Business Context and Reporting Period
Haverty Furniture Companies, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016. The company operates as a specialty retailer of residential furniture and accessories, with 124 company-operated stores in 16 Southern and Midwestern states and approximately 4.5 million retail square feet. It also sells through havertys.com and provides customer delivery through its own distribution and delivery network.
The filing reports annual results; fourth-quarter information is included where relevant. Revenue is recognized when merchandise is delivered to customers.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $821.6 million | $804.9 million | Up 2.1% |
| Comparable-store sales | Up 2.1% | Up 2.5% | Decelerated |
| Gross profit | $443.3 million | $430.8 million | Up 2.9% |
| Gross margin | 54.0% | 53.5% | Up 50 basis points |
| SG&A expense | $399.2 million | $384.8 million | Up 3.7% |
| SG&A as a percentage of sales | 48.6% | 47.8% | Up 80 basis points |
| Income before taxes | $45.8 million | $45.3 million | Up 1.2% |
| Net income | $28.4 million | $27.8 million | Up 2.0% |
| Diluted EPS, common stock | $1.30 | $1.22 | Up 6.6% |
| Net cash from operating activities | $60.1 million | $52.2 million | Up $7.8 million |
| Capital expenditures | $29.8 million | $27.1 million | Up $2.7 million |
| Free cash flow | $30.2 million | $25.1 million | Up $5.1 million |
Fourth-quarter 2016 sales were $220.6 million, compared with $215.9 million in the prior-year quarter. Fourth-quarter pretax income increased to $17.3 million from $15.1 million, and net income increased to $10.9 million from $9.2 million.
Cash and cash equivalents totaled $63.5 million at year-end, down from $70.7 million. Inventory declined to $102.0 million from $108.9 million. Total debt of $55.5 million consisted entirely of lease obligations; the company had no borrowings under its revolving credit facility. The amended facility had a $60.0 million commitment, with reported net availability of $47.4 million after borrowing-base and covenant-related reductions.
Total assets were $454.5 million, total liabilities were $172.6 million, and stockholders’ equity was $281.9 million. Debt to total capital increased to 16.4% from 15.0%.
Material Changes Versus the Prior Comparable Period
- Sales growth slowed to 2.1% from 4.7% in 2015, while comparable-store sales growth declined to 2.1% from 2.5%.
- Gross margin improved primarily from product mix, pricing execution, and a favorable $1.9 million LIFO-related impact.
- SG&A grew faster than sales, reflecting higher administrative costs, medical insurance and compensation costs, depreciation, in-home design activity, and delivery expense.
- Operating cash flow and free cash flow improved, supported in part by a $6.9 million reduction in inventory.
- The company repurchased $21.3 million of stock and paid $30.4 million in dividends, including $21.0 million of special dividends. The board authorized up to $10.0 million of additional repurchases after the remaining prior authorization is used.
- The company opened four stores and closed one, ending the year with 124 stores. Online sales increased 38.7% and reached approximately the sales level of a single large store.
- 2016 included approximately $3.3 million of insurance-related gains associated with the damaged Lubbock, Texas store and approximately $0.7 million of gains on the sale of a former retail location.
Guidance, Outlook, Risks and Unusual Items
Management expects 2017 retail square footage to remain approximately flat, with a net increase of about 0.3%. Planned 2017 capital expenditures are approximately $26.9 million. Management expects gross margin of approximately 53.6%, citing product and transportation costs, an expected negative LIFO impact, and increased markdown merchandise. Fixed and discretionary SG&A is expected to be approximately $260.0 million to $261.0 million, while variable SG&A is expected to be approximately 18.1% of sales. Expected 2017 interest expense is approximately $2.3 million.
Management believes improving economic conditions, consumer spending, and housing activity could support results. Key initiatives include upgraded stores, new merchandise, expanded special-order and design services, targeted marketing, technology investments, and productivity improvements.
- Demand is sensitive to discretionary consumer spending, housing activity, interest rates, consumer confidence, household debt, and credit availability.
- The company faces intense competition from furniture specialists, national and regional chains, manufacturers’ stores, mass merchants, department stores, and e-commerce providers.
- Approximately 69% of furniture purchases, excluding mattresses, were for goods not produced domestically. Tariffs, trade policy, freight costs, foreign sourcing conditions, currency movements, and vendor pricing could pressure margins or availability.
- Supply-chain disruptions, import lead times, vendor quality issues, inventory forecasting errors, and transportation costs could reduce sales or profitability.
- The company depends on three major distribution centers, making operations vulnerable to damage or disruption at a facility.
- Cybersecurity, information-technology failures, privacy regulation, product safety issues, self-insurance claims, and changes in actuarial assumptions for the unfunded supplemental executive retirement plan represent additional risks.
- Operating lease commitments totaled $157.0 million, while recorded lease obligations and purchase orders brought total contractual obligations to $312.7 million at year-end.
- The company adopted deferred-tax classification guidance and disclosed that upcoming revenue-recognition and lease standards may affect future reporting. The lease standard is expected to have a significant balance-sheet impact because operating lease assets and liabilities will be recognized.
The company’s defined-benefit pension plan was terminated and settled in 2014; no future obligations remained for that plan at December 31, 2016. The supplemental executive retirement plan remained unfunded with a $7.7 million obligation.
Most Important Facts to Verify
- Whether the planned 2017 margin decline to approximately 53.6% occurs and whether LIFO, freight, tariffs, and markdowns materially affect profitability.
- Whether sales and comparable-store sales accelerate from the modest 2016 growth rate without a disproportionate increase in SG&A.
- Whether the company delivers the projected $26.9 million of 2017 capital expenditures and maintains positive free cash flow after dividends and repurchases.
- The effect of ongoing store relocations, closures, replacements, and the Lubbock rebuilding project on sales, insurance proceeds, and capital spending.
- Actual borrowing-base availability and covenant compliance under the revolving credit facility, despite no outstanding revolver borrowings.
- Exposure to foreign sourcing, tariffs, vendor concentration, transportation costs, and supply-chain delays.
- The eventual balance-sheet impact and implementation timing of the new lease accounting standard.