HAVERTY FURNITURE COMPANIES, INC. Overview
Industry
The retail residential furniture industry's results are influenced by the overall strength of the economy, new and existing housing sales, consumer confidence, spending on large ticket items, interest rates, and availability of credit. These factors remain tempered by impediments to industry growth, such as inflation, higher interest rates, rising consumer debt, home inventory constraints, and tight access to home mortgage credit.
Our Business
We sell home furnishings in our retail stores and via our website and record
revenue when the products are delivered to our customer. Our products are
selected to appeal to a middle to upper-middle income consumer across a variety
of styles. Our commissioned sales team members receive a high level of product
training and are provided a number of tools with which to serve our customers.
We also have over 110 inhome designers serving most of our stores. These
individuals work with our sales team members to provide customers
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additional confidence and inspiration in their furniture purchase journey. We do not outsource the delivery function, something common in the industry, but instead ensure that the "last contact" is handled by a customer-oriented Havertys delivery team. We are recognized as a provider of high-quality fashionable products and exceptional service in the markets we serve.
Management Objectives
Management is focused on capturing more market share and increasing sales per square foot of showroom space. This growth will be driven by concentrating our efforts on our customers, with improved interactions highlighted by new products, high-touch service and better technology. In addition, our growth strategy includes the expansion of our retail operations to increase our footprint within our distribution network. The Company's strategies for profitability include gross margin focus, targeted marketing initiatives, productivity and process improvements, and efficiency and cost-saving measures. Our focus is to serve our customers better and distinguish ourselves in the marketplace.
Key Performance Indicators
We evaluate our performance based on several key metrics which include net sales, comparable store sales and written comparable store sales; sales per weighted average square foot; gross profit, selling, general and administrative costs as a percentage of sales; operating income; cash flow; and earnings per share. The goal of utilizing these measurements is to provide tools for economic decision-making, including decisions related to store growth, capital allocation and product pricing.
Net sales is the revenue from merchandise sales and related fees, net of expected returns and sales tax. We record our sales when the merchandise is delivered 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 by more than 10%. Large clearance sales events from warehouses or
temporary locations are also excluded from comparable store sales. The method we
use to compute comp-store sales may not be the same method used by other
retailers.
We also track written sales and written comp-store sales. Written sales reflect
those instances when a customer makes a deposit or pays in full when placing an
order. Written sales shows the current pace or trend of customer transactions.
The lag time between customers' order placement and delivery grew in 2020 and
remained high during 2021 and continued through mid-2022 due to disruptions in
supply chain and demand that outpaced merchandise supply. As a retailer,
compstore sales and written compstore 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
are not a substitute for net sales presented in accordance with US GAAP.
Sales per weighted average ("WAVG") square foot is calculated by dividing net
sales by WAVG square footage. WAVG square footage is a daily WAVG based on the
ratio of the days open in a period to the total days in the period.
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Results of Operations and Non-GAAP Measures
The table and discussion below should be read in conjunction with our consolidated financial statements and related notes included in this report.
