Haverty Furniture(HVT) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including balance sheets, income, cash flows, and detailed notes Condensed Consolidated Balance Sheets Total assets and stockholders' equity slightly increased, while total liabilities decreased from December 31, 2021, to September 30, 2022 Condensed Consolidated Balance Sheets (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $137,226 | $166,146 | | Inventories | $137,315 | $112,031 | | Total current assets | $310,087 | $309,057 | | Total assets | $692,946 | $686,290 | | Customer deposits | $79,746 | $98,897 | | Total current liabilities | $192,746 | $210,377 | | Total liabilities | $409,337 | $430,320 | | Total stockholders' equity | $283,609 | $255,970 | Condensed Consolidated Statements of Comprehensive Income Net sales and net income modestly increased for the three months, while nine-month net sales increased and net income slightly decreased, with improved EPS Condensed Consolidated Statements of Comprehensive Income (in thousands, except per share data) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $274,495 | $260,378 | $766,658 | $746,858 | | Gross profit | $156,720 | $148,003 | $444,290 | $424,538 | | Net income | $24,551 | $24,233 | $65,620 | $66,497 | | Basic earnings per share: Common Stock | $1.51 | $1.35 | $3.96 | $3.67 | | Diluted earnings per share: Common Stock | $1.46 | $1.31 | $3.83 | $3.55 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly decreased, while cash used in investing decreased and financing increased for the nine months ended September 30, 2022 Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (Nine Months Ended Sep 30) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $38,200 | $88,998 | | Net cash used in investing activities | $(22,043) | $(27,982) | | Net cash used in financing activities | $(45,040) | $(35,397) | | (Decrease) increase in cash, cash equivalents and restricted cash equivalents | $(28,883) | $25,619 | | Cash, cash equivalents and restricted cash equivalents at end of period | $143,979 | $232,390 | - Net cash provided by operating activities decreased by $50.8 million, primarily driven by changes associated with customer deposits[60] - Net cash used in financing activities increased by $9.6 million, primarily due to increased share repurchases in 2022[61] Notes to Condensed Consolidated Financial Statements Provides detailed disclosures on business operations, accounting policies, financial instruments, and other significant financial matters NOTE A - Business and Basis of Presentation Describes Havertys' operations as a single-segment residential furniture retailer, the basis of interim financial statements, and the absence of material legal claims - 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] - The company's unaudited condensed consolidated financial statements are prepared in accordance with Form 10-Q instructions and U.S. GAAP, involving management estimates and assumptions[12][13] - Currently, there are no pending claims or legal proceedings reasonably likely to have a material adverse effect on the company's financial condition, results of operations, or cash flows[14] Note B – COVID-19 and Economic Conditions Discusses the ongoing impact of COVID-19 and economic conditions, including rising costs, supply chain disruptions, and adverse effects on consumer spending from inflation and interest rates - During the nine months ended September 30, 2022, the company experienced rising product prices, volatile transportation costs, rising labor costs and shortages, and supply chain disruptions[15] - Discretionary consumer spending has been adversely impacted by rising inflation, including fuel costs, and interest rates, with many of these factors affecting the business in Q3 2022[15] NOTE C – Stockholders' Equity Details the increase in stockholders' equity from December 31, 2021, to September 30, 2022, influenced by net income, restricted stock, dividends, and treasury stock Changes in Stockholders' Equity (Nine Months Ended September 30, 2022, in thousands) | Item | Amount | | :--- | :--- | | Balances at December 31, 2021 | $255,970 | | Net income | $65,620 | | Dividends declared (Common Stock) | $(12,403) | | Dividends declared (Class A Common Stock) | $(963) | | Acquisition of treasury stock | $(29,998) | | Amortization of restricted stock | $6,032 | | Balances at September 30, 2022 | $283,609 | Dividends Declared Per Share (Three Months Ended September 30, 2022) | Stock Class | Dividend Per Share | | :--- | :--- | | Common Stock | $0.28 | | Class A Common Stock | $0.26 | NOTE D – Interim LIFO Calculations Explains the company's use of the LIFO method for inventory valuation, with interim calculations based on estimates and subject to year-end adjustments - Inventories are valued using the last-in, first-out (LIFO) method, with interim calculations relying on management's estimates of inventory levels and inflation rates[19] - Interim LIFO results are subject to change as they are based on estimates that may be affected by factors beyond management's control, pending final year-end valuations[19] NOTE E – Fair Value of Financial Instruments Discusses the fair value of financial instruments, noting short-term instruments approximate carrying values and non-qualified deferred compensation assets use Level 1 valuations - Fair values of cash, restricted cash, accounts payable, and customer deposits approximate their carrying values due to their short-term nature[20] - Assets for self-directed, non-qualified deferred compensation plans are valued using Level 1 valuation techniques (quoted market prices)[20] NOTE F – Credit Agreement Details the company's revolving credit facility, initially $60.0 million with no outstanding borrowings, and its October 2022 amendment to $80.0 million with an extended maturity - At September 30, 2022, the company had a $60.0 million revolving credit facility, secured primarily by inventory, with no outstanding borrowings and $55.7 million in net availability[21] - In October 2022, the Credit Agreement was amended to increase the revolving credit facility to $80.0 million, extend the maturity date to October 24, 2027, and replace LIBOR with SOFR as the interest rate benchmark[22] Note G – Revenues Outlines revenue recognition policies for merchandise sales and service fees, details changes in customer deposits, and presents disaggregated revenue by product categories - Revenue from merchandise sales and related service fees is recognized net of expected returns and sales tax upon delivery to the customer[23] Customer Deposits (in thousands) | Date | Amount | | :--- | :--- | | September 30, 2022 | $79,746 | | December 31, 2021 | $98,897 | Net Sales by Product Category (Three Months Ended September 30, in thousands) | Category | 2022 Net Sales | 2022 % of Net Sales | 2021 Net Sales | 2021 % of Net Sales | | :--- | :--- | :--- | :--- | :--- | | Case Goods | $101,735 | 37.1% | $92,440 | 35.5% | | Upholstery | $112,682 | 41.1% | $109,375 | 42.0% | | Mattresses | $22,646 | 8.3% | $23,616 | 9.1% | | Accessories and Other | $37,432 | 13.6% | $34,947 | 13.4% | | Total Net Sales | $274,495 | 100.0% | $260,378 | 100.0% | NOTE H – Leases Describes the company's operating leases for various assets, outlining lease terms, and how operating and variable lease costs are recognized, excluding variable costs from initial ROU asset measurement - The company holds operating leases for retail stores, offices, warehouses, and equipment, with remaining lease terms of 1 to 13 years and options to extend up to 20 years[25] - Variable lease payments, based on sales volume or asset usage, are expensed as incurred and not included in the initial measurement of right-of-use assets or lease liabilities[26] Total Lease Expense (Three and Nine Months Ended September 30, in thousands) | Lease Type | 3 Months 2022 | 3 Months 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $11,517 | $11,440 | $35,230 | $35,140 | | Variable lease cost | $1,706 | $1,739 | $5,183 | $4,856 | | Total lease expense | $13,223 | $13,179 | $40,413 | $39,996 | NOTE I – Income Taxes Details the company's effective tax rate for the nine months ended September 30, 2022, which increased to 24.6% from 23.1%, primarily due to state income taxes and vested stock awards Effective Tax Rate (Nine Months Ended September 30) | Period | Effective Tax Rate | | :--- | :--- | | 2022 | 24.6% | | 2021 | 23.1% | - The primary difference between the effective tax rate and the statutory rate was due to state income taxes and the impact from vested stock awards[28] NOTE J – Stock Based