Business Context and Reporting Period
Haverty Furniture Companies, Inc. is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers through company-operated Havertys stores. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $187.2 million | $199.4 million | Down 6.1% |
| Comparable-store sales | Down 4.7% | Down 1.1% | Declined further |
| Gross profit | $103.1 million | $108.9 million | Down 5.4% |
| Gross margin | 55.1% | 54.6% | Up 44 basis points |
| Income before interest and taxes | $4.4 million | $8.9 million | Down 51.0% |
| Net income | $3.6 million | $6.3 million | Down 42.6% |
| Net margin | 1.9% | 3.2% | Down approximately 1.2 percentage points |
| Diluted EPS, Common Stock | $0.17 | $0.29 | Down $0.12 |
| Cash flow from operations | $5.4 million | $7.3 million | Down $1.9 million |
| Capital expenditures | $3.8 million | $7.1 million | Down $3.4 million |
Cash, cash equivalents and restricted cash totaled $79.5 million at March 31, 2019, compared with $80.2 million at March 31, 2018. Cash and cash equivalents alone were $73.0 million at March 31, 2019. The company had no funded debt and no borrowings outstanding under its $60.0 million revolving credit facility; net availability was $50.0 million and the facility matures March 31, 2021.
Operating lease liabilities totaled $186.3 million at March 31, 2019, including $28.8 million current and $157.5 million noncurrent. The balance sheet also included $188.4 million of right-of-use lease assets. The company reported no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Sales decreased $12.2 million, reflecting a 4.7% comparable-store sales decline. Average written ticket increased 6.9%, while custom-order upholstery written business increased 8.2%.
- Upholstery sales declined 10.7%, while mattress sales increased 8.0%. Case-goods sales declined approximately 6.6%.
- Gross margin improved to 55.1% from 54.6%, partly because the prior-year period was negatively affected by promotions and markdowns related to store closures and remodels.
- SG&A expense decreased $2.1 million to $98.9 million, but increased to 52.8% of sales from 50.6% because sales declined faster than expenses. Selling and delivery costs decreased $1.8 million, marketing and advertising increased $0.5 million, and occupancy costs decreased $0.9 million.
- Other income was $0.2 million in Q1 2019 versus $1.0 million in Q1 2018; the prior-year amount included approximately $0.9 million of real estate-sale gains and insurance recoveries.
- Operating cash flow decreased primarily because of lower net income and less favorable changes in other assets and liabilities, partly offset by a larger increase in customer deposits.
- The company adopted the new lease accounting standard on January 1, 2019 using the modified retrospective method without restating comparative periods. The adoption added substantial lease assets and liabilities and produced a $6.8 million cumulative equity credit, but had an immaterial effect on Q1 2019 income and cash flow.
Guidance, Outlook, Risks and Unusual Items
- Management expects full-year 2019 gross margin of approximately 54.6%, consistent with 2018.
- Normal fixed and discretionary SG&A is expected to be approximately $258.0 million to $260.0 million in 2019, compared with $254.9 million in 2018. Variable SG&A is expected to be approximately 18.1% of sales versus 18.3% in 2018.
- Management estimates 2019 capital expenditures of approximately $19.0 million and expects net selling space to increase approximately 2.0%. Planned activity includes new or relocated stores in Newnan, St. Louis, an additional new market, and Baton Rouge.
- Management believes cash generated from operations, cash on hand and available credit will fund working capital, contractual obligations, taxes, dividends, potential stock repurchases and planned capital projects.
- Key identified risks include economic and housing-market conditions, consumer spending and preferences, competition, merchandise and energy costs, supplier disruptions, tariffs and retaliatory trade measures, capital-expenditure timing, and operational rationalization.
- Legal claims arise in the ordinary course of business; management believes any resulting liability will not materially affect financial condition, results of operations or cash flows.
- The company paid dividends of $0.18 per Common Stock share and $0.17 per Class A share during the period. The board has authorized up to $15.0 million of additional common-stock and Class A stock repurchases after use of approximately $1.3 million remaining under a prior authorization.
Important Facts for Investors to Verify
- Whether sales and comparable-store trends improve after the Q1 declines, particularly in upholstery and case goods.
- Whether the expected 54.6% full-year gross margin is achieved without elevated promotional activity or markdowns.
- The effect of higher fixed and discretionary SG&A, new-store openings and planned capital expenditures on operating leverage and cash flow.
- The company’s substantial operating lease commitments, including $240.1 million of undiscounted future minimum payments disclosed at March 31, 2019.
- Availability and covenant compliance under the $60.0 million revolving credit facility, including the dividend limitations tied to unused availability.
- The impact of tariffs, supplier disruptions and broader housing and consumer-spending conditions on merchandise costs and demand.
- Interim LIFO inventory estimates, which are subject to change based on final year-end inventory valuations.