Havertys Furniture Companies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Havertys is a residential furniture retailer 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, 2014. The company operates as one reportable segment and had 120 stores planned by year-end 2014.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $198.5 million | $192.7 million | $555.4 million | $549.9 million |
| Sales growth | 3.0% | 11.6% | 1.0% | 12.7% |
| Comparable-store sales growth | 3.5% | 11.8% | 1.9% | 11.5% |
| Gross profit margin | 53.5% | 53.9% | 53.7% | 53.7% |
| SG&A as a percentage of sales | 47.1% | 45.8% | 48.2% | 46.9% |
| Net income | $7.8 million | $9.5 million | $18.8 million | $22.6 million |
| Diluted EPS — Common Stock | $0.34 | $0.42 | $0.82 | $0.99 |
Operating cash flow for the first nine months was $49.1 million, compared with $41.0 million in the prior-year period. Capital expenditures were $22.0 million versus $16.7 million, and cash used in financing activities was $30.9 million versus $5.8 million, primarily because of a $22.6 million special dividend paid in September 2014.
Cash and cash equivalents were $78.7 million at September 30, 2014, compared with $83.2 million at December 31, 2013. Restricted cash was $8.0 million. The company reported no funded debt and no borrowings under its $50.0 million revolving credit facility. Net availability under the facility was $39.8 million after borrowing-base and fixed-charge-coverage adjustments. Lease obligations totaled $36.6 million, including $1.8 million current.
Total assets were $442.5 million and stockholders’ equity was $290.0 million at September 30, 2014. Inventories increased to $94.8 million from $91.5 million at year-end 2013. Customer deposits increased to $28.8 million from $19.0 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 3.0%, while nine-month sales increased only 1.0%; growth was substantially below the prior-year pace.
- Management attributed the slower nine-month performance partly to severe winter weather that affected approximately 75% of store locations during the first quarter.
- Third-quarter gross margin declined 40 basis points, reflecting a $0.2 million LIFO reserve increase and clearance activity associated with planned store and warehouse closures.
- SG&A increased $5.3 million in the third quarter and $9.4 million for the nine-month period. Higher delivery, warehouse, insurance, commission, designer, advertising and personnel costs contributed to the increase.
- Net income declined 17.6% in the third quarter and 16.8% for the first nine months. Diluted Common Stock EPS declined to $0.34 from $0.42 in the quarter and to $0.82 from $0.99 year to date.
- Operating cash flow improved because of higher customer deposits and favorable changes in accrued liabilities, despite lower earnings and higher inventories.
- Property and equipment increased $24.0 million, while lease obligations increased $19.5 million, primarily because six additional leased properties were recorded on the balance sheet.
- The company paid a special cash dividend of $1.00 per Common share and $0.95 per Class A share in September 2014, contributing to the year-to-date cash decrease of $4.5 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects fourth-quarter gross margin of approximately 53.6%, revised down from 53.8%, due to elevated clearance activity and an expected LIFO reserve increase.
- Management expects fixed and discretionary SG&A of approximately $61 million to $62 million in the fourth quarter and $232 million to $233 million for full-year 2014. Variable SG&A is expected to be approximately 17.2% of fourth-quarter sales and 17.4% for the full year.
- Management does not expect to be aggressive with promotions over the next few quarters but anticipates competitive pressure in the Dallas market beginning in the second quarter of 2015.
- Case-goods sales remained challenged by supplier fulfillment and lead-time issues. Management expected lead times to stabilize over the remainder of 2014.
- 2014 capital expenditures were planned at $34.0 million, including six new locations and one major expansion. 2015 capital expenditures were estimated at $30 million to $33 million, with five store openings planned and net selling square footage expected to increase 2.6%.
- The defined benefit pension plan was terminated effective July 20, 2014. The company expects a non-cash settlement charge, plus any funding required above plan assets, but the amount was not yet determined. Most obligations were expected to be settled by year-end 2014.
- A $0.8 million positive out-of-period adjustment related to vendor pricing allowances was recorded in the first quarter of 2013. Management concluded the adjustment was immaterial to full-year 2013 results.
- The company stated that ordinary-course legal claims are not expected to have a material adverse effect. Key forward-looking risks include economic and housing conditions, competition, merchandise and energy costs, capital-expenditure timing, product introductions and operational rationalization.
- Management concluded that disclosure controls were effective as of September 30, 2014, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the final amount and timing of the pension-plan termination and settlement charge.
- Assess whether the expected fourth-quarter gross-margin reduction and elevated clearance activity occurred.
- Monitor supplier lead times and case-goods availability, particularly their effect on comparable-store sales.
- Evaluate whether SG&A growth, delivery costs and personnel expenses remain consistent with management’s guidance.
- Confirm execution of the 2014 and 2015 store openings, relocations, closures and planned capital expenditures.
- Review liquidity after dividends, capital expenditures and lease additions, including compliance with the revolving-credit facility’s fixed-charge-coverage requirements.
- Reconcile the reported sales and earnings trends against the 2013 comparison period, including the disclosed 2013 vendor-allowance adjustment.