Compensation Plans Outlines the company's service-based and performance-based restricted stock awards, detailing compensation cost charged to SG&A and remaining unvested compensation Stock Award Activity (Nine Months Ended September 30, 2022) | Activity | Service-Based Restricted Stock Awards () | Performance-Based Restricted Stock Awards () | | :--- | :--- | :--- | | Outstanding at Dec 31, 2021 | 219,082 | 328,267 | | Granted/Issued | 153,681 | 103,104 | | Awards vested or rights exercised | (122,080) | (34,940) | | Forfeited | (3,900) | — | | Additional units earned due to performance | — | 59,249 | | Outstanding at Sep 30, 2022 | 246,783 | 455,680 | - Total compensation cost related to unvested equity awards was approximately $8.0 million as of September 30, 2022, expected to be recognized over a weighted-average period of two years[32] Stock-Based Compensation Expense (Nine Months Ended September 30, in thousands) | Period | Amount | | :--- | :--- | | 2022 | $6,032 | | 2021 | $6,456 | NOTE K – Earnings Per Share Explains the company's two-class method for earnings per share, detailing preferential dividend rates for Common Stock and voting/conversion rights of Class A Common Stock - Earnings per share are reported using the two-class method, assuming 100% of earnings are distributed as dividends based on contractual rights[33] - Common Stock has a preferential dividend rate of at least 105% of the dividend paid on Class A Common Stock[34] - Class A Common Stock carries ten votes per share and is convertible into Common Stock on a one-for-one basis at the holder's option[34] Basic and Diluted Earnings Per Share | EPS Type | Stock Class | 3 Months 2022 | 3 Months 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Basic EPS | Common Stock | $1.51 | $1.35 | $3.96 | $3.67 | | | Class A Common Stock | $1.43 | $1.28 | $3.75 | $3.45 | | Diluted EPS | Common Stock | $1.46 | $1.31 | $3.83 | $3.55 | | | Class A Common Stock | $1.40 | $1.25 | $3.66 | $3.38 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial performance, liquidity, and capital resources, highlighting trends in sales, gross profit, SG&A, economic impacts, and future outlook Forward-Looking Statements Contains a standard disclaimer for forward-looking statements, noting potential material differences in actual results due to risks and uncertainties, with no obligation to update - 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[37] - Known material risk factors are described in 'Item 1A. Risk Factors' of the company's Form 10-K and subsequent SEC reports[37] - The company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the report date, except as required by law[37] Net Sales Net sales and comparable-store sales increased in Q3 2022, despite declining in-store traffic and written business, with Q4 expected to be impacted by economic conditions Net Sales and Comp-Store Sales (Q1-Q3 2022 vs 2021, in millions) | Period | Net Sales 2022 | Net Sales % Change | Comp-Store Sales 2022 | Comp-Store Sales % Change | | :--- | :--- | :--- | :--- | :--- | | Q1 | $238.9 | 1.0% | $2.5 | 0.2% | | Q2 | $253.2 | 1.3% | $3.2 | 1.1% | | Q3 | $274.5 | 5.4% | $14.1 | 6.3% | | YTD Q3 | $766.7 | 2.7% | $19.8 | 2.6% | - Designer sales accounted for 25.2% of total written business in Q3 2022, up from 24.7% for 2021[41] - In-store traffic and written business declined from March through September 2022, with Q3 2022 written business down 7.2% compared to 2021, but up 15.8% compared to pre-pandemic Q2 2019[42][43] - The company expects Q4 2022 business to be affected by rising inflation, fuel costs, stock market volatility, higher interest rates, and recessionary concerns impacting discretionary consumer spending[43] Gross Profit Gross profit margin for Q3 2022 increased by 30 basis points to 57.1%, driven by pricing discipline and merchandise mix, with annual margins projected between 57.7% and 58.0% Gross Profit Margin (Q3 2022 vs 2021) | Period | Gross Profit Margin | Change (bps) | | :--- | :--- | :--- | | Q3 2022 | 57.1% | +30 | | Q3 2021 | 56.8% | | - The increase in gross profit margin is primarily attributed to pricing discipline and merchandise mix[44] - Annual gross profit margins for 2022 are expected to be 57.7% to 58.0%, with fluctuations quarter-to-quarter based on promotional cadence and