Haverty Furniture(HVT) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial information for Haverty Furniture Companies, Inc., covering financial statements and management's analysis Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, with detailed explanatory notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Cash and cash equivalents | $225,674 | $200,058 | $25,616 | 12.8% | | Inventories | $118,961 | $89,908 | $29,053 | 32.3% | | Total current assets | $378,521 | $316,244 | $62,277 | 19.7% | | Total assets | $763,760 | $680,372 | $83,388 | 12.3% | | Customer deposits | $120,149 | $86,183 | $33,966 | 39.4% | | Total current liabilities | $245,800 | $204,041 | $41,759 | 20.5% | | Total liabilities | $472,219 | $427,405 | $44,814 | 10.5% | | Total stockholders' equity | $291,541 | $252,967 | $38,574 | 15.2% | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income Highlights | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | YoY Change (in thousands) | % YoY Change | | :------------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :----------- | | Net sales | $260,378 | $217,513 | $42,865 | 19.7% | | Gross profit | $148,003 | $122,177 | $25,826 | 21.1% | | Net income | $24,233 | $18,261 | $5,972 | 32.7% | | Basic EPS (Common Stock) | $1.35 | $0.98 | $0.37 | 37.8% | | Diluted EPS (Common Stock) | $1.31 | $0.97 | $0.34 | 35.1% | | Cash dividends per share (Common Stock) | $0.25 | $0.20 | $0.05 | 25.0% | | Metric | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | YoY Change (in thousands) | % YoY Change | | :------------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :----------- | | Net sales | $746,858 | $506,913 | $239,945 | 47.3% | | Gross profit | $424,538 | $281,376 | $143,162 | 50.9% | | Net income | $66,497 | $33,720 | $32,777 | 97.2% | | Basic EPS (Common Stock) | $3.67 | $1.80 | $1.87 | 103.9% | | Diluted EPS (Common Stock) | $3.55 | $1.77 | $1.78 | 100.6% | | Cash dividends per share (Common Stock) | $0.72 | $0.55 | $0.17 | 30.9% | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights | Cash Flow Activity | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash provided by operating activities | $88,998 | $99,821 | $(10,823) | | Net cash (used in) provided by investing activities | $(27,982) | $67,194 | $(95,176) | | Net cash used in financing activities | $(35,397) | $(30,855) | $(4,542) | | Increase in cash, cash equivalents and restricted cash equivalents | $25,619 | $136,160 | $(110,531) | Notes to Condensed Consolidated Financial Statements NOTE A – Business and Basis of Presentation - Havertys operates as a retailer of residential furniture in the middle to upper-middle price ranges, exclusively under the Havertys brand, within a single reportable segment[12] - Interim financial statements are prepared in accordance with Form 10-Q instructions and U.S. GAAP, involving management estimates and assumptions that may differ from actual results[12][13] - The Company is subject to various legal claims but believes any resulting liability will not materially adversely affect its financial condition, results of operations, or cash flows[14] Note B – COVID-19 - Havertys closed all stores and halted deliveries in mid-March 2020 due to COVID-19, reopening 103 locations by May 1, 2020, and the remaining 17 by June 20, 2020, with deliveries restarting May 5, 2020[15] - Since reopening, business has been strong due to increased consumer spending on home furnishings, but the company faces product shortages, supply chain disruptions, and difficulties in increasing distribution and delivery capacity due to staffing shortages[16] - The duration and extent of the pandemic's influence on consumers and the business remain uncertain, and estimates and assumptions could change significantly in future reports[17] NOTE C – Stockholders' Equity Stockholders' Equity Summary | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Common Stock | $29,906 | $29,600 | $306 | | Class A Common Stock | $1,810 | $1,996 | $(186) | | Additional paid-in capital | $100,816 | $96,850 | $3,966 | | Retained earnings | $358,113 | $304,626 | $53,487 | | Treasury stock | $(196,692) | $(177,545) | $(19,147) | | Total stockholders' equity | $291,541 | $252,967 | $38,574 | - For the nine months ended September 30, 2021, net income contributed $66.5 million to retained earnings, while dividends declared for Common Stock and Class A Common Stock totaled $12.1 million and $0.9 million, respectively[19] - Treasury stock acquisitions amounted to $19.5 million for the nine months ended September 30, 2021, contributing to the decrease in total stockholders' equity[19] NOTE