HAVERTY FURNITURE COMPANIES INC quarterly report, Q3 FY2012

Haverty Furniture Companies, Inc. — Q3 2012 Form 10-Q Summary

Business Context and Reporting Period

Havertys is a retailer of residential furniture serving middle- to upper-middle-income customers under a single brand. The company operates in one reportable segment: home furnishings retailing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.

Financial Performance and Position

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Net sales	$172.7 million	$155.4 million	$487.8 million	$452.6 million
Gross profit	$90.7 million	$80.4 million	$255.8 million	$232.8 million
Gross margin	52.5%	51.8%	52.4%	51.4%
Income before taxes	$5.6 million	$0.1 million	$13.4 million	$(1.5) million
Net income (loss)	$3.3 million	$0.1 million	$8.1 million	$(1.5) million
Net margin	1.9%	0.1%	1.7%	(0.3)%
Operating cash flow	Not separately provided	Not separately provided	$48.3 million	$30.1 million

Q3 net sales increased 11.1%, while comparable-store sales increased 10.0%. Nine-month net sales increased 7.8%, with comparable-store sales up 7.1%.
Average ticket increased approximately 11.6% in Q3 and 7.5% for the first nine months. Upholstery sales increased 20.9% in Q3 and 16.7% year to date.
SG&A was $85.1 million in Q3 and $242.7 million for nine months. SG&A declined to 49.3% and 49.8% of sales, respectively, from 51.8% in both comparable 2011 periods.
At September 30, 2012, cash and cash equivalents were $75.0 million, restricted cash was $7.0 million, and total current assets were $191.4 million. Cash increased $25.4 million from December 31, 2011.
Inventories declined to $84.5 million from $93.7 million at year-end 2011, while property and equipment increased to $187.0 million from $179.3 million.
The company reported no funded debt. Lease obligations totaled $13.3 million, including $0.8 million current and $12.4 million long term.
The $50.0 million revolving credit facility had no borrowings and no outstanding letters of credit. Reported net availability was $38.7 million after borrowing-base and fixed-charge-coverage adjustments.
Stockholders’ equity was $272.4 million, compared with $262.7 million at December 31, 2011.

Cash Flow, Capital Allocation, and Liquidity

Operating cash flow of $48.3 million exceeded capital expenditures of $20.2 million, producing strong internally funded liquidity.
Investing cash outflows were $19.9 million, including capital expenditures; financing cash outflows were $3.0 million, including $1.8 million of dividends, $0.2 million of treasury-stock purchases, and lease payments.
The company stated that expected operating cash flow and available cash should fund working capital, obligations, dividends, stock repurchases, and planned capital projects.
2012 planned capital expenditures were $25.0 million, including $19.8 million for stores and improvements and $4.1 million for information technology. 2013 planned expenditures were estimated at $20.0 million.

Material Changes Versus the Prior Comparable Period

Profitability improved materially: nine-month net income changed from a $1.5 million loss to $8.1 million of income.
Gross margin expanded by 70 basis points in Q3 and 100 basis points year to date, attributed primarily to a greater mix of upper-middle price-point products and pricing discipline.
SG&A leverage improved despite higher absolute expense. Q3 SG&A increased $4.6 million, and nine-month SG&A increased $8.4 million, but both declined as a percentage of sales.
Operating cash flow increased $18.2 million year over year, primarily because of improved earnings and higher accounts payable and accrued liabilities.
The company began primarily self-insuring employee group health care claims in 2012, increasing reliance on actuarial estimates for incurred-but-not-reported claims.
Customer deposits increased $7.1 million and accrued liabilities increased $6.9 million from year-end, reflecting seasonal timing, payment timing, and higher self-insurance reserves.
The company paid dividends in 2012 after paying none in the comparable 2011 period. Common Stock dividends were $0.0400 per share in Q3 and $0.080 year to date.

Guidance, Outlook, Risks, and Unusual Items

Management expected Q4 2012 gross margin to approximate the Q3 rate of 52.5%.
Q4 SG&A was expected to be higher in dollars than Q3 but lower as a percentage of sales. Fixed and discretionary expenses were estimated at approximately $55 million, with variable costs estimated at 17.8% of sales.
New stores opened in Baltimore and Midland, Texas. A Dallas store and an Atlanta replacement store were planned for Q4. The 2012 plans were expected to increase net selling square footage by approximately 2.5%.
2013 plans included one new store and three showroom expansions, although lease expirations could result in closures and an estimated 1.4% decrease in net selling square footage.
State tax audit settlements reduced gross uncertain tax positions to $0.6 million from $1.1 million at December 31, 2011. Settlements and related tax changes increased nine-month 2012 tax expense by approximately $88,000.
Interim LIFO inventory valuation is based on estimates and may change at year-end. Pension costs increased to $1.1 million for nine months from $0.8 million in 2011, partly because of higher amortization of actuarial losses.
Ordinary-course legal claims were not expected by management to have a material adverse effect. The company reported no off-balance-sheet arrangements.
Key forward-looking risks include economic and housing-market conditions, competition, merchandise and energy costs, capital-expenditure timing, new products, operational changes, and other risks described in the company’s Form 10-K.

Important Facts for Investors to Verify

Confirm that comparable-store sales momentum and higher average tickets continue without excessive promotional activity.
Monitor whether gross-margin expansion is sustained and whether the planned Q4 52.5% margin is achieved.
Assess the sustainability of improved SG&A leverage amid higher compensation, commissions, delivery, occupancy, and self-insurance costs.
Review borrowing-base and fixed-charge-coverage provisions that reduced revolver availability to $38.7 million despite no borrowings.
Track cash conversion, inventory levels, customer deposits, accrued liabilities, and capital spending as store expansion continues.
Evaluate the assumptions supporting self-insured healthcare reserves, pension obligations, interim LIFO valuation, and uncertain tax positions.