Havertys Furniture Companies, Inc. — Q3 2020 Form 10-Q Summary
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 online channels. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
COVID-19 materially disrupted operations. All 120 stores closed March 19, deliveries stopped March 21, 103 stores reopened May 1, and the remaining 17 reopened by June 20. Delivery operations resumed May 5.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $217.5 million | $209.3 million | $506.9 million | $588.5 million |
| Gross profit | $122.2 million | $112.0 million | $281.4 million | $318.7 million |
| Gross margin | 56.2% | 53.5% | 55.5% | 54.2% |
| SG&A expense | $100.1 million | $104.2 million | $270.3 million | $298.8 million |
| Income before interest and taxes | $24.5 million | $7.9 million | $45.4 million | $20.2 million |
| Net income | $18.3 million | $6.1 million | $33.7 million | $15.8 million |
| Diluted EPS, Common Stock | $0.97 | $0.31 | $1.77 | $0.77 |
| Operating cash flow | Not separately provided | Not separately provided | $99.8 million | $58.4 million |
Q3 net sales increased 3.9%, while comparable-store sales increased 4.0%. Written sales increased 22.8% and written comparable-store sales increased 22.6%. For the nine-month period, net sales declined 13.9% because of store closures and delivery interruptions during the first half of the year.
Q3 SG&A represented 46.0% of sales versus 49.8% in the prior-year quarter. Q3 net margin was approximately 8.4%, compared with approximately 2.9% in Q3 2019; the filing does not present net margin as a reported metric.
Cash Flow, Debt, Liquidity and Balance Sheet
- Cash, cash equivalents and restricted cash totaled $218.6 million at September 30, 2020, compared with $82.4 million at December 31, 2019. Cash and cash equivalents alone were $211.8 million.
- Operating activities generated $99.8 million in the first nine months, primarily aided by a $58.3 million increase in customer deposits and a $13.9 million inventory reduction.
- Investing activities provided $67.2 million, including proceeds from the sale-leaseback transaction, versus $10.2 million used in the prior-year period.
- Financing activities used $30.9 million, including $10.3 million of dividends and $19.7 million of share repurchases.
- The company temporarily borrowed $43.8 million under its $60.0 million revolving credit facility in March and repaid the balance in June. No borrowings were outstanding at September 30, 2020; borrowing-base availability was $14.6 million.
- The credit facility matures September 27, 2024 and includes covenants that can restrict dividends if unused availability falls below $12.5 million.
- Total assets were $699.4 million and stockholders’ equity was $267.4 million at September 30, 2020. Lease liabilities increased by approximately $61.5 million, primarily from the sale-leaseback.
Material Changes Versus Prior Comparable Period
- Q3 gross margin expanded 270 basis points, primarily due to merchandise pricing and mix, lower markdowns and a smaller negative LIFO impact.
- Q3 SG&A decreased $4.1 million, driven mainly by lower advertising, travel and meeting costs, and reduced workforce-related expenses; higher commissions and incentive compensation partially offset the savings.
- Nine-month SG&A declined $28.5 million, reflecting store closures, furloughs, workforce reductions and cost controls.
- The company recorded a $31.6 million gain in May 2020 from selling three properties and leasing them back under 15-year operating leases. The transaction generated $70.0 million of gross proceeds and was the primary driver of the $34.3 million of other income recorded for the nine-month period.
- Customer deposits increased to $88.4 million from $30.1 million, reflecting higher undelivered sales.
- Property and equipment decreased to $109.7 million from $156.5 million, while right-of-use lease assets increased to $235.8 million from $175.5 million.
- The company repurchased 614,054 shares during Q3 for approximately $12.9 million. Approximately $16.8 million remained available under the repurchase authorization at September 30, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expected Q4 2020 gross margin to be comparable to Q3 levels, based on current product and freight cost estimates and anticipated LIFO reserve changes.
- Q4 variable SG&A was expected to be approximately 17.8% of sales versus 18.2% in Q4 2019. Fixed and discretionary expenses were expected to be approximately $67 million to $69 million versus $69.6 million in the prior-year quarter.
- Capital expenditures for 2020 were estimated at approximately $11.4 million, and net selling space was expected to be slightly below 2019 levels. A new Myrtle Beach, South Carolina location was planned for Q1 2021.
- Management stated that liquidity was sufficient to finance operations and expected capital requirements for at least 12 months if business continuity measures needed to be reinstated.
- Demand recovered strongly after reopening, but demand exceeded product availability in certain categories. Supplier capacity, raw-material shortages, distribution constraints and higher freight costs remained concerns.
- COVID-19 risks include renewed store closures or operating restrictions, volatile consumer demand, supply-chain disruption, labor shortages, increased safety costs, liquidity pressure, covenant compliance issues and potential impairment or financing costs. The company could not reasonably estimate the pandemic’s duration or ultimate financial impact.
- The company permanently reduced its workforce by approximately 1,200 employees effective April 30 and furloughed approximately 730 additional employees until June 1. Severance costs were approximately $1.7 million.
- The company received rent deferrals and abatements related to COVID-19; the filing states that their recognition had no material impact on the September 30 financial statements.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether strong written sales convert to recognized revenue as delivery capacity and product availability normalize.
- The sustainability of the elevated gross margin and whether freight, sourcing and LIFO costs pressure future margins.
- The extent to which customer deposits represent future delivery obligations and potential working-capital requirements.
- Actual borrowing-base availability and compliance with the revolving credit facility’s covenants, particularly if COVID-19 disruptions recur.
- The recurring earnings impact of the $31.6 million sale-leaseback gain, which is non-recurring, and the future lease expense associated with the properties.
- Whether supply-chain constraints, labor shortages, renewed COVID-19 restrictions or changes in consumer demand affect sales, fulfillment and liquidity.
- The company’s ability to maintain dividends and share repurchases while preserving liquidity.