Statement of Earnings Data Year Ended December 31, (Dollars in thousands, except per share data) 2022 2021 2020(1) 2019 2018 Net sales$ 1,047,215 $ 1,012,799 $ 748,252 $ 802,291 $ 817,733 Gross profit 604,224 574,625 418,994 434,488 446,542 Percent of net sales 57.7 % 56.7 % 56.0 % 54.2 % 54.6 % Selling, general and administrative expenses(2) 486,298 456,267 377,288 407,456 404,856 Percent of net sales 46.4 % 45.1 % 50.4 % 50.8 % 49.5 % Income before income taxes(2)(3) 119,501 118,535 76,731 28,724 40,408 Percent of net sales 11.4 % 11.7 % 10.3 % 3.6 % 4.9 % Net income(2)(3) 89,358 90,803 59,148 21,865 30,307 Percent of net sales 8.5 % 9.0 % 7.9 % 2.7 % 3.7 % Share Data Diluted earnings per Common share(2)(3) $ 5.24$ 4.90 $ 3.12 $ 1.08 $ 1.42 Cash dividends - per share: Common Stock(4) $ 2.06$ 2.97 $ 2.77 $ 0.76 $ 1.72 Class A Common Stock(4) $ 1.96$ 2.79 $ 2.62 $ 0.72 $ 1.63 Diluted weighted average common shares outstanding 17,038 18,543 18,932 20,261 21,295 Balance Sheet Data Total assets$ 649,049 $ 686,290 $ 680,372 $ 560,072 $ 440,179 Inventories 118,333 112,031 89,908 104,817 105,840 Net property and equipment(5) 137,475 126,099 108,366 156,534 218,852 Right-of-use lease assets 207,390 222,356 228,749 175,474 - Lease liabilities 221,287 230,352 233,666 179,055 - Customer deposits 47,969 98,897 86,183 30,121 24,465 Total debt(6) - - - - 50,803 Stockholders' Equity 289,399 255,970 252,967 260,503 274,629 Statement of Cash Flows Data Net cash provided by operating activities$ 51,015 $ 97,242 $ 130,191 $ 63,419 $ 70,392 Depreciation and amortization(5) 16,926 16,304 18,207 20,596 29,806 Capital expenditures 28,411 34,090 10,927 16,841 21,473 Dividends paid 33,948 52,446 50,521 15,056 35,464 Share repurchases 29,998 41,809 19,708 29,757 18,732 Other Supplemental Data and Metrics Number of stores 122 121 120 121 120 Retail square footage at year-end 4,363 4,354 4,352 4,426 4,417 Sales per WAVG retail square foot $ 256$ 232 $ 173 $ 183 $ 185 Average ticket (7) $ 3,171$ 2,865 $ 2,482 $ 2,323 $ 2,184 Net sales increases (%) 3.4 % 35.4 % (6.7) % (1.9) % (0.3) % Comparable store sales increase (%) 3.4 % 17.9 % 5.0 % (1.4) % 0.3 % Employees 2,831 2,845 2,766 3,425 3,418 (1)Stores were closed and delivery operations were paused for approximately six weeks due to COVID-19. (2)Includes impairment loss of$2.4 million , or$1.8 million after tax, on a retail store in 2019 which impacted diluted earnings per share$0.09 . (3)Includes gain of$31.6 million on a sale-leaseback transaction in 2020 which impacted diluted earnings per share$1.24 . (4)Includes special dividends of$1.00 for Common Stock and$0.95 for Class A Common Stock paid in the fourth quarter of 2022,$2.00 for Common Stock and$1.90 for Class A Common Stock paid in the fourth quarter of 2021 and 2020 and$1.00 for Common Stock and$0.95 for Class A Common Stock paid in the fourth quarter of 2018. (5)We adopted ASC 840 effectiveJanuary 1, 2019 . The cumulative effect included a reduction of property and equipment, net of$53,519,000 . Amortization of buildings under lease was included in depreciation expense. (6)Debt is comprised completely of lease obligations accounted for under ASC 840, prior to adoption of ASU 2016-02. (7)Average ticket is calculated by dividing total sales by the number of orders. 17
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The following outlines our sales and comp-store sales increases and decreases
for the periods indicated. (Amounts and percentages may not always add to totals
due to rounding.)
