HVT

Business Context and Reporting Period

Company: Haverty Furniture Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: The Company operates retail furniture stores, primarily in the Southeastern United States. The report covers the third quarter and the nine-month period ended September 30, 2000, compared to the same periods in 1999.

Key Financial Metrics

Note: 1999 figures are presented on a pro forma basis to reflect the change in revenue recognition accounting principle adopted in 2000.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 13.6% in Q3 and 14.0% for the nine months ended September 30, 2000, compared to pro forma 1999 results. Comparable-store sales (calculated on a billed basis) increased 10.1% for Q3 and 9.7% for the nine-month period.
• Profitability: Net income for the nine months decreased to $16.3 million from $18.5 million in 1999 (reported), but increased to $16.3 million from $17.3 million on a pro forma basis. The decrease in reported 1999 net income was due to a one-time cumulative effect of an accounting change of $3.4 million recorded in Q1 2000.
• Expense Management: Selling, general, and administrative (SG&A) expenses as a percentage of sales decreased to 40.4% in Q3 from 40.6% in the prior year. Interest expense as a percentage of sales also declined.
• Inventory Levels: Inventory increased significantly in the first two quarters of 2000 ($12.7 million in Q1, $1.1 million in Q2) but decreased by $2.7 million in Q3 as management adjusted levels in specific markets.
• Debt Structure: Borrowings under revolving credit facilities increased by $21.1 million during the nine-month period. Total debt levels rose, with 61.5% of total debt fixed or interest-rate protected as of September 30, 2000.

Guidance, Outlook, and Risks

• Accounting Change: The Company changed its revenue recognition method effective January 1, 2000, to recognize sales upon delivery rather than at the point of sale (billed basis). This change resulted in a $3.4 million reduction to net income in Q1 2000.
• Margin Outlook: Management anticipates gross margins will improve somewhat in the fourth quarter, which is historically the strongest quarter of the year.
• Capital Expenditures: Estimated capital expenditures for the fourth quarter of 2000 are approximately $15 million, including construction for new stores opening in 2001 and land purchases.
• Liquidity: The Company expects funds from operations, bank lines of credit, and other financing to be adequate for planned expenditures. Net cash provided by operating activities was $20.3 million for the first nine months.
• Risks: Key risks include the ability to maintain supplier relationships, availability of retail real estate, labor costs, general economic conditions affecting consumer confidence, and competition. The Company also noted the upcoming adoption of FAS 133 regarding derivative instruments in 2001, though management does not expect a material impact.

Investor Verification Checklist

• Revenue Recognition Impact: Verify the pro forma adjustments made to 1999 data to ensure accurate year-over-year comparisons, as the accounting change significantly altered the timing of revenue recognition.
• Inventory Turnover: Monitor the trend of inventory levels, which rose sharply in Q1/Q2 before declining in Q3, to assess potential overstocking or supply chain issues.
• Debt Servicing: Review the increase in revolving credit facility borrowings ($21.1 million) and the mix of fixed vs. variable rate debt to evaluate interest rate exposure.
• Comparable Store Sales: Note that comparable store sales are reported on a "billed" basis while financial statements are on a "delivered" basis; verify the consistency of this metric for future trend analysis.
• Capital Allocation: Confirm the execution of the $11.6 million stock repurchase program and the $23.7 million in capital expenditures against the company's growth strategy.