Business Context and Reporting Period
Company: Haverty Furniture Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2004
Business Overview: The Company operates retail stores selling home furnishings. Revenue is recognized upon delivery. The Company utilizes an "everyday low pricing" strategy supplemented by promotional financing.
Key Financial Metrics
| Metric (in thousands) | Q2 2004 | Q2 2003 | 6 Mo 2004 | 6 Mo 2003 |
|---|---|---|---|---|
| Net Sales | $179,614 | $168,634 | $369,915 | $344,014 |
| Gross Profit | $90,654 | $80,646 | $188,616 | $166,558 |
| Gross Margin % | 50.47% | 47.82% | 50.99% | 48.42% |
| Net Income | $3,745 | $2,137 | $9,895 | $7,035 |
| Diluted EPS (Common) | $0.16 | $0.10 | $0.43 | $0.32 |
| Cash & Equivalents (End of Period) | $21,835 | $31,591 | $21,835 | $4,295 |
| Operating Cash Flow (6 Mo) | $5,598 (2004) vs $22,992 (2003) | |||
| Total Debt (Current + Long-term) | $72,280 (June 30, 2004) |
Material Changes vs. Prior Period
- Sales Growth: Net sales increased 6.5% in Q2 2004 and 7.5% for the six-month period compared to 2003. Comparable store sales rose 2.6% in Q2 and 3.3% for the six months.
- Profitability: Net income increased 75% in Q2 and 41% for the six months. Gross margin improved by 86 basis points in Q2 on a comparable basis, driven by supply chain efficiencies and a higher mix of private-label "Havertys" branded merchandise (33.7% of sales vs 16.9% in 2003).
- Expense Management: Selling, General, and Administrative (SG&A) expenses were relatively flat as a percentage of sales on a comparable basis. Advertising costs increased slightly due to expanded newspaper inserts.
- Credit Portfolio: Credit service charge revenue declined as customers shifted to no-interest financing options. The percentage of sales financed dropped to 39.7% in Q2 2004 from 44.6% in 2003. Consequently, the allowance for doubtful accounts decreased to 3.9% of receivables from 4.5%.
- Liquidity: Cash and cash equivalents decreased by $9.8 million during the first six months of 2004, primarily due to a $12.1 million increase in inventory and a $12.2 million decrease in accounts payable.
Guidance, Outlook, and Risks
- Outlook: Management expects to add approximately 4% retail square footage in 2004. Planned capital expenditures for 2004 are $55.0 million for stores/distribution/IT and $20.1 million for lease asset purchases.
- Strategy: The Company plans to continue offering specially priced merchandise and competitive financing promotions to drive traffic, avoiding aggressive discounting that could harm its pricing integrity.
- Risks & Contingencies:
- Trade Duties: Preliminary anti-dumping duties on Chinese wooden bedroom furniture (4.9% to 10.9%) were imposed in June 2004. Management does not anticipate a negative margin impact due to sourcing flexibility and potential price adjustments.
- Accounting Changes: The Company adopted EITF 02-16, treating vendor allowances as a reduction of inventory costs rather than SG&A, impacting year-over-year comparability. Additionally, FIN 46 required the consolidation of a variable interest entity in late 2003, increasing debt and assets.
- Market Conditions: Risks include consumer confidence, economic conditions affecting big-ticket spending, and competition.
Investor Verification Checklist
- Inventory Valuation: Verify the impact of interim LIFO calculations and the $12.1 million inventory build-up against actual year-end valuations.
- Private Label Mix: Confirm the trajectory of "Havertys" branded sales reaching the projected 50% of total sales by year-end.
- Debt Covenants: Review the $80 million revolving credit facility terms and the impact of the $75.2 million unused capacity on future liquidity.
- Trade Duty Impact: Monitor the final determination of anti-dumping duties on Chinese imports in December 2004 and the Company's ability to pass costs to consumers.
- Comparable Sales Quality: Assess the sustainability of the 2.6% comparable store sales growth in a competitive retail environment.