December 31,
2022 2021 2020
Comp-Store Comp-Store Comp-Store
Net Sales Sales Net Sales Sales Net Sales Sales
% Increase % Increase % Increase % Increase % Increase % Increase
(decrease) (decrease) (decrease) (decrease) (decrease) (decrease)Period Dollars over prior over prior Dollars
over prior over prior Dollars over prior over prior
Ended in millions period period in millions
period period in millions period period
Q1 $ 238.9 1.0 % 0.2 % $ 236.5 31.8 % 11.5 % $ 179.4 (4.2) % 11.6 %
Q2 253.2 1.3 1.1 250.0 127.3 46.9 110.0 (42.7) (15.2)
Q3 274.5 5.4 6.3 260.4 19.7 17.7 217.5 3.9 4.0
Q4 280.6 5.5 5.7 265.9 10.2 9.2 241.3 12.9 13.7
Year $ 1,047.2 3.4 % 3.4 % $ 1,012.8 35.4 % 17.9 % $ 748.3 (6.7) % 5.0 %
Sales in 2022 set new records, with each quarter exceeding the comparable prior period quarter. We restored our normal operating level of inventory as supply chain issues abated in the second half of the year. This trend benefited our net sales, as we were able to deliver both new and previously written orders (or "backlog") during this period, which offset the slowing pace of new written orders. Consumers have returned to their historical shopping patterns of concentrating spending around traditional holiday events. We have had declines in in-store traffic particularly outside these peak periods. Our written business was down 8.8% compared to the extraordinary pace set in 2021. Our sales associates and design consultants are providing excellent service to each customer, and average ticket value was up 10.7% over last year. Design consultant engagement increased in 2022 and accounted for 24.% of our 2022 business, with an average ticket of$5,990 . Merchandise sales for most categories have returned to their historical percentages of total sales, with the exception of mattresses. (See Note 2, "Revenues and Segment Reporting" of the Notes to Consolidated Financial Statements). Sales in 2021 set a record pace as furniture demand remained strong despite ongoing COVID-19 concerns and supply chain challenges. The comparisons to 2020 reflect the impact of our store closures in midMarch and re-opening onMay 1, 2020 , and the surge in business that followed. In response to increasing product and freight costs, we raised our retail prices. The impact of the supply chain disruptions is reflected in our sales by merchandise category. Our mattress and bedroom furniture sales were particularly affected by such supply chain disruptions. Sales of upholstery in 2021 increased 37.3% as a result of our upholstery suppliers making good strides towards meeting demand with increased production. Sales in this category increased 60 basis points as a percent of total sales over 2020 levels. COVID-19 concerns continued to affect sales generated by our in-home designers in 2021, and such sales, as a percent of our total sales remained at the 2020 level of 22.8% for 2021. Our ability to deliver customer orders improved in 2021 compared to 2020 but was still longer than pre-pandemic time frames. Manufacturers began to recover from raw material shortages but were still challenged by labor shortages and disruptions in transportation logistics. Our warehouse and delivery operations adjusted due to personnel shortages. Due to staffing constraints, time between purchase and delivery lengthened from our pre-pandemic average of 3 to 5 days for in-stock items to 1 to 2 weeks. We added additional team members and during the last quarter of 2021, purchases of in-stock product were generally delivered within 3 to 5 days. The disruptions to our supply chain resulted in lower inventory, and for outofstock merchandise, delivery times ran 8 to 12 weeks. Our vendor partners for special order products continued to experience delays with delivery of these orders averaging 12 to 20 weeks. Sales in 2020 were impacted by COVID-19. Our written sales suffered during the first weeks of March as information and news coverage concerning the pandemic increased. We closed our stores and paused operations mid-March. We enacted our business continuity plan in April which anticipated continued low levels of sales. Most stores reopened onMay 1 with approximately 76% of their original staff, store hours were reduced 17%, and delivery capacity was also reduced. Our business was very strong upon reopening; total 18
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written sales for the two months endedJune 30, 2020 were up 13.9%; and written comparable store sales were up 17.5% compared to the same two-month period in 2019. Our written sales remained strong during the third quarter of 2020, with total written sales up 22.8% and written comparable store sales up 22.6% over the same period in 2019. Our written sales in the fourth quarter were up 16.7%, and written comp-store sales rose 17.5%. Our delivery capacity in 2020 was intentionally reduced as part of our business continuity plan. Deliveries resumed onMay 5, 2020 , with reduced personnel and capacity and total sales fromMay 5 through June 30, 2020 were down 13.4% compared with the same period of 2019. Demand quickly began to outpace supply, and we worked during the third quarter to increase our inventory levels and delivery capacity. We adjusted our operations during the third quarter, adding additional personnel, and worked with our vendors to accelerate orders. Revenues by product category as a percentage of net sales in 2020 increased over 2019 by 220 basis points in upholstery sales and by 60 basis points in home office due to "nesting" buying, and our mattress business declined 160 basis points due to supply-chain disruption caused by COVID-19. Our in-home designer sales were hampered during 2020 but were 22.8% of our total sales compared to 25.3% in 2019. Total sales for 2020 decreased$54.0 million , or 6.7% compared to 2019. Our comp-store sales, which includes online sales, increased 5.0%, or$32.7 million , in 2020 compared to 2019. The remaining$86.8 million of the change was primarily from our store closures in March through April and from new, closed and otherwise non-comparable stores.
