HVT

Haverty Furniture Companies, Inc. - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, and the six months ended on that date. Haverty Furniture Companies, Inc. operates retail stores selling home furnishings. The company reported a net income of $2.1 million for the quarter and $7.0 million for the six-month period, down from the prior year.

Key Financial Metrics

Note: Debt figures represent total borrowings including capital leases. Q2 2002 debt figures are not explicitly stated in the text but average debt decreased 46% year-over-year.

Material Changes vs. Prior Period

• Revenue: Net sales increased 2.3% in Q2 2003 compared to Q2 2002, driven by new store openings. However, comparable-store sales declined 2.2% in Q2 2003.
• Profitability: Net income decreased 43% in Q2 2003 ($2.1M vs $3.7M) and 33% for the six-month period. This decline was driven by higher Selling, General, and Administrative (SG&A) expenses and lower credit service charges.
• Expenses: SG&A expenses rose 7.8% year-over-year due to occupancy costs, warehouse/delivery expenses, and insurance. The company completed the roll-out of its Eastern distribution center, vacating 13 local warehouses.
• Credit Revenue: Credit service charges dropped significantly ($1.6M in Q2 2003 vs $2.2M in Q2 2002) as customers shifted to no-interest financing promotions.
• Liquidity: Accounts receivable decreased 11.6% from the prior year-end due to the outsourcing of credit programs and collection efforts.

Outlook, Risks, and Unusual Items

• Accounting Change (FIN 46): Effective July 1, 2003, the company will consolidate a Variable Interest Entity (VIE) related to its Dallas distribution center and three retail locations. This will increase reported property and equipment by approximately $26 million and long-term borrowings by $20.7 million.
• Guidance: Management expects capital expenditures of approximately $9.5 million for the remainder of 2003 and $34.0 million for 2004. Retail square footage is expected to grow by approximately 3% in 2003.
• Risks: Management cites weak consumer confidence, employment uncertainty, and geopolitical unrest as headwinds. The company faces risks related to supply chain disruptions for imported goods and the ability to maintain supplier relationships.
• Unusual Items: Inventory markdowns associated with the closure of 13 local market warehouses negatively impacted margins in Q2 2003. Additionally, in-house credit promotions with interest-free periods exceeding 12 months reduced margins by approximately 35 basis points.

Investor Verification Checklist

• FIN 46 Consolidation Impact: Verify the impact of the July 1, 2003 consolidation of the Dallas VIE on the balance sheet, specifically the addition of $20.7 million in debt and $26 million in assets.
• Comparable Store Sales: Monitor the trend of comparable-store sales, which declined 2.2% in Q2 2003 despite total sales growth, indicating potential market saturation or competitive pressure.
• Credit Program Transition: Assess the long-term profitability impact of outsourcing credit programs, which has reduced credit service revenue but also lowered bad debt risk and receivables.
• Inventory Levels: Review inventory turnover given the 2.4% increase in inventory levels and the shift toward imported goods with longer lead times.
• Capital Expenditures: Confirm the execution of the planned $34 million capital expenditure budget for 2004, which includes new store openings and distribution infrastructure.