Havertys Furniture Companies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Havertys is a single-segment retailer of residential furniture in the middle- to upper-middle-price ranges. The interim financial statements are unaudited and should be read with the 2016 Form 10-K.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $200.4 million | $194.5 million | +3.0% |
| Comparable-store sales | — | — | +1.6% |
| Gross profit | $109.6 million | $104.4 million | +5.0% |
| Gross margin | 54.7% | 53.7% | +100 basis points |
| Income before interest and taxes | $10.3 million | $8.2 million | +25.8% |
| Net income | $6.0 million | $4.7 million | +28.2% |
| Basic EPS—Common Stock | $0.28 | $0.21 | +$0.07 |
| Diluted EPS—Common Stock | $0.28 | $0.21 | +$0.07 |
| Operating cash flow | $5.8 million | $(4.8) million | +$10.5 million |
| Capital expenditures | $5.2 million | $9.0 million | $(3.8) million |
Net margin was approximately 3.0% in Q1 2017 versus 2.4% in the prior-year quarter. SG&A was $100.4 million, or 50.1% of sales, compared with 49.5% in Q1 2016. Interest expense declined to $0.6 million from $0.7 million. The effective tax rate was 38.5% in both periods.
At March 31, 2017, cash and cash equivalents were $61.5 million, restricted cash was $8.0 million, and total assets were $455.6 million. Total liabilities were $169.2 million and stockholders’ equity was $286.5 million. The company reported no funded debt and no borrowings under its $60.0 million revolving credit facility; net availability was $49.2 million. Lease obligations totaled $55.6 million, including current obligations.
Material changes versus the prior comparable period
- Sales increased 3.0%, while comparable-store sales increased 1.6%. Average written ticket rose 2.9% and custom-order upholstery sales increased 10.3%.
- Gross margin improved by 100 basis points, primarily from lower inbound freight on imported products, pricing and product mix, and reduced markdowns.
- SG&A increased $4.0 million, reflecting higher selling, occupancy, warehouse and delivery, advertising, compensation, and insurance costs. SG&A increased 60 basis points as a percentage of sales.
- Operating cash flow improved from a $4.8 million use to $5.8 million provided, primarily because of smaller reductions in accounts payable and accrued liabilities and favorable changes in other assets and liabilities.
- Inventory increased $6.2 million from December 31, 2016, mainly in preparation for factory shutdowns related to Chinese New Year. Customer deposits increased $2.3 million, while accounts payable and accrued liabilities declined $2.3 million and $4.2 million, respectively.
- Cash used in investing activities declined to $4.2 million from $9.0 million, primarily because of lower capital expenditures. Financing cash use increased to $3.6 million from $3.2 million, including higher dividends.
Guidance, outlook, risks, and unusual items
- Management expects full-year 2017 gross margin of approximately 53.9%. It expects inbound freight costs to rise in the second half of the year and anticipates a negative LIFO impact, primarily in the third and fourth quarters.
- Management expects full-year fixed and discretionary SG&A costs of approximately $259.0 million, compared with $250.0 million in 2016. Variable SG&A costs are expected to be approximately 18.1% of sales versus 18.2% in 2016.
- Planned 2017 capital expenditures are approximately $27.0 million. Store plans include a replacement in Lubbock, Texas, a new market in Greensboro, North Carolina, a replacement in Columbia, South Carolina, one planned closure, and expansion of the Western Distribution Center. Standard net selling space is expected to increase approximately 0.3%.
- The company recorded approximately $1.0 million of insurance recovery gains related to the damaged Lubbock store and approximately $0.2 million for business interruption and other expenses in Q1 2017. Minor additional amounts are expected in 2017.
- The company believes cash from operations, cash on hand, and available credit will fund working capital, dividends, stock repurchases, and planned capital projects. The board has authorized up to $10.0 million for additional common and Class A common stock repurchases after an immaterial prior authorization balance is used.
- Key risks include economic and housing-market conditions, consumer spending and preferences, competition, merchandise and energy costs, capital-expenditure timing, industry conditions, and execution of store and operating plans. Ordinary-course claims and legal proceedings are not expected to have a material adverse effect, according to management.
- ASU 2016-09 on share-based payments was adopted January 1, 2017 with no material impact. The company is assessing the future balance-sheet effect of the new lease standard, effective for Havertys in 2019, and does not expect the revenue-recognition standard effective in 2018 to materially affect financial condition, results, or liquidity.
Important facts for investors to verify
- Confirm that Q1 margin strength is sustainable after expected second-half freight increases and negative LIFO effects.
- Monitor SG&A growth, planned marketing activity, new-store occupancy costs, and the company’s ability to maintain operating leverage.
- Evaluate inventory growth, customer deposits, and working-capital seasonality following the Chinese New Year-related factory shutdowns.
- Track execution and spending against the approximately $27.0 million 2017 capital-expenditure plan and store-opening, replacement, closure, and distribution-center projects.
- Review the remaining Lubbock insurance recoveries and distinguish related gains from recurring operating performance.
- Assess liquidity after dividends, potential stock repurchases, lease obligations, and other contractual commitments; the filing reports no funded debt and $49.2 million of revolver availability at quarter-end.