Havertys Furniture Companies, Inc. — 2022 Q2 Form 10-Q
Business Context and Reporting Period
Havertys is a single-segment retailer of residential furniture serving middle- to upper-middle-income customers through company-operated stores and its website. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Net sales | $253.2 million | $250.0 million | $492.2 million | $486.5 million |
| Gross profit | $146.6 million | $141.5 million | $287.6 million | $276.5 million |
| Gross margin | 57.9% | 56.6% | 58.4% | 56.8% |
| SG&A expense | $118.1 million | $112.4 million | $233.3 million | $222.2 million |
| SG&A as a percentage of sales | 46.7% | 45.0% | 47.4% | 45.7% |
| Income before income taxes | $28.7 million | $29.2 million | $54.4 million | $54.5 million |
| Net income | $21.7 million | $22.9 million | $41.1 million | $42.3 million |
| Diluted EPS — Common Stock | $1.27 | $1.21 | $2.37 | $2.25 |
Six-month operating cash flow was $26.3 million, compared with $57.6 million in 2021. Capital expenditures were $13.5 million, versus $10.9 million, and cash used in financing was $35.5 million, primarily reflecting $25.0 million of share repurchases and $8.8 million of dividends.
At June 30, 2022, cash and cash equivalents were $143.5 million, restricted cash was $6.7 million, and total liquidity including restricted cash was $150.2 million. Inventory was $134.1 million, up from $112.0 million at December 31, 2021. The company had no borrowings under its $60.0 million revolving credit facility; net availability was $47.1 million. Lease liabilities totaled $232.9 million, including current and noncurrent obligations.
Material Changes Versus Prior Comparable Period
- Q2 net sales increased 1.3% and comparable-store sales increased 1.1%. Six-month sales increased 1.2%.
- Written business declined 13.3% in Q2, while written business remained 23.2% above the comparable 2019 period.
- Upholstery sales increased 8.7% in Q2, while case-goods sales declined 5.2%; case goods represented 34.3% of sales versus 36.7% in the prior-year quarter.
- Gross margin improved 130 basis points in Q2, primarily from pricing discipline and merchandise mix.
- SG&A increased 5.1% in Q2, driven by higher selling, distribution and delivery, occupancy, compensation, and fuel costs. SG&A as a percentage of sales increased 170 basis points.
- Net income declined 5.0% in Q2 and 2.8% for the first six months, despite higher sales and gross profit.
- Operating cash flow declined $31.3 million for the first six months, primarily due to changes in customer deposits, inventory, accounts payable, and accrued liabilities.
- The company repurchased 899,890 shares for approximately $25.0 million during the first six months. Substantially all funds under the current authorization had been used by June 30, 2022.
Guidance, Outlook, Risks, and Unusual Items
- Management expects 2022 gross margin of approximately 57.7% to 58.0%.
- Full-year variable SG&A is expected to be 18.2% to 18.4% of sales, and fixed and discretionary expenses are expected to be approximately $293.0 million to $295.0 million.
- Full-year capital expenditures are expected to be approximately $32.0 million. Net selling space is expected to be flat versus 2021.
- Management expects inflation, higher fuel costs, stock-market volatility, higher interest rates, recession concerns, supply-chain disruptions, and weaker discretionary spending to affect the second half of 2022.
- Product and freight cost inflation and supply-chain delays affected results; out-of-stock merchandise delivery times were approximately 8 to 12 weeks.
- Interim inventory results are subject to change because LIFO calculations depend on estimated inventory levels and inflation rates.
- The company reported no pending legal proceedings expected to have a material adverse effect, although ordinary-course claims and future litigation remain possible.
- Management stated that liquidity, operating cash flow, credit availability, and access to debt markets should fund operations, capital expenditures, dividends, and lease obligations for the next several years.
- No material changes were reported to previously disclosed risk factors, market-risk exposure, or internal controls. Disclosure controls were deemed effective.
Investor Verification Points
- Verify whether the improvement in gross margin can offset persistent increases in delivery, labor, occupancy, fuel, freight, and other SG&A costs.
- Monitor written sales, store traffic, customer deposits, inventory availability, and delivery times for evidence of demand or supply-chain deterioration.
- Reconcile operating cash flow with changes in inventory, customer deposits, accounts payable, and accrued liabilities.
- Assess the effect of inflation, interest rates, recession risk, and other pressures on discretionary furniture spending.
- Confirm execution of the $32.0 million capital-expenditure plan and the planned store openings, closures, and relocations.
- Review the impact of share repurchases and dividends on cash balances, liquidity, and per-share results.
- Consider potential changes to interim LIFO estimates and related effects on gross margin and inventory valuation.