D – Interim LIFO Calculations - Interim LIFO calculations are based on management's estimates of inventory levels and inflation rates, which are subject to change based on final year-end LIFO inventory valuations[21] NOTE E – Fair Value of Financial Instruments - The fair values of cash, restricted cash, accounts receivable, accounts payable, and customer deposits approximate their carrying values due to their short-term nature[22] - Assets related to self-directed, non-qualified deferred compensation plans were approximately $9.2 million at September 30, 2021, and $7.9 million at December 31, 2020, valued using Level 1 valuation techniques (quoted market prices)[22] NOTE F – Credit Agreement - The Company has a $60.0 million revolving credit facility, secured by inventory, accounts receivable, cash, and other personal property, maturing on September 27, 2024[24] - Borrowings under the facility were $43.8 million in March 2020, repaid in June 2020, with total interest paid of $0.4 million for the nine months ended September 30, 2020[25] - As of September 30, 2021, the borrowing base was $15.7 million, with no outstanding letters of credit, resulting in a net availability of $15.7 million[26] Note G – Revenues - Revenue from merchandise sales and related service fees is recognized upon delivery to the customer, net of expected returns and sales tax[27] - Customer deposits, recorded when payments are received in advance of delivery, totaled $120.1 million at September 30, 2021, an increase from $86.2 million at December 31, 2020[27] Net Sales by Product Category | Product Category | 3 Months Ended Sep 30, 2021 Net Sales (in thousands) | % of Net Sales | 9 Months Ended Sep 30, 2021 Net Sales (in thousands) | % of Net Sales | | :------------------------------ | :----------------------------------------- | :------------- | :----------------------------------------- | :------------- | | Case Goods | $92,440 | 35.5% | $272,941 | 36.5% | | Upholstery | $109,375 | 42.0% | $305,842 | 41.0% | | Mattresses | $23,616 | 9.1% | $68,257 | 9.1% | | Accessories and Other | $34,948 | 13.4% | $99,818 | 13.4% | | Total | $260,378 | 100.0% | $746,858 | 100.0% | NOTE H – Leases - The Company has operating leases for retail stores, offices, warehouses, and equipment, with terms ranging from 1 to 14 years and options to extend up to 20 years[30] Lease Expense Summary | Lease Expense | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :--------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Operating lease cost | $11,440 | $11,596 | $35,140 | $33,111 | | Variable lease cost | $1,739 | $1,627 | $4,856 | $3,825 | | Total lease expense | $13,179 | $13,223 | $39,996 | $36,936 | - In June 2021, the Company renewed leases for ten retail locations, increasing right-of-use assets by $17.6 million and lease liabilities by $20.6 million; in August 2021, it purchased a distribution center and a retail location, decreasing right-of-use assets and lease liabilities by approximately $5.3 million[34] - A sale and leaseback transaction of three distribution facilities in May 2020 generated $70.0 million in proceeds and a $31.6 million gain, with the properties leased back under 15-year operating agreements[36] NOTE I – Income Taxes - The effective tax rate for the nine months ended September 30, 2021, was 23.1%, down from 25.8% in the prior year, primarily due to state income taxes and the tax impact from vested stock awards[37] NOTE J – Stock Based Compensation Plan - Shareholders approved the 2021 Long-Term Incentive Plan (LTIP) with 1,500,000 shares reserved, replacing the 2014 LTIP Plan for new grants[40] Stock-Based Compensation Award Activity | Award Activity (9 Months Ended Sep 30, 2021) | Service-Based Restricted Stock Awards (shares) | Performance-Based Restricted Stock Awards (shares) | | :------------------------------------------- | :--------------------------------------------- | :------------------------------------------------- | | Outstanding at December 31, 2020 | 239,281 | 213,895 | | Granted/Issued | 119,921 | 93,685 | | Awards vested or rights exercised | (130,323) | (56,578) | | Additional units earned due to performance | — | 77,265 | | Outstanding at September 30, 2021 | 223,258 | 328,267 | - Total compensation cost for unvested equity awards was approximately $8.6 million as of September 30, 2021, expected to be recognized over a weighted-average period of two years[43] NOTE K – Earnings Per Share - The Company reports earnings per share using the two-class method, assuming 100% of earnings are distributed as dividends based on contractual rights[45] - Common Stock has a