Business Context and Reporting Period
Haverty Furniture Companies, Inc. is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers under the Havertys brand. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $171.1 million, up 12.9% | $357.2 million, up 13.4% |
| Gross profit | $91.3 million; 53.4% margin | $191.6 million; reported 53.6% margin |
| Income before taxes | $7.9 million | $21.3 million |
| Net income | $4.8 million, versus $2.4 million | $13.1 million, versus $4.8 million |
| Net margin | 2.8%, versus 1.6% | 3.7%, versus 1.5% |
| Diluted EPS | Common Stock: $0.21; Class A: $0.20 | Common Stock: $0.58; Class A: $0.55 |
| Operating cash flow | Not separately provided | $13.0 million, versus $20.5 million |
| Capital expenditures | Not separately provided | $10.2 million |
Second-quarter comparable-store sales increased 11.2%; first-half comparable-store sales increased 11.3%. The average written ticket rose approximately 7.7% in the quarter and 10.3% in the first half. Custom-order upholstery and casual dining sales increased 21.7% and 30.4%, respectively, in the second quarter.
Second-quarter SG&A expense was 48.6% of sales, down from 50.4%; first-half SG&A was 47.6%, down from 50.0%. Reported first-half gross margin included a $0.8 million out-of-period vendor pricing allowance adjustment; excluding its estimated 20-basis-point impact, first-half gross margin was 53.4%, compared with 52.4% in 2012.
At June 30, 2013, cash and cash equivalents were $52.3 million, restricted cash was $7.0 million, and total assets were $399.1 million. Total liabilities were $127.0 million and stockholders’ equity was $272.1 million. The Company had no funded debt, although it reported $17.9 million of lease obligations. It had no borrowings under its $50.0 million revolving credit facility and reported net availability of $43.8 million after borrowing-base and covenant-related reductions.
Cash declined by $1.3 million during the first half to $52.3 million. Operating cash flow was reduced by a $11.1 million decrease in accounts payable and accrued liabilities and other working-capital movements. Financing cash use included $1.8 million of dividends and $2.5 million of taxes on vested restricted shares.
Material Changes Versus Prior Comparable Period
- Sales growth accelerated materially, with second-quarter net sales up 12.9% versus 5.9% in the 2012 quarter and first-half sales up 13.4% versus 6.0%.
- Net income approximately doubled in the second quarter and increased substantially for the first half, aided by higher sales, improved gross margin, and SG&A leverage.
- Gross margin improved 80 basis points in the second quarter. First-half adjusted gross margin improved approximately 100 basis points.
- Operating cash flow decreased to $13.0 million from $20.5 million despite higher earnings, principally because of working-capital timing and lower accounts payable and accrued liabilities.
- Capital expenditures decreased to $10.2 million from $12.8 million, while financing cash use increased due to higher dividends and withholding taxes on vested equity awards.
- The Company closed three stores and expects net selling square footage to decrease approximately 2.0% in 2013. Plans also include expanding five showrooms and refreshing 18 Bright Inspiration stores.
Guidance, Outlook, Risks, and Unusual Items
Management expects second-half 2013 gross margin to exceed the 52.7% recorded in the second half of 2012 but to be modestly below the adjusted first-half rate of 53.4%. Fixed and discretionary SG&A expenses are expected to be at the high end of the previously disclosed $220.0 million to $222.0 million range. Variable SG&A is expected to be at the lower end of the prior 17.0% to 17.5% of sales range. Planned capital expenditures are approximately $22.0 million for 2013 and $25.0 million for 2014.
The first-quarter $0.8 million non-cash out-of-period adjustment increased first-half gross profit and diluted earnings per share by approximately $0.02 after tax. Management concluded that prior financial statements were not materially misstated and that the adjustment was immaterial to estimated full-year 2013 results and earnings trends.
Management believes available cash and expected operating cash flow will fund obligations, dividends, stock repurchases, and planned capital projects. Risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new-product execution, and operational rationalization. The Company reports ordinary-course legal claims that it does not expect to have a material adverse effect. Interim LIFO inventory values remain subject to year-end adjustment. No material market-risk changes or off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Confirm the sustainability of the strong comparable-store sales growth and higher average ticket.
- Monitor whether gross-margin improvement persists after the $0.8 million out-of-period adjustment and with planned pricing competitiveness.
- Assess conversion of earnings into cash, including the effect of accounts payable, accrued liabilities, inventory, and other working-capital timing.
- Review the revolving-credit covenant calculation and the resulting $43.8 million net availability.
- Track store closures, showroom expansions, refresh projects, planned capital expenditures, and their effect on selling square footage.
- Evaluate pension obligations, lease commitments, restricted workers’-compensation cash, and the impact of equity-award vesting taxes.