Haverty Furniture(HVT) - 2020 Q4 - Annual Report

PART I Business Havertys is a specialty retailer of residential furniture and accessories, operating 120 stores across 16 states, targeting middle to upper-middle-income consumers with a quality and value brand Overview and Operations - Founded in 1885, Havertys has grown to 120 stores in 16 states, primarily in the Southern and Midwest regions, and does not franchise its locations[23][24] - The company targets college-educated women in middle to upper-middle-income households, with a brand recognized for quality, fashion, and value[24] Merchandise, Stores, and Online Presence - The merchandise assortment ranges from traditional to contemporary styles, with nearly all furniture bearing the Havertys brand, avoiding lower-quality, promotional merchandise[25][26] - As of year-end 2020, the company operated 120 stores with an average size of 35,000 square feet and does not expect significant retail square footage expansion in 2021[28][29] - Total online sales increased by 65% in 2020 compared to 2019, accounting for approximately 4.4% of total sales, making the website the company's highest-performing 'store'[33] Competition, Supply Chain, and Distribution - The home furnishings market is highly fragmented, with Havertys competing with online retailers, specialty stores, and national chains through a targeted merchandise mix, custom order capabilities, and in-home design services[34][35] - The company sources from numerous foreign and domestic suppliers, with the top ten accounting for about 45% of product purchases in 2020, primarily importing wood products from Asia and producing upholstered items domestically[36] - The distribution system utilizes three distribution centers (DCs) and four home delivery centers (HDCs) to manage inventory and facilitate its branded 'Top Drawer Delivery' service[41] - Due to COVID-19 related demand and supply chain constraints, delivery times for some merchandise extended up to 12 weeks by the end of 2020[42] Human Capital Resources - As of December 31, 2020, Havertys employed 2,766 team members, with none being part of a union contract[45] - In response to COVID-19, the company implemented extensive health and safety protocols, including following CDC guidelines, enhanced cleaning, and establishing a contact tracing program[46] - The company focuses on diversity, competitive compensation and benefits, and professional development, providing approximately 119,000 hours of learning to team members in 2020[48][49][50] Risk Factors The company faces significant risks from the COVID-19 pandemic, intense competition, reliance on foreign suppliers, supply chain disruptions, IT vulnerabilities, and economic downturns - The COVID-19 pandemic is a major risk, with uncertainty around its duration, its effect on consumer spending habits (e.g., a potential shift away from home goods post-pandemic), and its impact on supply chains[56][57] - Approximately 55% of the company's total furniture purchases in 2020 were for goods not produced domestically, exposing it to risks from exchange rates, tariffs, and political/economic instability in foreign countries[63] - The business is dependent on third-party producers, and any failure on their part to meet quality standards, secure raw materials, or adhere to labor laws could negatively impact operations and reputation[64][65] - The company's IT infrastructure is vulnerable to cyber threats, which could disrupt point-of-sale, distribution, and payment systems, potentially leading to data breaches and reputational damage[75][77][78] - Demand for products is tied to discretionary spending and economic factors such as interest rates, housing sales, and consumer confidence, making the business susceptible to economic downturns[79] Properties As of December 31, 2020, Havertys operated 120 retail stores totaling approximately 4.4 million square feet, with 38 owned and 82 leased, alongside leased distribution facilities and corporate headquarters Store Count by State (as of Dec 31, 2020) | State | Number of Stores | | :--- | :--- | | Florida | 29 | | Texas | 22 | | Georgia | 17 | | North Carolina | 8 | | Virginia | 8 | | South Carolina | 6 | | Alabama | 6 | | Tennessee | 6 | | Other (8 states) | 18 | - The company owns 38 of its 120 retail locations, with the remaining 82 being leased[81] - Key leased distribution facilities are located in Braselton, GA (808,000 sq ft), Coppell, TX (394,000 sq ft), and Lakeland, FL (335,000 sq ft)[82] Information about our Executive Officers This section lists the company's executive officers as of March 1, 2021, including their names, ages, current positions, and principal occupations, with key executives being Clarence H. Smith (Chairman & CEO) and Steven G. Burdette (President) Key Executive Officers (as of March 1, 2021) | Name | Age | Position | | :--- | :--- | :--- | | Clarence H. Smith | 70 | Chairman of the Board, Chief Executive Officer | | Steven G. Burdette | 59 | President | | Richard B. Hare | 54 | Executive Vice President and Chief Financial Officer | - Executive officers are elected annually by the Board of Directors[90] PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's two classes of common stock, HVT (Common) and HVT.A (Class A), are traded on the New York Stock Exchange, with a history of quarterly cash dividends since 1935, and no common stock repurchases in Q4 2020 - The company has paid a cash dividend every year since 1935 and expects to continue this practice[95] - No shares of outstanding common stock were repurchased during the three months ended December 31, 2020[96] Selected Financial Data This section presents a five-year summary of key financial data, showing 2020 net sales of $748.3 million (a 6.7% decrease), but net income significantly increased to $59.1 million due to a $31.6 million sale-leaseback gain, resulting in diluted EPS of $3.12 Selected Financial Data (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $748,252 | $802,291 | $817,733 | | Net sales change over prior year | (6.7)% | (1.9)% | (0.3)% | | Gross profit | $418,994 | $434,488 | $446,542 | | Gross profit % of net sales | 56.0% | 54.2% | 54.6% | | Net income | $59,148 | $21,865 | $30,307 | | Diluted EPS (Common Stock) | $3.12 | $1.08 | $1.42 | | Net cash provided by operating activities | $130,191 | $63,419 | $70,392 | - Net income in 2020 includes a gain of $31.6 million from a sale-leaseback transaction, which impacted diluted EPS by $1.24[103] - The company paid a special dividend of $2.00 per Common Stock share in the fourth quarter of 2020[103] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic, leading to store closures and workforce