preferential dividend rate of at least 105% of the dividend paid on Class A Common Stock, which is convertible one-for-one into Common Stock[46] Earnings Per Share Summary | EPS (Common Stock) | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :----------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Basic | $1.35 | $0.98 | $3.67 | $1.80 | | Diluted | $1.31 | $0.97 | $3.55 | $1.77 | | EPS (Class A Common Stock) | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :------------------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Basic | $1.28 | $0.94 | $3.45 | $1.71 | | Diluted | $1.25 | $0.93 | $3.38 | $1.70 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results, detailing the impact of COVID-19 and key financial metrics Forward-Looking Statements - Statements in this Form 10-Q that are not historical facts are considered "forward-looking statements" and involve risks and uncertainties that could cause actual results to differ materially from expectations[49] - The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law[49] Impact of COVID-19 on Our Business - In response to COVID-19, Havertys closed stores, furloughed approximately 87% of its workforce (3,033 team members), and permanently reduced its workforce by about 1,200 team members in April 2020[50] - The Company strengthened its financial position by reviewing operating expenses, reducing capital expenditures, temporarily borrowing $43.8 million (repaid within 96 days), and completing a $70.0 million sale-leaseback transaction[51] - Despite strong business since reopening, the Company faces product shortages, supply chain disruptions, and labor shortages impacting distribution and delivery capacity, with manufacturers in Vietnam and Indonesia experiencing COVID-19 related shutdowns[52][56] Net Sales - Net sales are recognized upon delivery to the customer, and the Company tracks 'written sales' and 'written comp-store sales' as indicators of customer orders prior to delivery[55] Net Sales and Comp-Store Sales Performance | Period | Net Sales (in millions) | % Change (YoY) | Comp-Store Sales (in millions) | % Change (YoY) | | :----- | :---------------------- | :------------- | :----------------------------- | :------------- | | Q1 2021 | $236.5 | 31.8% | $15.4 | 11.5% | | Q2 2021 | $250.0 | 127.3% | $48.8 | 46.9% | | Q3 2021 | $260.4 | 19.7% | $38.4 | 17.7% | | YTD Q3 2021 | $746.9 | 47.3% | $102.6 | 22.5% | - Long production lead times for custom upholstery orders (averaging 16 weeks, up from 4-6 weeks pre-pandemic) have negatively impacted sales in this category, with custom upholstery orders falling from 29.8% of total written upholstery sales in Q3 2020 to 20.0% in Q3 2021[58] Gross Profit - Gross profit margin for Q3 2021 was 56.8%, up 60 basis points from 56.2% in Q3 2020, driven by pricing adjustments in response to product price increases and higher inbound freight costs[60] - For the first nine months of 2021, gross profit margin was 56.8%, an increase of 130 basis points from 55.5% in the same period of 2020, with retail pricing and sales mix offsetting negative impacts from LIFO reserve increases[60] - The Company estimates full-year 2021 gross profit margins to be between 56.5% and 56.8%[61] Selling, General and Administrative Expenses - SG&A costs as a percentage of sales decreased to 44.6% in Q3 2021 from 46.0% in Q3 2020, reflecting cost leveraging on increased sales and operational changes[62] Selling, General and Administrative Expenses Breakdown | SG&A Classification | 3 Months Ended Sep 30, 2021 (in thousands) | % of Net Sales | 9 Months Ended Sep 30, 2021 (in thousands) | % of Net Sales | | :--------------------------------- | :----------------------------------------- | :------------- | :----------------------------------------- | :------------- | | Variable | $43,708 | 16.8% | $126,374 | 16.9% | | Fixed and discretionary | $72,448 | 27.8% | $211,941 | 28.4% | | Total | $116,156 | 44.6% | $338,315 | 45.3% | - Fixed and discretionary expenses in Q3 2021 increased due to higher compensation, benefits, payroll, labor costs ($3.8 million), warehouse expense ($2.8 million), and marketing spend ($1.7 million) compared to Q3 2020[66] - Full-year 2021 variable SG&A expenses are anticipated to be 17.0% to 17.3%, while fixed and discretionary expenses are expected to be approximately $278.0 million to $281.0 million[67] Liquidity and Capital Resources - As of September 30, 2021, the Company had $225.7 million in cash and cash equivalents and $6.7 million in restricted cash equivalents, believed sufficient for operating requirements, capital expenditures, dividends, and lease