2023 Outlook
We cannot predict the impact of inflation, rising interest rates, market volatility, and geopolitical concerns on consumer spending on home furnishings. We believe we benefit from our footprint that covers many of the fastest-growing markets in the country. In addition, we have improved our customers' online experience and continue to deploy targeted marketing efforts. We believe that our existing stores are well-positioned in their respective markets and plan to open additional locations during the year. We believe that our offerings of on-trend merchandise, knowledgeable salespeople, free in-home design service, and special-order capabilities help make us a market leader in the residential furniture industry and will continue to strengthen our business in the year ahead.
Gross Profit
Our cost of goods sold consists primarily of the purchase price of the merchandise together with inbound freight, handling within our distribution centers and transportation costs to the local markets we serve. Our gross profit is primarily dependent upon vendor pricing, the mix of products sold and promotional pricing activity. Substantially all of our occupancy and home delivery costs are included in selling, general and administrative expenses as is a portion of our warehousing expenses. Accordingly, our gross profit may not be comparable to those entities that include some of these expenses in cost of goods sold. Year-to-Year Comparisons Gross profit as a percentage of net sales was 57.7% in 2022 compared to 56.7% in 2021. The increase of 100 basis points was primarily due to merchandise price increases and disciplined discounting which offset product cost and freight increases. The use of the LIFO method generated a$10.8 million charge in 2022 versus$12.3 million in 2021. Gross profit as a percentage of net sales was 56.7% in 2021 compared to 56.0% in 2020. The increase was primarily due to merchandise price increases and disciplined discounting offsetting product cost and freight increases.The use of the LIFO method generated a$12.3 million charge in 2021 versus$0.6 million in 2020, or a negative 110 basis points impact to the total gross profit change.
2023 Outlook
Our expectations for 2023 are for annual gross profit margins of approximately
58.0% to 58.5%. This assumes changes in merchandise and freight costs and their
impact on the LIFO reserve.
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Selling, General and Administrative Expenses
SG&A expenses are comprised of five categories: selling, occupancy, delivery and certain warehousing costs, advertising, and administrative. Selling expenses are primarily comprised of compensation of sales team members and sales support staff, and fees paid to credit card and third-party finance companies. Occupancy costs include rents, depreciation charges, insurance and property taxes, repairs and maintenance expense and utility costs. Delivery costs include personnel, fuel costs, and depreciation and rental charges for rolling stock. Warehouse costs include supplies, depreciation, and rental charges for equipment. Advertising expenses are primarily media production and space expenditures, direct mail costs, market research expenses and agency fees. Administrative expenses are comprised of compensation costs for store personnel exclusive of sales team members, information systems, executive, accounting, merchandising, advertising, supply chain, real estate and human resource departments. 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 are classified as fixed and discretionary because these costs do not fluctuate with sales.
The following table outlines our SG&A expenses by classification:
2022 2021 2020
% of % of % of
(In thousands) Net Sales Net Sales Net Sales
Variable $ 193,675 18.5 % $ 173,810 17.2 % $ 135,286 18.1 %
Fixed and discretionary 292,623 27.9 282,457 27.9 242,002 32.3
$ 486,298 46.4 % $ 456,267 45.1 % $ 377,288 50.4 %
Year-to-Year Comparisons
Our SG&A dollars as a percent of sales increased to 46.4% in 2022 from 45.1% in
2021. Advertising expenditures increased approximately $2.3 million . Our selling
expenses increased $13.5 million primarily from increased sales commissions,
benefits, and third-party financing costs. Our occupancy costs increased $2.7
million due to increases in utilities, state and local taxes, and repairs and
maintenance. Warehouse, delivery, and transportation expenses rose $6.9 million
from 2021 driven by higher personnel and fuel costs. Administrative expense
increased $4.7 million primarily from increased wages and related expense and
higher travel costs that were partly offset by lower group health insurance
expense.
