HAVERTY FURNITURE COMPANIES INC - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission file number:    1-14445

HAVERTY FURNITURE COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ⌧  No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ⌧  No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ⌧

HAVERTY FURNITURE COMPANIES, INC.

INDEX

 

PART I.  FINANCIAL INFORMATION

 

 

 

Item 1.  Financial Statements

HAVERTY FURNITURE COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to these condensed consolidated financial statements.

HAVERTY FURNITURE COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See notes to these condensed consolidated financial statements.

HAVERTY FURNITURE COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to these condensed consolidated financial statements.

(in thousands)		Common Stock				Class A Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Treasury Stock				Total
Balances at December 31, 2020		$	29,600			$	1,996			$	96,850			$	304,626			$	(2,560	)		$	(177,545	)		$	252,967
Net income															19,406												19,406
Dividends declared:
Common Stock, $0.22 per share															(3,717	)											(3,717	)
Class A Common Stock, $0.20 per share															(270	)											(270	)
Class A conversion			154				(154	)																			—
Restricted stock issuances			35								(835	)															(800	)
Amortization of restricted stock											2,679																2,679
Other comprehensive income																			49								49
Balances at March 31, 2021		$	29,789			$	1,842			$	98,694			$	320,045			$	(2,511	)		$	(177,545	)		$	270,314

(in thousands)		Common Stock				Class A Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Treasury Stock				Total
Balances at December 31, 2019		$	29,431			$	2,054			$	93,208			$	295,999			$	(2,087	)		$	(158,102	)		$	260,503
Net income															1,819												1,819
Dividends declared:
Common Stock, $0.20 per share															(3,459	)											(3,459	)
Class A Common Stock, $0.19 per share															(291	)											(291	)
Acquisition of treasury stock																							(6,810	)			(6,810	)
Restricted stock issuances			27								(345	)															(318	)
Amortization of restricted stock											972																972
Other comprehensive income																			31								31
Balances at March 31, 2020		$	29,458			$	2,054			$	93,835			$	294,068			$	(2,056	)		$	(164,912	)		$	252,447

		Three Months Ended March 31,
		2021								2020
(In thousands)		Net Sales				% of Net Sales				Net Sales				% of Net Sales
Merchandise:
Case Goods
Bedroom Furniture		$	39,178				16.6	%		$	27,639				15.4	%
Dining Room Furniture			27,599				11.7				18,219				10.2
Occasional			22,064				9.3				16,248				9.1
			88,841				37.6				62,106				34.6
Upholstery			95,626				40.4				73,629				41.0
Mattresses			20,481				8.7				18,821				10.5
Accessories and Other (1)			31,543				13.3				24,876				13.9
		$	236,491				100.0	%		$	179,432				100.0	%

(1)	Includes delivery charges and product protection.

		Three Months Ended March 31,
		2021				2020
Operating lease cost		$	11,806			$	10,431
Variable lease cost			1,508				1,615
Total lease expense		$	13,314			$	12,046

		Three Months Ended March 31,
		2021				2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	13,093			$	9,996
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		$	4,125			$	12,043

		Service-Based Restricted Stock Awards								Performance-Based Restricted Stock Awards
		Shares or Units (#)				Weighted-Average Award Price ($)				Shares or Units (#)				Weighted-Average Award Price ($)
Outstanding at December 31, 2020			239,281				20.77				213,895				21.08
Granted/Issued			114,368				32.96				91,485				32.75
Awards vested or rights exercised (1)			—				—				(56,578	)			22.95
Forfeited			(1,225	)			23.94				—				—
Additional units earned due to performance			—				—				77,265				20.42
Outstanding at March 31, 2021			352,424				24.71				326,067				23.87
Restricted units expected to vest			352,424				24.71				383,882				25.26

(1)	Includes shares repurchased from employees for employee’s tax liability.

		Three Months Ended March 31,
		2021				2019
Numerator:
Common:
Distributed earnings		$	3,717			$	3,459
Undistributed earnings			14,262				(1,782	)
Basic			17,979				1,677
Class A Common earnings			1,427				142
Diluted		$	19,406			$	1,819
Class A Common:
Distributed earnings		$	270			$	291
Undistributed earnings			1,157				(149	)
		$	1,427			$	142
Denominator:
Common:
Weighted average shares outstanding - basic			16,793				17,460
Assumed conversion of Class A Common Stock			1,431				1,532
Dilutive options, awards and common stock equivalents			507				274
Total weighted-average diluted Common Stock			18,731				19,266
Class A Common:
Weighted average shares outstanding			1,431				1,532
Basic earnings per share:
Common Stock		$	1.07			$	0.10
Class A Common Stock		$	1.00			$	0.09
Diluted earnings per share:
Common Stock		$	1.04			$	0.09
Class A Common Stock		$	0.98			$	0.09

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and with the audited consolidated financial statements, accompanying notes, related information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020 (“Form 10-K”).

