Haverty Furniture Companies Downgrade in Accelerating Weakness (HVT)

There are several different traits that play a role in successful investing. I’ve found that one of the most important things is to stay true to yourself. And another is to be intellectually flexible to incorporate new data in as unbiased a way as possible as possible. When the picture changes, your attitude towards a situation should change. And while I’m far from perfect at it, I do my best to embody these two traits when I put on my investing hat.

This article is an exercise in that. You see, in November 2023, I wrote an optimistic article about Haverty Furniture Companies (NYSE: HVT), a fairly small player in the retail furniture space. Even at that time, the company was showing weakening financial results. Despite this, the company’s cash surplus, combined with how cheap the shares were led me to rate the company a ‘buy’. But since then, the stock is up just 5.7 percent at a time when the S&P 500 is up 20.1 percent. Looking at the latest data provided by management, I have almost reaffirmed my bullish stance on the company, largely due to the company’s excess cash position. But when you look at the picture a little deeper, I think it’s time to admit that this is a prospect that just hasn’t played out well and has too many options to warrant an optimistic outlook. For this reason, I have decided to put the company on “hold” until such time as we see some significant improvements.

A difficult time for Haverty furniture companies

When we last wrote about Haverty Furniture Companies late last year, we only had data covering the third quarter of fiscal 2023. The results now extend through the first half of 2024. That might be a good place to start . In the first six months of fiscal 2024, the company’s revenue was $362.6 million. That’s down 15.9 percent from the $431 million the business reported just a year ago. This was despite the fact that the average ticket size in the company’s stores increased from $3,250 to $3,332. That is an increase of 2.5%. The real pain for shareholders, then, came from a 16.2% decline in comparable store sales. With the average ticket size increasing, this decrease can only be attributed to a reduction in overall traffic.

This type of space has a small margin in nature. And when revenue contracts, particularly due to lower comparable store sales, the margin contraction is gross as opposed to exceptional. And that’s exactly what we can see here. Net income in the first half of 2024 was $6.8 million. That was well below the $24.2 million reported for the same period a year earlier. All other profitability metrics also followed lower net profits. Operating cash flow was cut by more than half, from $40.1 million to $17.5 million. If we adjust for changes in working capital, we get a decrease from $37.2 million to $22.4 million. And finally, EBITDA for the business fell from $38.3 million to $16.8 million.

2024 is not the only time that has been difficult for the company. If you look at the chart above, you can see the financial performance for 2023 compared to 2022. Revenue fell 17.7% from $1.05 billion to $862.1 million. This was despite the average ticket size rising nicely from $3,171 to $3,278 for a year-over-year gain of 3.4%.

However, comparable store sales fell 18.4%. This compares with the 3.4% improvement in comparable store sales seen from 2021 to 2022. The decline in revenue brought with it the decline in profits and cash flow. The only exception to this was operating cash flow, which nearly doubled from $51 million to $97.2 million. But once we adjust for changes in working capital, we get a drop from $115.2 million to $83 million. This general trend is disconcerting to say the least.

One of the two positives about the company was that the stock is fairly cheap. In the chart above, you can see how the stock is valued using historical results from 2023. You can also see how the stock is valued using projected numbers for 2024. These projections were taken by annualizing the observed results for the first half of the year only. year. But even so, the stock looks decently priced. In the table below, we have then compared the Haverty furniture companies to five similar businesses. If we use 2023 numbers, then only one of the companies was cheaper than Haverty Furniture Companies on an EV to EBITDA basis. Meanwhile, using the price to operating cash flow approach, we get that three of the five are cheaper than it. The ranking for price to operating cash flow remains unchanged if we use estimates for 2024. But the ranking for EV to EBITDA changes, with three of the five companies being cheaper than our candidate.

Click to enlarge

Another really positive thing about the company is that cash and cash equivalents are quite high. The company has $116.1 million set aside for cash. And he has no debt on the books. For a company with a market cap of just $452.8 million at the time of writing, this can certainly be considered a positive for shareholders. This means the firm has plenty of capital available in case times get tough. But let’s hope it doesn’t come to that.

Reviewing the business, I initially thought I would keep the company rated “buy” not only because of how cheap the shares are, but also because of the excess cash. All the company has to do is wait out this pain and it should be fine. This thought process was initially supported by the chart above. In it, you can see month-to-month advance retail sales for the US as calculated by the Federal Reserve. In the chart below, you can see the year-over-year decline in total sales for the first six months of this year compared to the first six months of last year. Even though overall sales are weaker this year compared to last year, the picture is gradually improving. In January, when things were at their worst, year-over-year sales fell 13.5 percent. And while May was better, the decline seen in June was only 4%. This shows a gradual trend of improvement from month to month. And this could be a sign of a turnaround.

The deciding factor for me was the revelation of how much worse the declines in comparable store sales were for the Haverty furniture companies than for the industry as a whole. Remember, earlier in this article, we mentioned that the decline in comparable store sales for the first half of 2024 was 16.2%. This is significantly worse than the 7.8% decline seen by the industry as a whole in the first six months of this year. This indicates to me that Haverty Furniture Companies is in a worse position than the overall industry. This is worrying to say the least. You don’t want to be the ugly duckling in an industry that is already struggling.

Take away

As much as I wish I could stick to my original thesis, I don’t think that would do me or you any favors. To be clear, there are some positive signs we see when it comes to Haverty Furniture Companies and the furniture industry in general. But the results turned out to be quite weak, and the comparable store sales decline experienced by the Haverty furniture companies was significantly worse than that seen for the industry. Despite all the positives, I think these negatives make up enough to warrant a downgrade to a “hold” rating.

Editor’s Note: This article covers one or more microcap actions. Please be aware of the risks associated with these stocks.