anticipated changes in product/freight costs impacting LIFO reserve[44] Selling, General and Administrative Expenses SG&A costs as a percentage of sales increased to 45.4% in Q3 2022, driven by higher selling, advertising, administrative, and occupancy expenses, with full-year projections adjusted SG&A Expenses as % of Sales (Q3 2022 vs 2021) | Period | SG&A as % of Sales | | :--- | :--- | | Q3 2022 | 45.4% | | Q3 2021 | 44.6% | - SG&A dollars increased by $8.4 million (7.2%) in Q3 2022, driven by higher selling expenses ($4.9M), advertising/marketing ($1.1M), administrative costs ($1.5M), and occupancy expenses ($0.5M)[46] SG&A Expenses by Classification (Three Months Ended September 30, in thousands) | Classification | 2022 | 2022 % of Net Sales | 2021 | 2021 % of Net Sales | | :--- | :--- | :--- | :--- | :--- | | Variable | $50,228 | 18.3% | $43,708 | 16.8% | | Fixed and discretionary | $74,306 | 27.1% | $72,448 | 27.8% | | Total | $124,534 | 45.4% | $116,156 | 44.6% | - Full-year 2022 variable SG&A expenses are anticipated to be 18.2% to 18.4% of sales, an increase from previous estimates, while fixed and discretionary expenses are expected to be $293.0 to $295.0 million, a decrease from previous guidance due to changes in marketing spend[50] Liquidity and Capital Resources Details the company's cash and restricted cash position as of September 30, 2022, and management's belief that current resources and capital markets will sufficiently fund future operations and obligations Cash and Cash Equivalents (September 30, 2022, in millions) | Item | Amount | | :--- | :--- | | Cash and cash equivalents | $137.2 | | Restricted cash equivalents | $6.8 | - The company expects capital expenditures of approximately $30.0 million for the full year of 2022[52] - Management believes current cash position, cash flow from operations, funds from the credit agreement, and access to long-term debt capital markets should be sufficient for operating requirements, capital expenditures, dividend payments, and lease obligations through the next several years[51][52] Long-Term Debt Details the company's revolving credit facility, initially $60.0 million with no outstanding amounts, and its October 2022 amendment to $80.0 million with an extended maturity - The company had a $60.0 million revolving credit facility, maturing September 27, 2024, with no outstanding amounts and $55.7 million availability at September 30, 2022[53] - In October 2022, the credit facility was amended to increase to $80.0 million and extend the maturity date to October 24, 2027[53] Leases The company utilizes operating leases to finance a portion of its real estate, including stores, distribution centers, and support spaces - Operating leases are used to fund a portion of the company's real estate, including stores, distribution centers, and store support space[54] Share Repurchases Details the Board's authorization of an additional $25.0 million for share repurchases, with $5.0 million in Q3 2022 repurchases, leaving $20.0 million remaining - In November 2021, the Board authorized $25.0 million for share repurchases, which was fully utilized by June 30, 2022, with 899,890 shares purchased[55] - An additional $25.0 million was authorized in August 2022. During Q3 2022, 187,488 shares were repurchased for approximately $5.0 million, with $20.0 million remaining under authorization as of September 30, 2022[56] - Future repurchases depend on factors such as cash balances, credit availability, financial performance, market price, and alternative investment opportunities[57] Cash Flows Summary Summarizes cash flow activities for the first nine months of 2022, noting a significant decrease in operating cash, a decrease in investing cash, and an increase in financing cash Net Cash Flows (Nine Months Ended September 30, in millions) | Activity | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Operating Activities | $38.2 | $89.0 | $(50.8) | | Investing Activities | $(22.0) | $(28.0) | $6.0 | | Financing Activities | $(45.0) | $(35.4) | $(9.6) | - The decrease in net cash provided by operating activities was primarily driven by changes associated with customer deposits[60] - The increase in cash used in financing activities was primarily due to increased share repurchases in 2022[61] Store Plans