reductions, followed by a strong demand rebound, improved gross profit margin, strengthened liquidity via a $70.0 million sale-leaseback, and a strong cash position of $200.1 million, with anticipated 2021 capital expenditures of $23.0 million Impact of COVID-19 and Management Objectives - In response to COVID-19, the company closed stores in March 2020, furloughed 87% of its workforce, and later made a permanent reduction of approximately 1,200 team members[107] - To maintain financial flexibility, the company completed a $70.0 million sale-leaseback transaction in May 2020[108] - Business was very strong after reopening, driven by a consumer 'nesting' trend, leading to increased online shopping and a higher average ticket[109] Results of Operations Net Sales and Comp-Store Sales Growth | Year | Net Sales (M$) | % Change | Comp-Store Sales % Change | | :--- | :--- | :--- | :--- | | 2020 | $748.3 | (6.7)% | 5.0% | | 2019 | $802.3 | (1.9)% | (1.4)% | | 2018 | $817.7 | (0.3)% | 0.3% | - Gross profit as a percentage of net sales increased to 56.0% in 2020 from 54.2% in 2019, primarily due to less discounting and favorable product mix[124] - SG&A expenses decreased to 50.4% of sales in 2020 from 50.8% in 2019, driven by reduced advertising, rent abatements, and workforce reductions[129][130] - The effective tax rate was 22.9% in 2020, down from 23.9% in 2019, benefiting from state quality jobs credits[137] Liquidity and Capital Resources - The company ended 2020 with $200.1 million in cash and cash equivalents, a significant increase from $75.7 million at the end of 2019[138][204] - Net cash provided by operating activities was $130.2 million in 2020, compared to $63.4 million in 2019, driven by net income and favorable changes in working capital like customer deposits[147][148] - Investing activities provided $65.4 million in cash, primarily from $76.3 million in proceeds from the sale-leaseback transaction, offset by $10.9 million in capital expenditures[149] - Financing activities used $71.2 million, consisting mainly of $50.5 million in dividend payments and $19.7 million in share repurchases[151] Store Expansion and Capital Expenditures - In 2020, the company opened one store and closed two, resulting in a net decrease in store count to 120[154] Capital Expenditures (Approximate in thousands) | Category | Proposed 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Total stores | $12,900 | $4,800 | $10,300 | | Distribution | $6,400 | $3,600 | $2,700 | | Information technology | $3,700 | $2,500 | $3,800 | | Total | $23,000 | $10,900 | $16,800 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure stems from fluctuations in interest rates, specifically LIBOR, related to its Credit Agreement, with management stating that a 100-basis point change would not have a significant adverse impact, and the company does not use derivative instruments for speculative purposes while monitoring LIBOR's potential phase-out - The main market risk is exposure to floating interest rates through the company's Credit Agreement[162] - The company does not engage in derivatives trading or other speculative activities[161] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020, and its internal control over financial reporting was also effective, a finding supported by an unqualified audit opinion from Grant Thornton LLP - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the period[166] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework (2013)[167] - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[168][172] PART III Directors, Compensation, Security Ownership, and Principal Accounting Fees This section, covering directors, executive compensation, security ownership, related transactions, and principal accounting fees, incorporates information by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information required for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2021 Proxy Statement[181][182][183][185][186] PART IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including consolidated financial statements, financial statement schedules (specifically Schedule II – Valuation and Qualifying Accounts), and a comprehensive list of exhibits such as the company's charter, bylaws, credit agreements, and various compensation plans - This section provides a complete list of all financial statements, schedules, and exhibits filed with the annual report[188][189] Financial Statements and Notes Consolidated Financial Statements The audited consolidated financial statements present the company's financial position as of December 31, 2020 and 2019, and its results of operations and cash flows for the three years ended December 31, 2020, with key 2020 figures including total assets of $680.4 million, total liabilities of $427.4 million, total stockholders' equity of $253.0 million, and net income of $59.1 million on net sales of $748.3 million Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $200,058 | $75,739 | | Inventories | $89,908 | $104,817 | | Total assets | $680,372 | $560,072 | | Customer deposits | $86,183 | $30,121 | | Total liabilities | $427,405 | $299,569 | | Total stockholders' equity | $252,967 | $260,503 | Consolidated Statement of Income Highlights (in thousands) | Metric | 2020 (in thousands) | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | :--- | | Net sales | $748,252 | $802,291 | $817,733 | | Gross profit | $418,994 | $434,488 | $446,542 | | Net income | $59,148 | $21,865 | $30,307 | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, including the significant impact of COVID-19, revenue breakdown, LIFO inventory method, credit facility details, a major sale-leaseback transaction, income taxes, benefit plans, and stock-based compensation - In response to COVID-19, the company closed all stores on March 19, 2020, and reopened them starting May 1, 2020, also making a permanent workforce reduction of approximately 1,200 team members[213] - The company completed a sale-leaseback of three facilities on May 18, 2020, for a total price of $70.0 million, resulting in a recognized gain of $31.6 million[236][271] - Under the CARES Act, the company deferred $1.6 million of employer-paid social security taxes and recorded $2.3 million in refundable employee retention credits in 2020[261] - The company has a $60.0 million revolving credit facility secured by inventory and receivables, under which it borrowed and repaid $43.8 million in 2020[254][255][256] Selected Quarterly Net Sales (Unaudited, in thousands) | 2020 Quarter | Net Sales (in thousands) | | :--- | :--- | | March 31 | $179,432 | | June 30 | $109,968 | | September 30 | $217,513 | | December 31 | $241,339 |