Our SG&A dollars as a percent of sales decreased to 45.1% in 2021 from 50.4% in
2020. We were able to leverage our fixed and discretionary costs as we achieved
record sales throughout the year. We increased our advertising spend $9.5
million in 2021 to $49.3 million . Our occupancy costs increased $3.9 million ,
driven by greater rent expense - primarily for the distribution facilities in
the sale-leaseback in 2020 - and higher utilities and repairs and maintenance
that were partly offset by lower depreciation expense. Warehouse and
transportation expense rose $10.6 million on higher salaries and benefits, and
temporary labor costs and $4.2 million in accessorial and demurrage fees.
Administrative expense increased $18.9 million , primarily from increased wages
and related costs, higher amortization expense on performance stock awards, and
increased incentive compensation costs.
2023 Outlook
Fixed and discretionary expenses within SG&A are expected to be in the$292.0 to$295.0 million range for 2023. We anticipate higher costs in 2023 due to rising inflationary pressures and additional costs associated with new stores. Fixed and discretionary expenses are expected to be at similar quarterly levels in 2022 as in 2021, as adjusted for the overall increases. Variable costs within SG&A for 2023 are expected to be between 19.5% and 19.7% as a percent of sales. This increase is primarily driven by wage inflation and higher delivery and third-party financing costs. 20
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Interest (Income) Expense, Net
We earned
Provision for Income Taxes Our effective tax rate was 25.2% in 2022, 23.4% in 2021 and 22.9% in 2020. The rates vary from theU.S. federal statutory rate primarily due to state income taxes. The rates in 2022, 2021 and 2020 also benefited from the recognition of state tax credits of$899,000 ,$481,000 and$1,206,000 , respectively. See Note 7, "Income Taxes" of the Notes to Consolidated Financial Statements for further information about our income taxes.
Liquidity and Capital Resources
Cash and Cash Equivalents at End of Year AtDecember 31, 2022 , we had$123.1 million in cash and cash equivalents, and$6.8 million in restricted cash equivalents. See Note 1 to our consolidated financial statements for further discussion of our 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$28.0 million in 2023. Long-Term Debt AtDecember 31, 2022 , we had a$80.0 million revolving credit facility (the "Credit Agreement") with a bank. The Credit Agreement maturesOctober 24, 2027 . See Note 5, "Credit Arrangement" of the Notes to Consolidated Financial Statements for information about our Credit Agreement.
Leases
We use operating leases to fund a portion of our real estate, including our stores, distribution centers, and store support space.
AtDecember 31, 2022 , we had aggregate lease obligations of$221.3 million , with$34.4 million payable within 12 months. Aggregate lease obligations include$2.8 million related to leases not yet commenced. See Note 8, "Leases" of the Notes to Consolidated Financial Statements for further discussion of our operating leases. Share Repurchases InAugust 2022 , our Board of Directors authorized additional amounts under a share repurchase program. We made cash payments of$30.0 million for repurchases of 1.1 million shares of our Common Stock through open market purchases during 2022 and there is approximately$20.0 million atDecember 31, 2022 that may yet be purchased under the existing authorization. 21
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Cash Flows Summary
[[Image Removed: hvt-20221231_g3.jpg]]
Operating Activities. Cash flow generated from operations provides us with a
significant source of liquidity. Our operating cash flows result primarily from
cash received from our customers, offset by cash payments we make for products
and services, employee compensation, operations, and occupancy costs.
Cash provided by or used in operating activities is also subject to changes in
working capital. Working capital at any specific point in time is subject to
many variables, including seasonality, inventory selection, the timing of cash
receipts and payments, and vendor payment terms.
