HVT

Haverty Furniture Companies, Inc. - 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Haverty Furniture Companies, Inc., a full-service home furnishings retailer operating under the Havertys brand. The report covers the quarterly period ended September 30, 2009, and the nine-month period ended on the same date. The company operates primarily in the southeastern United States and does not franchise its concept.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 13.5% in Q3 2009 and 19.5% for the nine months ended September 30, 2009, compared to the prior year. Comparable store sales declined 11.9% in Q3 and 19.1% year-to-date.
• Profitability: The company returned to profitability in Q3 2009 with a net income of $0.5 million, reversing a net loss of $1.5 million in Q3 2008. However, the nine-month period resulted in a net loss of $13.3 million, widening from a $2.8 million loss in the prior year.
• Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 15.7% in Q3 2009, outpacing the sales decline. This was driven by reduced advertising spend, lower delivery costs, and administrative cost cuts.
• Liquidity Improvement: Cash and cash equivalents increased significantly from $3.7 million at year-end 2008 to $46.1 million at September 30, 2009. This was driven by strong operating cash flow and a $6.6 million sale-leaseback transaction.
• Inventory Management: Inventories decreased by $15.6 million year-to-date as the company adjusted purchases to match weak sales demand.

Outlook, Risks, and Management Commentary

• Market Conditions: Management cites historically low housing sales, declining home values, tightened lending, and rising unemployment as primary drivers of reduced consumer spending. No significant rebound in demand is anticipated for the remainder of 2009 or 2010.
• Store Strategy: The company closed a store in Hattiesburg, MS, and completed a relocation in Little Rock, AR. Two additional stores (Albany, GA and Fredericksburg, VA) are scheduled to close in Q1 2010. No growth in retail square footage is expected in 2010.
• Capital Expenditures: Planned 2009 expenditures are $3.6 million. 2010 plans range from $8.0 million to $14.0 million for potential new/relocated stores and IT.
• Liquidity & Credit: The company has a $60 million revolving credit facility. While no amounts were borrowed as of September 30, 2009, net availability was $33.7 million due to a failure to meet a fixed charge coverage ratio test and outstanding letters of credit.
• Tax Position: A valuation allowance of approximately $18.0 million was recorded against deferred tax assets due to cumulative losses. The effective tax rate for the nine months ended September 30, 2009, was negative (2.5%) due to this allowance and state taxes based on gross margin.

Investor Verification Checklist

• Verify the sustainability of the Q3 2009 return to profitability given the continued 19.5% year-to-date sales decline.
• Confirm the impact of the fixed charge coverage ratio covenant breach on future borrowing availability under the $60M credit facility.
• Monitor the execution of planned store closures in Q1 2010 and the associated costs or lease termination liabilities.
• Assess the adequacy of the $1.1 million allowance for doubtful accounts given the 6.6% ratio to receivables and the economic environment.
• Review the timeline for the potential rebound in housing sales and consumer confidence as cited by management.