HAVERTY FURNITURE COMPANIES INC quarterly report, Q3 FY2023

Havertys Furniture Companies, Inc. — Q3 2023 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 quarterly report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.

Financial Performance and Position

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Net sales	$220.3 million	$274.5 million	$651.4 million	$766.7 million
Gross profit	$134.0 million	$156.7 million	$391.7 million	$444.3 million
Gross margin	60.8%	57.1%	60.1%	58.0%
Income before interest and taxes	$21.2 million	$32.1 million	$50.5 million	$86.3 million
Net income	$17.2 million	$24.6 million	$41.3 million	$65.6 million
Diluted EPS, Common Stock	$1.02	$1.46	$2.46	$3.83

Q3 SG&A was $112.7 million, or 51.1% of sales, versus 45.4% in the prior-year quarter. Nine-month SG&A was $341.1 million, or 52.4% of sales, versus 46.6%.
Net interest income increased to $1.7 million in Q3 and $3.7 million for nine months, compared with $0.5 million and $0.7 million, respectively, in 2022.
Effective tax rate was 23.8% for the nine months ended September 30, 2023, versus 24.6% in 2022.
Cash and cash equivalents were $134.3 million, with restricted cash of $7.0 million, at September 30, 2023.
Net cash provided by operating activities was $79.4 million for the first nine months, compared with $38.2 million in 2022. Capital expenditures were $46.4 million versus $22.1 million.
Cash used in financing activities was $21.6 million, including $14.3 million of dividends, $3.2 million of share repurchases, and $4.1 million of taxes on vested restricted shares.
The company had no borrowings under its $80.0 million revolving credit facility, which matures October 24, 2027. Net availability was $80.0 million at quarter-end.
Total assets were $676.7 million and stockholders’ equity was $316.4 million at September 30, 2023. Total liabilities were $360.3 million, substantially including operating lease liabilities.

Material Changes Versus the Prior Comparable Period

Q3 net sales declined 19.7%, and comparable-store sales declined 20.7%. Nine-month sales declined 15.0%, while nine-month comparable-store sales declined 15.8%.
Management attributed weaker demand to inflationary pressures, stock market volatility, and higher interest rates affecting discretionary spending.
Written business declined 11.5% in Q3, and written comparable-store sales declined 12.6%. The company’s design service generated 29.0% of written business versus 25.2% in the prior-year quarter, while average ticket increased 4.3%.
Gross margin improved 370 basis points in Q3, primarily from lower freight and product costs. The LIFO reserve change contributed a $2.3 million benefit in 2023 versus a $2.5 million charge in 2022.
Despite lower SG&A dollars, SG&A as a percentage of sales increased because sales declined faster than expenses. The company reported lower selling, warehouse and delivery, advertising, and administrative costs.
Operating cash flow increased by $41.2 million year over year, primarily due to working-capital changes, including lower inventory and backlog-related customer deposits.
Capital spending increased, including the approximately $28.2 million purchase of the Lakeland, Florida distribution facility in May 2023.

Guidance, Outlook, Risks, and Unusual Items

Management expects full-year 2023 gross margin of 60.0% to 60.2%.
Expected 2023 variable SG&A is 19.6% to 19.8% of sales; fixed and discretionary SG&A is expected to be approximately $286.0 million to $288.0 million.
Full-year 2023 capital expenditures are estimated at approximately $55.0 million, depending on project timing.
Planned store activity and other changes are expected to increase net selling space by approximately 0.6% in 2023. Four locations secured from the Bed Bath & Beyond bankruptcy are expected to open in the first half of 2024.
The company purchased its Florida distribution center and entered into an early termination agreement for a retail lease; these transactions reduced right-of-use assets and lease liabilities by approximately $16.0 million.
The company believes cash, operating cash flow, credit availability, and access to capital markets will fund operations, capital expenditures, dividends, and lease obligations for the next several years.
Key risks include continued pressure on discretionary consumer spending, inflation, interest rates, market volatility, promotional cadence, freight and product costs, lease obligations, and inventory valuation estimates. Interim LIFO results may change based on the final year-end valuation.
The company reports ordinary-course legal claims, including product liability and personal injury matters, but does not believe any pending matter is reasonably likely to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Management concluded that disclosure controls were effective as of September 30, 2023, with no material changes to internal control over financial reporting.

Facts Investors Should Verify

Whether the sharp decline in comparable-store and written sales stabilizes and whether higher design-service penetration and average ticket offset lower customer traffic.
Whether the projected 60.0%–60.2% gross margin is achieved after final LIFO calculations and changes in freight, product costs, and promotions.
Whether SG&A can be reduced sufficiently to restore operating leverage at lower sales volumes.
The pace and return on the Lakeland distribution-center investment, planned 2024 store openings, and other capital expenditures.
The sustainability of operating cash flow given changes in inventory, customer deposits, vendor payments, and the reduced order backlog.
Future share repurchases and dividend payments relative to cash generation, lease obligations, and the $80.0 million undrawn credit facility.