Net cash provided by operating activities in 2022 was
Net cash provided by operating activities in 2021 was$97.2 million driven primarily by net income of$90.8 million and non-cash adjustments to net income of$25.5 million consisting primarily of depreciation and amortization and stock-based compensation expense, and by working capital inflows driven primarily by customer deposits and outflows for inventory turnover and timing of inventory purchases.
Investing Activities. Cash used in investing activities in 2022 consisted
primarily of
Cash used in investing activities in 2021 primarily reflected
Financing Activities. Cash used in financing activities in 2022 consisted
primarily of
Cash used in financing activities in 2021 primarily reflected$17.4 million of quarterly cash dividends,$35.0 million of special cash dividends, and$41.8 million of share repurchases. 22
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Contractual Obligations
We have no short-term borrowings or funded debt. The following summarizes our contractual obligations and commercial commitments as ofDecember 31, 2022 (in thousands): Payments Due or Expected by Period Less than 1-3 4-5 After 5 Total 1 Year Years Years Years Operating leases(1)$ 273,983 $ 45,427 $ 77,893 $ 58,500 $ 92,163 Rent deferrals(2) 533 119 226 - 188 Purchase orders 88,127 88,127 - - -
Total contractual obligations(3)
(1)These amounts are for our undiscounted lease obligations recorded in our consolidated balance sheets, as lease liabilities. For additional information about our leases, refer to Note 8, "Leases" of the Notes to the Consolidated Financial Statements. (2)Lease concessions related to the impact of COVID-19. For additional information about our leases, refer to Note 8, "Leases" of the Notes to the Consolidated Financial Statements. (3)The contractual obligations do not include any amounts related to retirement benefits. For additional information about our plans, refer to Note 10, "Benefit Plans" of the Notes to the Consolidated Financial Statements.
Store Expansion and Capital Expenditures
We have entered new markets and made continued improvements and relocations of our store base. The following outlines the change in our selling square footage for each of the three years endedDecember 31 (square footage in thousands): 2022 2021 2020 # Square # Square # Square Store Activity: of Stores Footage of Stores Footage of Stores Footage Opened 3 97 2 44 1 28 Closed 2 88 1 42 2 102 Year end balances 122 4,363 121 4,354 120 4,352 The following table summarizes our store activity in 2022 and plans for 2023. Opening (Closing) Quarter Location Actual or Planned Category Austin, TX Q-2-22 Open Atlanta, GA Q-2-22 Closure Metro DC Q-4-22 Open Indianapolis, IN Q-4-22 Relocation Durham, NC Q-1-23 Open Atlanta, GA Q-2-23 Closure Charlotte, NC Q-3-23 Open Dayton, OH Q-4-23 Open Location to be announced Q-4-23 Open Location to be announced Q-4-23 Open
Assuming the new stores open and existing stores closed as planned, the above activity and other changes should increase net selling space in 2023 approximately 2.2% over 2022.
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Our investing activities in stores and operations in 2022, 2021 and 2020 and planned outlays for 2023 are categorized in the table below. Capital expenditures for stores in the years noted do not necessarily coincide with the years in which the stores open. (Approximate in thousands) Proposed 2023 2022 2021 2020 Stores: New or replacement stores(1)$ 9,700 $ 7,700 $ 7,000 $ 1,000 Remodels/expansions 2,900 4,400 4,300 600 Other improvements 6,700 6,600 4,500 3,200 Total stores 19,300 18,700 15,800 4,800 Distribution(1) 5,800 6,900 15,300 3,600 Information technology 2,500 2,800 3,000 2,500 Total$ 27,600 $ 28,400 $ 34,100 $ 10,900
(1)In 2021 we purchased one retail location and one distribution facility that were previously leased.
Critical Accounting Estimates and Assumptions
Our discussion and analysis is based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, and evaluate our estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions. Accounting estimates are considered critical if both of the following conditions are met: (a) the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change and (b) the effect of the estimates and assumptions is material to the financial statements.
We have reviewed our accounting estimates, and none were deemed to be considered critical for the accounting periods presented.
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