and legal proceedings were not expected to have a material adverse effect. The company had no off-balance-sheet arrangements.
- Key risks include economic and housing-market conditions, competition, merchandise and energy costs, supply-chain execution, product introductions, capital-expenditure timing, and operational rationalization.
- The workers’ compensation collateral agreement supporting $8.0 million of restricted cash expired December 31, 2015. The filing states that available cash and expected operating results were sufficient for planned obligations, dividends, repurchases, and capital projects.
Important facts for investors to verify
- Whether the sales momentum and comparable-store growth continued after the third quarter, particularly in the Dallas market.
- Whether the expected 53.4% full-year gross margin was achieved despite promotional activity and merchandise closeouts.
- Whether SG&A leverage improved as new stores matured, and whether the $240 million to $241 million fixed-cost forecast was met.
- Actual fourth-quarter and full-year capital expenditures, store openings and closures, and related lease obligations.
- Changes in cash generation, customer deposits, inventory levels, and revolver availability.
- The effect of ongoing supply-chain conditions, competition, housing-market trends, and other forward-looking risks.