Forward-Looking Statements

Impact of COVID-19 on Our Business

The COVID-19 pandemic has resulted in significant economic disruption and impacted our business. We closed our stores and ceased delivery operations in the second half of March 2020. Affected team members were paid during this period and most corporate personnel transitioned to working remotely. On April 1, 2020, we extended our store closure for another 30 days and furloughed 3,033 team members or approximately 87% of our workforce. Given the dramatic shock to the economy caused by the pandemic and uncertainty of the ongoing impact, we made a permanent reduction in our workforce of approximately 1,200 team members effective April 30, 2020 and extended the furlough of approximately 730 team members until June 1, 2020. We reopened 103 of our stores on May 1, 2020 and the remaining 17 were opened by June 20, 2020 and deliveries restarted on May 5, 2020.

We took several steps to strengthen our financial position and maintain financial flexibility by reviewing operating expenses, evaluating merchandise purchases, reducing capital expenditures,  temporarily borrowing $43.8 million on our credit facility (which has since been repaid), and completing a $70.0 million sale-leaseback transaction in May 2020.

Our business has been very strong since reopening.  Consumers not negatively impacted financially are spending more on their homes as they spend more time at home. Demand is outpacing product availability in certain categories. Manufacturers are challenged to ensure safe work environments and have encountered some raw material shortages and transportation capacity issues, resulting in product shortages and delays in a number of product categories. We are continuing to assess our staffing needs and have encountered difficulties in increasing our distribution and delivery capacity.

The COVID-19 pandemic is complex and continues to evolve with sporadic resurgences, new virus variants, and the vaccine rollout. At this point, we cannot reasonably estimate the duration of the pandemic’s influence on consumers, the “nesting” economy, and our business. 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Sales

Our sales are generated by customer purchases of home furnishings. Revenue is recognized upon delivery to the customer. Comparable-store or “comp-store” sales is a measure which indicates the performance of our existing stores and website by comparing the growth in sales in store and online for a particular month over the corresponding month in the prior year. Stores are considered non-comparable if they were not open during the corresponding month in the prior year or if the selling square footage has been changed significantly. Stores closed due to COVID-19 were excluded from comp-store sales. The method we use to compute comp-store sales may not be the same method used by other retailers. We record our sales when the merchandise is delivered to the customer. We also track “written sales” and “written comp-store sales” which represent customer orders prior to delivery. The lag time between customers placing orders and delivery has grown in 2021 due to demand outpacing merchandise supply. As a retailer, comp-store sales and written comp-store sales are an indicator of relative customer spending and store performance. Comp-store sales, total written sales and written comp-store sales are intended only as supplemental information and is not a substitute for net sales presented in accordance with US GAAP.

The following outlines our sales and comp-store sales increases and decreases for the periods indicated:

Our sales in the first quarter of 2020 were good until the first weeks of March as information and news coverage concerning the pandemic increased. We closed our stores and paused operations in mid-March. Our business has been strong since reopening in May 2020. Our stores are operating with a smaller staff and are open fewer hours. Our delivery capacity remains slightly behind our prior year pre-pandemic level due to labor shortages and supply chain disruptions. Manufacturers remain challenged by raw material shortages, production changes to meet safety needs, and transportation logistics.

Total sales for the first quarter of 2021 increased $57.1 million or 31.8% compared to 2020. Our comp-store sales, which exclude March, increased 11.5% or $15.4 million in 2021 compared to 2020. The remaining $41.7 million of the change was primarily from stores closed in March 2020 and therefore considered non-comparable.  Written business for the first two months of 2021 compared to the same period of 2020 was up 24.9%.

 

Store and website traffic continue to be strong. Revenues by product category as a percentage of net sales in 2021 increased over 2020 by 120 basis points in bedroom furniture sales and our mattress business declined 180 basis points due to supply-chain disruption. Our in-home designer sales are beginning to rebound and were 23.6% of our total written business for the first two months of 2021 compared to 24.9% for 2020 and custom order upholstery written business grew 18.1% for the first two months of 2021 compared to the 2020 level.

