HAVERTY FURNITURE COMPANIES, INC. 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 endedDecember 31, 2022 ("Form 10-K").
Forward-Looking Statements
Statements in this Form 10-Q that are not historical facts, including statements about our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Known material risk factors applicable to us that could cause our actual results to differ from these forward-looking statements are described in "Item 1A. Risk Factors" of our Form 10-K and in the subsequent reports we file with theSEC . All forwardlooking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report except as required by law.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. 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 disruptions to our supply chain have resulted in lower inventory in certain categories, and out-of-stock merchandise delivery times can be 8 to 12 weeks. 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 none are substitutes for net sales presented in accordance with US GAAP.
The following table outlines our sales and comp-store sales increases and decreases for the periods and from the prior year indicated:
2023 2022
Net Sales Comp-Store Sales Net Sales Comp-Store Sales
Total % $ % $ Total % $ % $
Period Dollars Change Change Change Change Dollars Change Change Change Change
Q1 $ 224.8 (5.9) % $ (14.2) (6.7) % $ (16.0) $ 238.9 1.0 % $ 2.5 0.2 % $ 0.4 Total sales for the first quarter of 2023 decreased
Impacting sales were continued inflationary pressures, stock market volatility,
and rising interest rates, all of which had a negative affect on discretionary
spending. Written business for the first quarter of 2023 was down 11.7% compared
to 2022. Our written business for the first quarter of 2023 compared to the
"normal" pre-pandemic first quarter of 2019 was up 10.9% and written comp-store
sales were up 6.9%.
Our free in-home design service continues to grow, and designer sales were 26.0%
of our total written business for the first quarter of 2023 compared to 23% for
2022. Average ticket increased 4.1% for the first quarter of 2023 compared to
the first quarter of 2022 largely due to the increase in in-home design sales.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Gross Profit
Gross profit for the first quarter of 2023 was 59.1%, up 10 basis points compared to the prior year period of 59.0%. The increase is primarily due to pricing discipline and merchandise mix.
We expect annual gross profit margins for 2023 will be 58.5% to 59.0%. Gross
profit margins fluctuate quarter to quarter in relation to our promotional
cadence. Our estimated gross profit margins are based on anticipated changes in
product and freight costs and their impact on our LIFO reserve.
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 quarter of 2023 were 52.7% versus 48.2% for 2022. SG&A dollars increased$3.2 million , or 2.8%, for the first quarter of 2023 compared to the same prior year period. The change is driven by higher costs associated with selling expense of$1.4 million , higher occupancy costs of$2.0 million , increase in administrative expenses of$1.3 million , and a decrease in warehouse and delivery costs of$1.4 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 and distribution 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:
Three Months Ended March 31,
2023 2022
% of % of
(In thousands) $ Net Sales $ Net Sales
Variable $ 44,867 20.0 % $ 44,384 18.6 %
Fixed and discretionary 73,494 32.7 % 70,770 29.6 %
$ 118,361 52.7 % $ 115,154 48.2 %
The variable expenses in dollars were higher in the first quarter of 2023 compared to 2022 primarily due to the increase in third-party credit costs partly offset by a reduction in warehouse temporary labor.
Fixed and discretionary expenses were impacted in the first quarter of 2023 primarily by increases in occupancy costs and administrative expenses compared to the prior year quarter.
Our variable expenses within SG&A for the full year of 2023 are anticipated to be 19.5% to 19.7%. Fixed and discretionary expenses are expected to be approximately$289.0 to$292.0 million for the full year of 2023, a decrease from our previous guidance based on changes in our marketing spend and warehouse and delivery costs.
Liquidity and Capital Resources
Cash and Cash Equivalents at End of Year AtMarch 31, 2023 , we had$120.2 million in cash and cash equivalents, and$6.9 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. 11
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Long-Term Debt InOctober 2022 , we entered into the Fourth Amendment to our Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with a bank. The Credit Agreement, which maturesOctober 24, 2027 , provides for a$80.0 million revolving credit facility. The borrowing based atMarch 31, 2023 was$125.7 million and the net availability was$80.0 million .
Leases
We lease a portion of our real estate, including our stores, distribution centers, and store support space, pursuant to operating leases.
Share Repurchases InAugust 2022 , our board of directors authorized$25.0 million under a share repurchase program. No shares of common stock were purchased during the three months endedMarch 31, 2023 . There is approximately$20.0 million atMarch 31, 2023 that may be purchased under the existing authorization.
The timing, manner and number of shares repurchased in future periods will depend on a variety of factors, including, but not limited to, the level of cash balances, credit availability, financial performance, general business conditions, the market price of the Company's stock and the availability of alternative investment opportunities.
Cash Flows Summary
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 was$11.1 million in the first three months of 2023 compared to$20.6 million during the same period in 2022. This difference resulted primarily from changes in working capital and a decrease in net income. Working capital was impacted by a reduction in customer deposits as the backlog was reduced in 2023 and the timing of vendor payments, compared against higher inventories in 2022 due to the receipt of delayed product and merchandise and freight cost inflation.
Investing Activities. Cash used in investing activities decreased by
Financing Activities. Cash used in financing activities of decreased by$10.0 million in the first three months of 2023 compared to the first three months of 2022, primarily due to$12.5 million of share repurchases in 2022 and none in 2023.
Store Plans and Capital Expenditures
Opening Quarter
Location Actual or Planned Category
Durham, NC Q-1-23 Open
Atlanta, GA Q-3-23 Closure - Outlet
Charlotte, NC Q-3-23 Open
Dayton, OH Q-4-23 Open
Richmond, VA Q-4-23 Open - Outlet
Assuming the new stores open and existing stores close as planned, the above
activity and other changes should increase net selling space in 2023
approximately 1.6% over net selling space in 2022. We entered into a purchase
agreement March 31, 2023 to acquire our Lakeland, Florida distribution facility
for approximately $28.2 million . We previously owned the facility prior to
selling it to the landlord in May 2020 in a sale leaseback transaction. We
expect this property acquisition to close in the second quarter of 2023.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Total capital expenditures are estimated to be$53.1 million (inclusive of the$28.2 million for the property acquisition described above) in 2023 depending on the timing of spending for these projects.
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.
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