Business Context and Reporting Period
Haverty Furniture Companies, Inc. is a retailer of residential furniture in the middle- to upper-middle price ranges. The company operates one reportable segment and sells exclusively through company-operated Havertys stores. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $181.7 million | $186.1 million | Down 2.3% |
| Comparable-store sales | Down 0.9% | Up 11.5% | Declined 12.4 percentage points |
| Gross profit | $97.9 million | $100.3 million | Down 2.4% |
| Gross margin | 53.8% | 53.5% reported | Up 30 basis points, excluding a 2013 adjustment |
| Income before taxes | $10.0 million | $13.5 million | Down 26.0% |
| Net income | $6.1 million | $8.3 million | Down 25.8% |
| Net margin | 3.4% | 4.4% | Down approximately 1.1 percentage points |
| Diluted EPS, Common Stock | $0.27 | $0.36 | Down $0.09 |
| Cash flow from operations | $8.4 million | $5.4 million | Up $3.1 million |
| Capital expenditures | $4.5 million | $4.0 million | Up $0.5 million |
Cash and cash equivalents were $84.5 million at March 31, 2014, compared with $83.2 million at December 31, 2013. Restricted cash was $8.0 million, primarily collateral for workers’ compensation obligations. Total assets were $421.8 million and stockholders’ equity was $303.6 million.
The company had no funded debt and no borrowings under its $50.0 million revolving credit facility. Net availability was $43.8 million after a $6.2 million reduction related to the fixed-charge coverage ratio test. Lease obligations totaled $16.9 million, including current obligations.
Material Changes Versus the Prior Comparable Period
- Sales declined $4.4 million, primarily reflecting severe winter weather that affected approximately 75% of locations. The 30 southernmost locations not affected by the weather generated a 7.3% comparable-store sales increase.
- The average written ticket increased 5.1%, supported by product mix and the in-home design program. Written business in custom upholstery increased 11.0%.
- Gross margin improved to 53.8%, aided by a greater mix of upper-middle price-point products, pricing discipline and favorable inbound ocean freight costs.
- SG&A increased $1.0 million. Advertising and marketing costs rose $0.6 million, while warehouse and delivery costs increased $0.9 million due to personnel, insurance and storm-related disruption. Administrative costs declined $0.4 million.
- Operating cash flow increased to $8.4 million, primarily due to a $5.7 million increase in customer deposits and favorable changes in other assets and liabilities, partly offset by higher inventories and lower earnings.
- Dividends paid increased to $1.8 million from $0.9 million, reflecting the doubling of the dividend per share.
- Q1 2013 included a non-cash, out-of-period vendor pricing-allowance adjustment that increased gross profit by $0.8 million, or $0.02 per diluted share after tax. Management determined the adjustment was immaterial to full-year 2013 results.
Guidance, Outlook, Risks and Unusual Items
- Management expects full-year 2014 gross margin of approximately 53.8%, excluding the effect of future LIFO changes in landed merchandise costs.
- Fixed and discretionary SG&A expenses are expected to be approximately $231 million to $234 million in 2014, compared with $224 million in 2013. Variable SG&A is expected to be 17.0% to 17.2% of sales.
- Planned 2014 capital expenditures are $35.0 million. The company expects to open six locations, complete one major expansion, relocate three stores and close two stores at lease expiration, potentially increasing the store count to 120 and selling square footage by approximately 1.8%.
- Management believes operating cash flow and existing cash will fund obligations, dividends, stock repurchases and planned capital projects. The company also has the undrawn revolving facility described above.
- Key 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 claims and legal proceedings but expects any resulting liability not to materially affect financial condition, results of operations or cash flows.
- Interim LIFO inventory calculations are estimated and may change based on the year-end valuation. Management reported no significant changes to critical accounting estimates.
- Disclosure controls were considered effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether weather-related sales weakness was temporary and whether comparable-store sales recovered in subsequent quarters.
- Whether the projected 53.8% gross margin and $231 million to $234 million SG&A range were achieved.
- Execution of the planned store openings, relocations, expansion and closures, including the expected 120-store footprint.
- Inventory growth, customer-deposit trends and the sustainability of improved operating cash flow.
- Availability and covenant-related reductions under the revolving credit facility.
- The effect of LIFO adjustments, freight costs, pricing decisions and product mix on future margins.
- The impact of higher dividends, planned capital expenditures and any stock repurchases on liquidity.
- Subsequent developments in ordinary-course litigation, insurance collateral requirements and pension obligations.