Gross Profit

Gross profit for the first quarter of 2021 was 57.1%, up 160 basis points compared to the prior year period of 55.5%. The increase is primarily due to merchandise pricing and mix, partially offset by a larger negative LIFO impact.

We expect annual gross profit margins for 2021 will be 56.5% to 57.0%.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Substantially all of our occupancy and home delivery costs are included in selling, general and administrative expenses (“SG&A”) as are a portion of our warehousing expenses. Accordingly, our gross profit may not be comparable to those entities that include these costs in cost of goods sold.

Selling, General and Administrative Expenses

Our SG&A costs as a percent of sales for the first three months of 2021 were 46.4% versus 54.4% for 2020. SG&A dollars increased $12.2 million for the first quarter of 2021 compared to the same prior year period. The increase is driven by the costs associated with our sales growth, primarily higher selling expense of $3.7 million, delivery costs of $1.4 million, and incentive compensation of $4.9 million.

We classify our SG&A expenses as either variable or fixed and discretionary. Our variable expenses include the costs in the selling and delivery categories and certain warehouse expenses as these amounts will generally move in tandem with our level of sales. The remaining categories and expenses for occupancy, advertising, and administrative costs are classified as fixed and discretionary because these costs do not fluctuate with sales. 

The following table outlines our SG&A expenses by classification:

The variable expenses in dollars were higher in the first quarter of 2021 compared to 2020 due to the increase in sales.

The variable expenses for the three months ended March 31, 2021 as a percent of sales reflect additional leveraging of our selling and delivery expenses. The variable expenses for the three months ended March 31, 2020 include payment of approximately $4.3 million in wages during the last weeks of March when stores were closed and deliveries were halted.

Fixed and discretionary expenses were impacted in the first quarter of 2021 primarily by increases in incentive compensation of $4.9 million as incentive compensation in the first quarter of 2020 was reduced to its lowest level given the store closures and outlook for the year. We also had increases in the first quarter of 2021 in health insurance costs of $2.3 million and advertising spending of $1.0 million compared to the prior year quarter, partially offset by reduced travel and occupancy costs.

Our variable type expenses within SG&A for the full year of 2021 are anticipated to be 17.5% to 17.8%. Fixed and discretionary expenses are expected to be approximately $265.0 to $269.0 million for the full year of 2021.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Liquidity and Capital Resources

 

Cash and Cash Equivalents at End of Year

At March 31, 2021, we had $210.1 million in cash and cash equivalents, and $6.7 million in restricted cash equivalents. We believe that our current cash position, cash flow generated from operations, funds available from our credit agreement, and access to the long-term debt capital markets should be sufficient for our operating requirements and to enable us to fund our capital expenditures, dividend payments, and lease obligations through the next several years. In addition, we believe we have the ability to obtain alternative sources of financing. We expect capital expenditures of approximately $23.0 million for the full year of 2021.

In May 2020, we entered into the Third Amendment to our Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) with a bank. The Credit Agreement, which matures September 27, 2024, provides for a $60.0 million revolving credit facility. Amounts available to borrow fluctuate and availability at March 31, 2021 was $15.5 million and we had no amounts outstanding.

Cash Flows Summary

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Store Plans and Capital Expenditures

Net selling space in 2021 is expected to be slightly up compared to 2020.  Total capital expenditures are estimated to be $23.0 million in 2021 depending on the timing of spending for new projects.

Off-Balance Sheet Arrangements

 

As of March 31, 2021, we had no off-balance sheet arrangements or obligations.

Critical Accounting Estimates

 

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. We reviewed our accounting estimates, and none were deemed to be considered critical for the accounting periods presented in our Form 10-K. We had no significant changes in those accounting estimates since our last annual report.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Item 4.  Controls and Procedures

 

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during the Company’s fiscal quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result of the COVID-19 pandemic, team members have shifted to a rotating work from home and office environment. We have reviewed our financial reporting process to provide reasonable assurance that we could report our financial results accurately and timely, and we will continue to evaluate the impact of any related changes to our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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 set forth in this Form 10-Q.

Item 1A.  Risk Factors

Item 6.   Exhibits

(a)  Exhibits

The exhibits listed below are filed with or incorporated by reference into this report (those filed with this report are denoted by an asterisk). Unless otherwise indicated, the exhibit number of documents incorporated by reference corresponds to the exhibit number in the referenced documents.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.