Haverty Furniture Companies, Inc. – Currently Listed as ‘HVT’ and ‘HVT.A’ on the New York Stock Exchange

Free

Company Overview

Haverty Furniture Companies, Inc. (“HVT”) is a specialty retailer of residential furniture and accessories and has stated that their “customers are typically well-educated women in middle to upper-to-middle income households” [5]. The Company was founded in the year 1885 before eventually being incorporated in September 1929, right before their IPO in October 1929. As of the date of the latest 10-K filing the Company operated 121 stores in 16 states in the Southern and Midwest regions.

The Company operates within a single reportable segment.

This Security Issue came to our attention at the price of approximately 30.84 at around mid-December, with drafting of this Piece beginning relatively soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s previous earnings consistency and stability
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Silver’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from HVT’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 1.46 in accordance with Table 2 – 3, and Table 2 – 4 above. The best, average and worst-case scenarios are 1.28, 1.22 and 1.10 respectively, the latter three of which were below the minimum recommended figure of 1.5. The Issue also fails the acid test in all four instances.

The Company has no long-term debt to have less than 110% of the net current asset value.

The Company has not demonstrated any losses over the last decade, and it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company has an uninterrupted annual dividends streak going back to 1985.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2013) we can see that over the latest fiscal decade, the EPS have increase by approximately 244%.

The discernible tangible equity per share is 0.21 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -2.78, -4.51 and -5.74, respectively. The current price of 29.90 is greater than 120% of all of these values, with the latter three being negative thus rendering the metric invalid.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were three main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following three points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Equity of Stock

As you no doubt saw in the title of this Piece, Haverty Furniture Companies, Inc. has two forms of publicly traded equity via the Common Stock (stock ticker symbol HVT) and the Class A Common Stock (stock ticker symbol HVT.A). The provenance of this we are unsure of, but we believe the fundamental differences have been outlined by the Company in the following manner:

Common Stock has a preferential dividend rate of at least 105% of the dividend paid on Class A Common Stock. Class A Common Stock has greater voting rights which include:  voting as a separate class for the election of 75% of the total number of directors and on all other matters subject to shareholder vote, each share of Class A Common Stock has ten votes and votes with the Common Stock as a single class. Class A Common Stock is convertible at the holder’s option at any time into Common Stock on a 1-for-1 basis; Common Stock is not convertible into Class A Common Stock. [5, 7, 9, 11]

It does appear that the public is able to purchase whichever equity they prefer which leaves each potential with the clear options of more dividends, more voting power or both (i.e., invest in both types of equity). At least that is how it presents on a surface level. If anything, we would perhaps suggest the voting power is more important especially as the amount of dividends paid is not that significantly different but perhaps if the equity purchase is scaled up, then the small percentage point difference translates to much large dividend numbers in theory. Of course, we are speaking from the standpoint of the smaller scale individual investor which is why we suggested what we did. If one wishes to be an active partaker in the voting of (relatively) significant matters when the opportunity presents itself, then it could be seen as imperative to have your vote hear as loud as possible which is easier done in this instance with the HVT.A shares. That being said, we imagine more investors would likely have the cash dividends instead which we do not blame anybody for, as the operations we try to shed light on are outlined as follows – “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative” [2]. The adequate return is subjective, and if somebody favours that element it us up to them. Ultimately as always, we leave the final decision up to the reader.

Controlled Company Status

Quick subsection here, but the Table below shows why we would have expected this to have been referred to as “controlled”:

Surprisingly such references were not made which caught us by surprise, but we wonder if this is on account of the subsection above. Relevantly we had the following unfavourable Management observations:

  1. There was an Executive Committee which never hold meetings.
  2. There are non-GAAP measures used to determine EO compensation.
  3. The Company recently increased their stock ownership guideline requirements.
  4. There were a few delinquent Section 16(a) reports in the latest decade’s worth.

Decreased Footfall In-Store

On account of the recent technological changes, it occurred that Issue may be at risk of financial setbacks and some fiscal decadence as there is notoriously declining footfall in conventional retail spaces. Online shopping and the rise of e-commerce poses some threat to the traditional brick-and-mortar stores and whilst HVT has had some acknowledgment of their efforts to manage an online presence we thought to have a quick look into some reported metrics, at the end of the financial year’s end, to see how some changes have occurred. Please see Table 4 – 2 directly below:

A lot of the metrics have increased, but the most notable decreases were the number of employees and the shareholder’s equity, both of which peaked around 2015-2016. The net sales, total assets, and net income have all increased so any possible footfall in the brick-and-mortar stores is very possibly being offset against the Company’s online presence. We’d perhaps suggest an eye be kept on this, but no more than any other particular store as we would not say there has been much if any apparent stagnation here with regards to dollars generated.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. The Company has been around for over a century, thus has stood the test of time.
  2. The Business may be in the peak of a business cycle.
  3. The Company is overly conservatively capitalized so may not make for an interesting speculative purchase in this regard.
  4. The Company has provided many predictions, some are accurate and some are not. We did not note much consistency.
  5. We would say this is a medium sized company in terms of consolidated financials.
  6. We do not suspect any corporate pyramiding.
  7. The basis of presentation has said that the companies are wholly-owned.
  8. Depreciation is accounted for on the income statement. It is in the “Selling, General and Administrative Expenses” line of the income statement. The fixed assets are depreciated “over the estimated useful lives of the assets using the straight-line method” [1, 3, 5, 7, 9, 11, 13, 15, 17, 19, 21, 23], which are as follows: i) ‘Buildings’ is 25 – 33 years; ii) ‘Improvements’ is 5 – 15 years; iii) ‘Furniture and Fixtures’ is 3-15 years; and iv) ‘Equipment’ is 3-15 years.
  9. No recent history of stock splits [24] or stock dilution.
  10. No history of hostile take-overs, especially via unrelated companies or debt accumulation.
  11. There is an active share repurchase plan in place.
  12. There are treasury stock on the Company’s balance sheet, the intention of which we are unsure of.
  13. The net income and comprehensive income are approximately the same.
  14. There are more year-over-year increases in cash and cash equivalents than there have been decreases over the last decade.
  15. Regarding the inventory valuation, the Company has said that “inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method” [1, 3, 5, 7, 9, 11, 13, 15, 17, 19, 21, 23].
  16. The effective tax rates are typically higher than the official corporate tax rates.
  17. There are no particularly large or concerning payments due in a year or so.
  18. There has not been a recent notable decline in the value of assets and current assets.
  19. The latest 10-K filing said that “from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results” [5]. Prior to that it said “there are no material pending legal proceedings to which we are a party or of which any of our properties is the subject” [1, 3, 5, 7, 9, 11, 13, 15, 17, 19, 21, 23].
  20. As of the 2021 10-K filing date, the Company has identified as a “large accelerated filer” in Rule 12b-2 of the Exchange Act., prior to which it was a “accelerated filer”.

Points we feel may be considered negative

  1. The Company lost money during the economic downturn in 2008-2009 [23].
  2. Very high institutional ownership of the common shares outstanding (80.79% at the time of writing [25]).
  3. We noted several unusual charges over latest five 10-K filings:
    1. “Other income, net for the year ended December 31, 2015 includes proceeds received of $800,000 for the settlement related to credit card litigation” [13].
    2. “During 2016, partly offsetting the expenditures for new stores and the expansion of the Florida distribution center we had $12.7 million of investments which matured and received $3.0 million in insurance proceeds for the destroyed Lubbock store” [13].
    3. “During 2017, we received approximately $2.0 million in insurance proceeds to offset costs of rebuilding and repairing two stores” [13].
    4. “We had a store receive significant damage on December 27, 2015 from a blizzard. We reduced the value of the property and its contents at December 31, 2015 to zero and recorded an insurance recovery receivable” [11].
    5. “During 2016, we recorded $2,228,000 in gains for the insurance recovery on the building and $1,110,000 for inventory, business interruption and other expenses” [11].
    6. “We received additional amounts in 2017 for the remaining full replacement value of the building as construction was completed and recognized a gain of $1,351,000” [11].
    7. “During 2017 we also recorded $1,500,000 in gains from insured losses related to a store damaged by a faulty underground sprinkler line and losses from Hurricane Irma” [11].
    8. “The sale of former retail locations and other operating assets generated losses of $425,000 in 2018 and gains of $525,000 in 2017 and $700,000 in 2016” [11].
    9. “During 2017 we also recorded $2,851,000 in gains from insured losses related to store damage, including property losses from Hurricane Irma” [9].
    10. “An impairment loss of $2,415,000 for a retail store was recorded during the fourth quarter of 2019 and no impairment losses were recorded in 2018 or 2017” [9].
    11. “During the year ended December 31, 2020, we received concessions from certain landlords in the form of rent deferrals of approximately $4.5 million and abatements of approximately $1.8 million. We have elected to account for these rent concessions as though enforceable rights and obligations for those concessions existed in the original lease agreements and have recorded a non-interest bearing payable for the deferred rent payments” [7].
    12. “Includes gain of $31.6 million on a sale-leaseback transaction in 2020 which impacted diluted earnings per share $1.24” [5].
  4. We noted that the dividend streak overlapped with losses, say during 2008 and 2009, i.e., cash dividends were paid to shareholders during years which the Company was not profitable.

