Havertys Furniture Companies, Inc. — Q3 2013 Form 10-Q
Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers through company-operated stores under the Havertys brand. The filing covers the three and nine months ended September 30, 2013; financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $192.7 million | $172.7 million | $549.9 million | $487.8 million |
| Sales growth | 11.6% | 11.1% | 12.7% | 7.8% |
| Comparable-store sales growth | 11.8% | 10.0% | 11.5% | 7.1% |
| Gross profit | $103.9 million | $90.7 million | $295.7 million | $256.0 million |
| Gross margin | 53.9% | 52.5% | 53.7% | 52.4% |
| SG&A expense | $88.3 million | $85.1 million | $258.1 million | $242.7 million |
| SG&A as a percentage of sales | 45.8% | 49.3% | 46.9% | 49.8% |
| Net income | $9.5 million | $3.3 million | $22.6 million | $8.1 million |
| Basic EPS, Common Stock | $0.42 | $0.15 | $1.01 | $0.37 |
| Cash dividends per Common share | $0.080 | $0.040 | $0.16 | $0.080 |
Q3 pretax income was $15.4 million, compared with $5.6 million in the prior-year quarter, and the effective tax rate for the first nine months was 38.5%, versus 39.4% in 2012. Net margin was approximately 4.9% in Q3 and 4.1% for the first nine months.
For the nine months, operating cash flow was $41.0 million, down from $48.3 million. Capital expenditures were $16.7 million, down from $20.2 million, producing approximate operating cash flow less capital expenditures of $24.3 million. Financing activities used $5.8 million, primarily for dividends and taxes on vested restricted shares. Cash and cash equivalents increased to $72.1 million from $53.6 million at December 31, 2012; restricted cash was $7.0 million.
At September 30, 2013, total assets were $410.5 million and stockholders’ equity was $280.9 million. The company reported no funded debt and no borrowings under its $50.0 million revolving credit facility. Net availability under the facility was $43.1 million after borrowing-base and fixed-charge-coverage adjustments. Lease obligations totaled $17.4 million, including current obligations.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased $20.0 million, or 11.6%; comparable-store sales increased 11.8%. The average written ticket rose approximately 5.6%, and custom-order upholstery sales increased 22.9%.
- Q3 gross margin expanded 140 basis points to 53.9%; excluding the favorable LIFO-reserve effect, the improvement was approximately 100 basis points. Management cited product mix, pricing discipline, lower inbound ocean freight costs and fewer prior-year accessory closeouts.
- Q3 SG&A increased $3.2 million in dollars but declined 350 basis points as a percentage of sales. Nine-month SG&A increased $15.4 million, reflecting higher selling costs, compensation and benefits, depreciation and advertising.
- Q3 net income increased approximately 187%, while nine-month net income increased approximately 178%, supported by sales growth, gross-margin expansion and SG&A leverage.
- Inventories declined $5.3 million from year-end as sales outpaced replenishment. Accounts payable declined $7.9 million, while customer deposits increased $2.1 million.
- The Common Stock dividend was doubled to $0.080 per share in Q3 from $0.040 in the prior-year quarter; the Class A dividend increased to $0.075 from $0.0375.
Guidance, Outlook, Risks and Unusual Items
- Management expects the adjusted year-to-date gross-margin run rate of approximately 53.6% to be a reasonable expectation for the next few quarters, subject to future LIFO effects and landed merchandise costs.
- Full-year 2013 fixed and discretionary SG&A costs are expected to be approximately $223.5 million, slightly above the prior $220.0 million to $222.0 million range. Variable SG&A is expected to be approximately 16.7% of sales, slightly below the prior 17.0% to 17.5% range.
- 2013 capital expenditures are planned at approximately $22.0 million. 2014 plans contemplate net store growth of three locations, a 3.0% increase in selling square footage and capital expenditures of $25.0 million to $29.0 million.
- Three stores were closed in 2013, reducing net selling square footage by approximately 2.2%. The company planned three showroom expansions and 18 Bright Inspiration store refreshes.
- A $0.8 million non-cash, out-of-period adjustment increased nine-month gross profit by $0.8 million and diluted earnings per share by $0.02 after tax, relating to historical vendor pricing allowances. Management concluded prior financial statements were not materially misstated.
- Interim LIFO inventory amounts are estimated and may change at year-end. The company also faces normal-course legal claims, but believes any resulting liability will not materially affect financial condition, results or cash flows.
- Key forward-looking risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new products and operational changes. The filing reports no material change in market risk and no off-balance-sheet arrangements.
Investor Verification Items
- Verify the sustainability of the strong comparable-store sales growth and the 53%-plus gross-margin run rate after excluding the vendor allowance and LIFO effects.
- Monitor whether higher compensation, advertising, occupancy and other SG&A costs continue to leverage against sales.
- Reconcile operating cash flow with earnings, particularly the effects of accounts payable, accrued liabilities and other working-capital movements.
- Review the $43.1 million revolver availability, the fixed-charge-coverage adjustment and the $7.0 million restricted cash requirement.
- Assess execution of planned store expansions, closures, refreshes and 2014 capital expenditures.
- Consider the impact of housing, consumer demand, merchandise costs, freight costs and LIFO adjustments on future margins.