Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture in the middle- to upper-middle price ranges, operating all stores under the Havertys brand. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $224.8 million | $238.9 million | Down 5.9% |
| Gross profit | $132.8 million | $141.0 million | Down 5.8% |
| Gross margin | 59.1% | 59.0% | Up 10 basis points |
| Income before interest and taxes | $14.4 million | $25.6 million | Down 43.7% |
| Net income | $12.4 million | $19.4 million | Down 36.0% |
| Diluted EPS, Common Stock | $0.74 | $1.11 | Down $0.37 |
| Cash flow from operations | $11.1 million | $20.6 million | Down $9.5 million |
- Net margin was approximately 5.5%, compared with approximately 8.1% in the prior-year quarter. Income before interest and taxes represented approximately 6.4% of sales, compared with 10.7%.
- SG&A increased 2.8% to $118.4 million and rose to 52.7% of sales from 48.2%. Higher selling, occupancy and administrative costs were partly offset by lower warehouse and delivery costs.
- Interest income increased to $1.0 million from $0.1 million. The effective tax rate declined to 19.9% from 24.7%.
- Cash, cash equivalents and restricted cash totaled $127.0 million at March 31, 2023, including $120.2 million of unrestricted cash and $6.9 million of restricted cash, compared with $129.9 million at December 31, 2022.
- Inventories were $114.3 million, down from $118.3 million at year-end 2022. Customer deposits were $46.4 million, down from $48.0 million.
- The company had no borrowings under its $80.0 million revolving credit facility. Net availability was $80.0 million, with a $125.7 million borrowing base; the facility matures October 24, 2027.
- Total lease liabilities were approximately $222.0 million, consisting of $36.2 million current and $185.9 million noncurrent liabilities.
- Capital expenditures were $6.7 million. Dividends paid were $4.5 million, and no common stock was repurchased during the quarter.
Material Changes Versus the Prior Comparable Period
- Comparable-store sales declined 6.7%, and written business declined 11.7%. Management cited inflation, stock market volatility and higher interest rates as pressures on discretionary spending.
- Written business remained 10.9% above the comparable first quarter of 2019, while written comparable-store sales were 6.9% above 2019.
- Average ticket increased 4.1%, and designer sales increased to 26.0% of written business from 23.0%.
- Upholstery sales declined to $95.8 million from $111.2 million, while case goods increased to $79.3 million from $74.2 million. Mattress sales declined to $18.4 million from $19.7 million.
- Operating cash flow decreased primarily because of lower net income, reduced customer deposits as the backlog declined and the timing of vendor payments.
- Cash used in financing activities declined to $7.3 million from $17.3 million, primarily because the company repurchased $12.5 million of stock in Q1 2022 but none in Q1 2023.
Guidance, Outlook, Risks and Unusual Items
- Management expects full-year 2023 gross margin of 58.5% to 59.0%, variable SG&A of 19.5% to 19.7% of sales, and fixed and discretionary SG&A of approximately $289 million to $292 million.
- Total 2023 capital expenditures are estimated at $53.1 million, including the planned $28.2 million acquisition of the Lakeland, Florida distribution facility. The transaction was expected to close in the second quarter of 2023.
- Store plans include a Durham, North Carolina opening in Q1 2023; planned openings in Charlotte, Dayton and Richmond; and an Atlanta outlet closure. Planned activity is expected to increase net selling space approximately 1.6% in 2023.
- Supply-chain disruptions continue to affect inventory availability, with out-of-stock merchandise delivery times of 8 to 12 weeks.
- Interim inventory valuation uses estimated LIFO indices and inflation rates; year-end LIFO calculations could change reported interim results.
- Management believes cash, operating cash flow, credit availability and access to debt markets should fund operating needs, capital expenditures, dividends and lease obligations for the next several years.
- The company reported no pending legal claims or proceedings expected to have a material adverse effect, but ordinary-course product liability and personal injury claims remain possible. Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether declining comparable-store and written sales persist amid inflation, interest-rate pressure and weaker discretionary spending.
- Whether the company achieves its 2023 gross-margin and SG&A guidance while maintaining pricing discipline.
- The timing, funding and final cost of the $28.2 million Lakeland distribution facility acquisition and the broader $53.1 million capital-expenditure plan.
- Inventory availability, delivery times and the potential effect of final year-end LIFO calculations.
- Cash generation relative to dividends, lease obligations, planned capital spending and any future share repurchases.
- The company’s ability to preserve liquidity without drawing on the revolving credit facility, which had no outstanding borrowings at quarter-end.