Haverty: The Status Quo Isn’t Ideal, But Things Can Get Better (NYSE:HVT)

Introduction

Potential investors looking for small-cap proxies to play the domestic residential furniture market may be interested in Haverty Furniture (NYSE: HVT) a premium retailer with 120 stores in 17 states in the American South and Midwest regions. The majority its products are priced in the mid- to upper-mid price ranges, and the company refrains from stocking price-based promotional products that typically characterize the product portfolio of most regional and national retailers. The theme of premiumisation is driven home by the fact that, unlike many other retailers, Haverty does not outsource its delivery function and also offers in-house designer services for customers looking for a deeper personalized experience.

To gain exposure to Haverty, investors can go two ways, as it has a dual-class share offering. If you are looking for higher liquidity and superior dividends, you can go for it for HVT, but if you want to have a stronger influence on company matters, HVT.A would be a better bet.

To elaborate further, the majority of Haverty’s investor base consists of HVT holders, as they comprise approximately 98.2% of the total shareholder base. When it comes to dividends, HVT holders also receive 105% of the dividends that are paid to HVT.A holders. Also, it’s worth noting that Haverty Furniture has been paying cash dividends for 89 years now!

However, HVT.A holders have voting rights superior to 10:1 on all matters subject to a shareholder vote and, specifically, when it comes to electing 75% of the board of directors, they can vote separated. Crucially, HVT.A holders always have the option to convert their holding into HVT (on a 1:1 basis) at any time, but this conversion flexibility is not available to HVT holders.

However, this year has proven to be a challenging year for holders of both share classes. On a YTD basis, when other small-cap discretionary stocks held on with positive gains of nearly 4%, HVT and HVT.A fell -21% and -26%, respectively.

Is the worst over, or could we see further weakness as we head into the final quarter of the year?

Status quo

Haverty management has repeatedly beaten the drum on how a hostile interest rate environment and frozen housing market (sales in the recent spring season were the worst in 12 years) have dampened their sales momentum. In fairness, they’re not the only home furnishings retailer to have had to take it on the chin. Industry data would show that this segment is contracting, but there is every reason to believe that Haverty could lose share in a declining market.

For example, cumulative monthly sales data for 2024 from the Census shows that furniture and home furnishing stores saw a 7% drop in sales for Q1, but only Haverty saw reported sales fall by a greater margin of 16 % for the same period (product store sales for S1 fell by a similar threshold).

Haverty’s woes are compounded in a down cycle as it tries to position itself as a premium furniture business and is not typically where customers would choose to shop when money is tight. In fact, at last month’s quarterly event, management noted that while store traffic has seen some sequential improvement, their closing rates continue to decline. This essentially suggests that while the appetite for home furnishings is growing slightly, one is not likely to get the best value proposition at Haverty Furniture.

How is Haverty doing?

During tough markets like this, it’s common to see companies pay costs to deal with a top-line decline, but while Haverty is doing this in some areas, it’s also taking the bold approach of making some strategic investments in expansion into new locations. (target is to open five stores each in FY24 and FY25), upgrade stores, improve website etc. As a result, there was not necessarily a significant change in the cost base.

Overall, it can be seen that while sales have trended lower over the past three years, the rate of decline in administrative costs and expenses on an annual basis is about half the rate of decline in sales. In other words, as of H1, SG&A margin is currently at a higher 58.6% versus 53% in H1-23. What investors also need to recognize is that a larger proportion of Haverty’s SG&A base consists of fixed and discretionary costs that don’t normally move in tandem with sales.

From H1-24, these more persistent costs saw their share as a percentage of sales increase by 570bp to 38.8%. Looking ahead, even though the cost of fixed overhead costs for the fiscal year is likely to decrease by $8 million per year in H2, the pace will certainly be higher than that seen in H1 (expenses expected to be $142.3 million vs. USD 140.7 million).

If there is one area of ​​strength worth highlighting, it is probably HVT’s gross margins which are up 60bps and currently stand at 60.4%; even for FY, the gross margin outlook is quite stable, with management expecting to deliver in a range of 60-60.5%. We can appreciate why it’s likely to remain resilient, as HVT hasn’t necessarily bloated its balance sheet with unnecessary inventory that risks being sold off and thus hurting GM. Note that inventory, which peaked in the second half of 2022, has been on a downward trend for some time, and throughout FY24 has remained flat at $92-94 million.

Why are we moving Haverty to a holdover purchase?

As mentioned in previous sections, Haverty and the residential furniture markets are not in the best of health, but a useful catalyst on the horizon is the Fed’s stance on monetary policy rates. There is still much debate over how many 50 or 25 bps cuts the Fed will facilitate this week, but before the end of FY25, rates are still expected to fall by more than 200 bps, with more than 100 bps expected. of discounts only this year. This could revive some momentum in the housing market and work well for a premium player like Haverty as he seasonally approaches the strongest quarter of the year (Q4).

Another thing to note is the fact that, sequentially, the sales declines in the composition stores have decreased over time; in Q1 it reached -18.5%, followed by -13.6% in Q2, and Q3 could benefit from a light base (the decline in product store sales in Q3 last year was -20.7%) .

Then, we know that when all is said and done, FY24 will still end up as a disappointing year for earnings (expected 56% YoY decline), and that’s why we’ve seen share price weakness throughout this year . But what about next year?

Well, over the past six months, FY25 EPS estimates have also been cut quite a bit by -33% to $2.75. However, even at these levels, we’re looking at a pretty impressive profit growth of over 86% YoY%.

Expected FY25 EPS of $2.75 also sees the stock priced at just 9.83x 1-year forward P/E, which translates to a 17% discount to its rolling average on long term.

The reduced valuation picture may see investors who specialize in small-cap discretionary stocks take more interest in Haverty. Note that Haverty’s relative resistance ratio to this peer group it is now approaching the record lows last seen during the pandemic lows, from where we have seen a rebound. As it stands, the current RS ratio is about 38% lower than the long-term average.

Interestingly enough, you might be interested to note that the smart money has already been gradually lifting its stake in Haverty for some time now. Overall, over the past six months, they have increased their position by a double-digit percentage.

Another reason why Haverty may be doing well right now is that you also get a juicy dividend yield of 4.58%, across both share classes, and this could provide useful insurance during later draws. Consider that the current yield is almost 100bp more than the stock yield.

Finally, we will sign off with favorable developments in Haverty’s monthly chart. From the pandemic lows of $8, we saw a strong uptrend to the $46 levels, followed by a long consolidation phase. In this consolidation phase, we have resistance leaning at the sub-$35 levels with good support at the $23-24 levels. The red triangles on the chart highlight how the stock has broken down to those levels multiple times and received bargain hunting support, which supported the stock price. Given the current share price and the upper and lower bounds of this consolidation phase, we think the risk-reward is quite favorable.

In conclusion, Haverty is still not out of the woods, but given the stable gross margin and stock picture, the potential for earnings growth next year, attractive valuations, attractive yield, institutional support and favorable risk reward in the charts, we are revising our rating from a HOLD to a BUY.