Havertys Furniture Companies, Inc. — Q3 2019 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 nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $209.3 million | $210.5 million | $588.5 million | $608.8 million |
| Gross profit | $112.0 million | $115.4 million | $318.7 million | $332.1 million |
| Gross margin | 53.5% | 54.8% | 54.2% | 54.6% |
| Income before interest and taxes | $7.9 million | $11.5 million | $20.2 million | $29.3 million |
| Net income | $6.1 million | $8.4 million | $15.8 million | $20.9 million |
| Diluted EPS, Common Stock | $0.31 | $0.39 | $0.77 | $0.98 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $58.4 million | $62.5 million |
SG&A was $104.2 million, or 49.8% of sales, in Q3 and $298.8 million, or 50.8% of sales, for the first nine months. The effective tax rate was 25.4% for the nine-month period. Cash and cash equivalents were $89.5 million at September 30, 2019, with total cash, cash equivalents and restricted cash of $96.2 million.
The company reported no funded debt and no borrowings under its revolving credit facility. The $60.0 million facility had $48.6 million of net availability at September 30, 2019. Lease liabilities totaled $184.3 million, including $29.3 million current and $155.0 million noncurrent, following adoption of the new lease accounting standard.
For the first nine months, investing activities used $10.2 million, including $12.4 million of capital expenditures. Financing activities used $31.8 million, including $11.2 million of dividends and $19.3 million of stock repurchases. Cash increased by $16.4 million during the period.
Material changes versus the prior comparable period
- Q3 sales declined 0.6%, while comparable-store sales declined 0.4%. Nine-month sales declined 3.3%, and comparable-store sales declined 2.4%.
- Q3 gross margin decreased 130 basis points to 53.5%, reflecting more aggressive promotions, product and freight cost increases, tariffs, LIFO impacts and markdowns.
- Nine-month net income declined 24.5% and diluted Common Stock EPS declined to $0.77 from $0.98.
- Nine-month SG&A dollars decreased $4.1 million, but SG&A as a percentage of sales increased to 50.8% from 49.8%.
- Operating cash flow decreased $4.1 million year over year, while capital expenditures decreased $5.8 million.
- The company adopted ASC 842 on January 1, 2019. The adoption added $183.5 million of right-of-use assets and $184.3 million of lease liabilities at September 30, 2019 and substantially changed balance-sheet presentation without materially affecting nine-month earnings or cash flow.
- Inventory declined $5.9 million, partly because supply-chain changes delayed receipt of certain goods. Customer deposits increased $10.4 million due to higher undelivered sales.
- The company repurchased $19.3 million of stock during the first nine months and paid higher per-share dividends than in 2018.
Guidance, outlook, commentary and risks
- Management expected full-year 2019 gross margin of approximately 54.1%, compared with 54.6% in 2018.
- Full-year fixed and discretionary SG&A was expected to be approximately $257.0 million to $258.0 million, versus $254.9 million in 2018. Variable SG&A was expected to be approximately 18.4% of sales, versus 18.3% in 2018.
- Full-year capital expenditures were estimated at approximately $18.5 million. Store plans were expected to increase net selling space by approximately 1.4% in 2019.
- Management cited production and vendor-supply difficulties while shifting certain products to alternative facilities. Average written ticket increased 4.7% and custom-order upholstery sales increased 13.9% in Q3.
- Management stated that cash generated from operations, cash on hand and available credit should be sufficient to fund operating needs, dividends, repurchases and planned capital projects.
- Principal risks include economic and housing-market conditions, competition, consumer spending and preferences, merchandise and energy costs, supplier disruptions, tariffs and retaliatory trade measures, capital-expenditure timing and operational changes.
- Ordinary-course legal claims were disclosed; management did not expect them to have a material adverse effect. The filing reported no off-balance-sheet arrangements.
- The credit facility maturity was extended to September 27, 2024 from March 31, 2021. Dividend payments may be restricted if unused availability falls below $12.5 million.
Important facts for investors to verify
- Whether sales and comparable-store trends improve after the reported sourcing and supply disruptions.
- Whether promotions, tariffs, freight costs, LIFO effects and merchandise markdowns continue to pressure gross margin.
- The pace of fixed-cost growth and its effect on operating leverage if sales remain weak.
- The composition, duration and cash requirements of the $184.3 million lease-liability balance.
- Actual availability and covenant compliance under the amended revolving credit facility.
- Progress against the approximately $18.5 million capital-expenditure plan and planned store openings or relocations.
- The sustainability of dividends and share repurchases relative to operating cash flow and future liquidity needs.