obligations for the next several years[68] - The $60.0 million revolving credit facility had $15.7 million available at September 30, 2021, with no outstanding amounts[69] - The Board authorized an additional $25.0 million for the share repurchase program in August 2021, with approximately $22.3 million remaining under authorization as of September 30, 2021[71] - Net cash provided by operating activities was $89.0 million for the first nine months of 2021, primarily from net income and customer deposits, partially offset by inventory outflows[74] - Net cash used in investing activities was $28.0 million in the first nine months of 2021, a significant change from $67.2 million provided in 2020, mainly due to $74.4 million in proceeds from asset sales in 2020[77] - Net cash used in financing activities was $35.4 million in the first nine months of 2021, primarily for $19.5 million in share repurchases and $13.0 million in cash dividends[78] Store Plans and Capital Expenditures - New store openings include Myrtle Beach, SC (Q1-21) and The Villages, FL (Q3-21), with a closure in Dallas, TX (Q3-21) and a planned opening in Austin, TX (Q1-22)[79] - Net selling space in 2021 is expected to remain flat compared to 2020[79] - Total capital expenditures are estimated to be approximately $37.0 million in 2021, including purchases of a Virginia home delivery center and a retail location, as well as investments in information technology and website enhancements[80] Critical Accounting Estimates - The Company's critical accounting estimates involve significant judgment and inherent uncertainties, but no significant changes were deemed critical for the accounting periods presented since the last annual report[81] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to the company's Form 10-K for detailed disclosures on market risk, confirming no material changes since December 31, 2020 - The Company's exposure to market risk has not materially changed since December 31, 2020[83] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as of September 30, 2021, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021, providing reasonable assurance for timely and accurate financial reporting[84] - No material changes in internal control over financial reporting were identified during the quarter ended September 30, 2021[85] - The Company continues to evaluate the impact of COVID-19 related changes, such as a rotating work-from-home environment, on its internal control over financial reporting[85] PART II. OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, equity sales, and a list of exhibits Item 1. Legal Proceedings This section refers to Note A of the Condensed Consolidated Financial Statements for information regarding legal proceedings - Information regarding legal proceedings is described in Note A of the Notes to the Condensed Consolidated Financial Statements[88] Item 1A. Risk Factors This section directs readers to the company's Form 10-K for a discussion of material risk factors and confirms no material changes since its filing - There have been no material changes from the risk factors described in the Company's Form 10-K[89] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase program, including additional authorization and repurchase activity during the third quarter of 2021 - The Board of Directors authorized an additional $25.0 million for the share repurchase program on August 6, 2021, bringing the total available authorization to approximately $33.1 million at that time[90] - The share repurchase program has no expiration date and may be terminated by the board at any time, with approximately $22.3 million remaining under authorization as of September 30, 2021[90] Share Repurchase Program Activity | Period (2021) | Total Number of Shares Purchased (shares) | Average Price Paid Per Share ($) | Approximate Dollar Value of Shares That May Yet be Purchased ($) | | :------------ | :---------------------------------------- | :------------------------------- | :--------------------------------------------------------------- | | July 1 – July 31 | 44,579 | $36.17 | $15,202,200 | | August 1 – August 31 | 412,617 | $36.60 | $25,100,700 | | September 1 – September 30 | 80,000 | $34.74 | $22,321,200 | | Total | 537,196 | | | Item 6. Exhibits This section lists the exhibits filed with or incorporated by reference into the Form 10-Q, including the 2021 Long-Term Incentive Plan and certifications - Key exhibits include the 2021 Long-Term Incentive Plan, certifications from the Chief Executive Officer and Chief Financial Officer, and financial statements formatted in inline XBRL[93]