and Capital Expenditures Outlines planned store openings, closures, and relocations for 2022-2023, with net selling space expected to remain flat and total capital expenditures estimated at $30.0 million Store Plans (2022-2023) | Location | Opening Quarter | Category | | :--- | :--- | :--- | | Austin, TX | Q1-22 | Open | | Atlanta, GA | Q2-22 | Closure | | Metro DC | Q4-22 | Open | | Indianapolis, IN | Q4-22 | Relocation | | Durham, NC | Q1-23 | Open | - Net selling space at the end of 2022 is expected to be relatively flat compared to 2021[63] - Total capital expenditures are estimated to be $30.0 million in 2022, depending on the timing of spending for new projects[63] Critical Accounting Estimates Defines critical accounting estimates as those requiring difficult judgments, noting management found none to be critical for the periods presented, with no significant changes - Critical accounting estimates are defined as those requiring difficult, subjective, or complex judgments due to inherently uncertain matters[64] - Management reviewed its accounting estimates and deemed none to be critical for the periods presented in the Form 10-K, with no significant changes since the last annual report[64] Item 3. Quantitative and Qualitative Disclosures about Market Risk Refers to the Form 10-K for detailed quantitative and qualitative disclosures about market risk, noting no material changes in exposure since December 31, 2021 - For quantitative and qualitative disclosures about market risk, the company refers to Item 7A of its Form 10-K[65] - The company's exposure to market risk has not changed materially since December 31, 2021[65] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes in 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, 2022, providing reasonable assurance for timely and accurate financial reporting[66] - No material changes in internal control over financial reporting were identified during the quarter ended September 30, 2022[67] - The company continues to evaluate the impact of the shift to a rotating work-from-home and office environment on its internal control over financial reporting[67] PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note A of the financial statements, indicating no material pending claims - Information regarding legal proceedings is described under the subheading 'Business and Basis of Presentation' in Note A of the Notes to the Condensed Consolidated Financial Statements[69] Item 1A. Risk Factors Refers to 'Item 1A. Risk Factors' in the Form 10-K for a discussion of material risk factors, noting no material changes from the annual report - The company refers to 'Item 1A. Risk Factors' in its Form 10-K for a discussion of known material risk factors[70] - There have been no material changes from the risk factors described in the company's Form 10-K[70] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the Board's authorization of an additional $25.0 million for share repurchases, with 187,488 shares repurchased for $5.0 million in Q3 2022, leaving $20.0 million available - The board of directors authorized additional amounts for the stock repurchase program on November 5, 2021, and August 5, 2022, with no expiration date[71] Common Stock Repurchase Activity (Q3 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares That May Yet Be Purchased | | :--- | :--- | :--- | :--- | | July 1 - July 31 | — | $— | $4,700 | | August 1 - August 31 | — | $— | $25,004,700 | | September 1 - September 30 | 187,488 | $26.65 | $20,007,700 | | Total | 187,488 | | | Item 6. Exhibits Lists the exhibits filed with or incorporated by reference into the report, including the company's charter, by-laws, credit agreement amendments, and CEO/CFO certifications - The exhibits include the Articles of Amendment and Restatement of the Charter, By-laws, Fourth Amendment to Amended and Restated Credit Agreement, and certifications from the Chief Executive Officer and Chief Financial Officer[74] SIGNATURES The report is duly signed on behalf of Haverty Furniture Companies, Inc. by its Chairman and CEO, and Executive Vice President and CFO - The report is signed by Clarence H. Smith, Chairman of the Board and Chief Executive Officer, and Richard B. Hare, Executive Vice President and Chief Financial Officer, on November 4, 2022[77]