Points we feel may be considered positive

  1. We would say the operations of the Company are easy for the layman to understand.
  2. There is no reliance on a small number of customers or suppliers.
  3. There currently is no long-term debt on the balance sheet, and has not been for some time.
  4. Extra cash dividends have been paid to shareholders in recent years.
  5. There are frequently no related party transactions.

Possible Questions for HVT’s Approximate 12,469 Stockholders to Consider, Investigate and/or Raise with Management

  1. Over the last decade there has not been much of a change with the Company’s income, on average. Is anything being done to improve this?
  2. Is the Company not “controlled”?
  3. The number of states the Company operates in has been rather consistent over the last decade, are there not any plans to improve this?
  4. Why has the 10-K filing’s mentions of legal proceeding changed? Has the Company recently been involved in any lawsuits and or legal proceedings?
  5. Going forward can the Company provide full comprehensive breakdowns of the ‘other current assets’ and ‘other assets’ listed on all 10K and 10-Q filings?
  6. Can exact estimated useful lives of the assets be provided?
  7. What are the Company’s intentions with the treasury stock?
  8. The Company has mentioned ‘stockholder engagement’, how do they reach out to the smaller/individual investor?
  9. For the last decade the DEF 14As have said that no Directors attended the latest annual meeting. Why is this consistently the case? Is there a lack of interest?
  10. Why did the Company recently increased their stock ownership guideline requirements for Management?

 

Valuations

For this valuation we will be using the share price of the Common Stock, but we believe that regardless of the equity type used here, the valuation will be the same. The price of this Security Issue at the time of this Piece’s publication is 29.90. Using our most recent three-year average of the diluted EPS (1.72) as opposed to the most recent EPS figure (2.67) increased the P/E ratio from 11.20 to 17.38; and using our discernible tangible equity value per share (0.21) as opposed to the stated book value per share (8.33, in accordance with Table 2 – 2) has increased the P/BV ratio from 3.59 to 140.26. With that in mind and considering current federal interest rates (4.50% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 1.72 for diluted EPS and our stated discernible tangible equity value per share of 0.21, and multiplying the corresponding P/E and P/BV ratios of 17.38 and 140.26 respectively, we get a figure of 2,438.38, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 2.87).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – no longer valid
  • The Company’s previous earnings consistency and stability – still valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently overvalued on account of its current and previous quantitative showing.

Our Valuation: Rubber

This Issue did not do great in our ‘Initial Discussions Regarding the Company’s Financials’ section? If this had come in at a pricing point of say 10-15 we would have likely assigned it the next highest valuation of ‘Plastic’.

At this point in time and all matters here considered, this is not stock pick we would likely follow nor likely add to a stock portfolio even at a seemingly reasonable price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. HVT’s 3rd 2022 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/216085/000162828022028381/hvt-20220930.htm
  4. HVT’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608522000008/hvtdef14a2022.htm
  5. HVT’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000114036122007311/hvt10k123121.htm
  6. HVT’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608521000012/hvtdef14a2021.htm
  7. HVT’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000114036121007795/hvt10k123120.htm
  8. HVT’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608520000024/hvtdef14a20.htm
  9. HVT’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608520000011/hvt10k123119.htm
  10. HVT’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608519000008/hvtdef14a2019.htm
  11. HVT’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608519000005/hvt10k123118.htm
  12. HVT’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608518000015/hvtdef14a2018.htm
  13. HVT’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608518000011/hvt10k123117.htm
  14. HVT’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608517000008/hvtdefa2017.htm
  15. HVT’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608517000006/hvt10k123116.htm
  16. HVT’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608516000047/hvtdef14a2016.htm
  17. HVT’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608516000043/hvt10k123115.htm
  18. HVT’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608515000012/hvtdef142015.htm
  19. HVT’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608515000009/hvt10k2014.htm
  20. HVT’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608514000012/hvtdef14a2014.htm
  21. HVT’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608514000008/hvt10k2013.htm
  22. HVT’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/216085/000021608513000015/hvtdef14a.htm
  23. HVT’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/216085/000021608513000010/hvt10k123112.htm
  24. https://www.stocksplithistory.com/?symbol=hvt
  25. https://www.gurufocus.com/stock/HVT/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K filing/annual report which represents the financial year ended that same year, typically in the calendar month of December, i.e., any mention of the ‘2019 10-K filing’ or ‘2019 annual report’ etc. refers to the 10-K filing representing the fiscal year ended December 2019. The filings are usually published a few months later, the following calendar year.

Throughout this Piece, any mention of a given year’s proxy statement refers to the DEF 14A filing/proxy statement which accompanied the most recent 10-K filing, i.e., any mention of the ‘2020 proxy statement’ refers to the DEF 14A form which accompanied the 2019 10-K filing; usually published not too soon after the 10-K filing (typically the same calendar month as the 10-K filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V