Business Context and Reporting Period
Company: Haverty Furniture Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: The Company operates retail stores selling home furnishings. The report covers the third quarter and the nine months ended September 30, 2003, comparing results to the same periods in 2002.
Key Financial Metrics
| Metric (in thousands) | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Net Sales | $195,352 | $175,680 | $539,366 | $515,525 |
| Gross Profit | $95,817 | $84,636 | $262,375 | $247,050 |
| Gross Margin % | 49.1% | 48.2% | 48.6% | 47.9% |
| Net Income | $7,397 | $5,909 | $14,432 | $16,381 |
| Diluted EPS | $0.33 | $0.27 | $0.65 | $0.74 |
| Operating Cash Flow (9mo) | $55,111 (2003) vs $68,136 (2002) | |||
| Cash & Equivalents | $18,296 (Sep 30, 2003) vs $3,764 (Dec 31, 2002) | |||
| Total Debt | $67,712 (Sep 30, 2003) vs $82,498 (Dec 31, 2002) |
Material Changes vs. Prior Period
- Sales Growth: Net sales increased 11.2% in Q3 2003 and 4.6% for the nine-month period compared to 2002. Comparable-store sales increased 6.1% in Q3 2003, reversing a decline in the prior year.
- Profitability: Q3 net income rose 25.2% year-over-year. However, nine-month net income decreased 11.9% due to higher expenses in the first half of the year.
- Margin Expansion: Gross profit margin improved by 90 basis points in Q3 2003, driven by a higher mix of private-label "Havertys" branded merchandise (increasing from 30% to 35% of core furniture).
- Expense Management: Selling, General, and Administrative (SG&A) expenses as a percentage of sales decreased to 43.7% in Q3 2003 from 45.2% in Q3 2002, aided by the completion of the Eastern distribution center rollout.
- Balance Sheet Strength: Cash and cash equivalents increased significantly to $18.3 million. Total debt decreased by approximately 17.9% year-over-year.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that consumer confidence and housing sales are positive factors, though the industry remains competitive with aggressive promotional pricing by peers.
- Strategy: The Company is focusing on "everyday low pricing" rather than deep discounting, supplemented by financing promotions (e.g., 18-month deferred payment plans) to drive traffic.
- Capital Expenditures: CapEx for the remainder of 2003 is estimated at $5.0 million. For 2004, CapEx is projected at $58.0 million to fund five new stores, expansions, and distribution infrastructure.
- Accounting Risks (FIN 46): The Company leases a Dallas distribution center and three retail locations from a Variable Interest Entity (VIE). While currently not consolidated, new FASB rules (FIN 46) may require consolidation by December 31, 2003. If consolidated, this would increase reported debt by approximately $20.7 million and assets by $26.0 million.
- Credit Risk: Credit service charge revenue declined as customers opted for no-interest financing. The Company has outsourced a portion of its credit program, which increased SG&A costs but reduced bad debt risk.
Investor Verification Checklist
- VIE Consolidation Impact: Verify the final determination on the consolidation of the Dallas VIE under FIN 46 and its effect on the balance sheet and leverage ratios.
- SG&A Sustainability: Confirm if SG&A expense ratios will continue to improve in 2004 as the new distribution system is fully leveraged, offsetting the higher costs of outsourced credit programs.
- Inventory Management: Monitor inventory levels given the shift to 60% imported core merchandise, which involves longer lead times and potential supply chain disruptions.
- Debt Covenants: Review the terms of the $80 million revolving credit facility and the impact of the recent debt reduction on interest rate spreads.
- Comparable Store Sales: Track the sustainability of the 6.1% comp-store sales growth in Q3 against the backdrop of a strengthening economy and competitive promotions.