HVT - Haverty Furniture: A Comfy Prospect Heading Into Q1 Earnings

2023-05-01 04:58:56 ET

Summary

• Haverty Furniture is expected to announce financial results for the first quarter of its 2023 fiscal year soon.
• Analysts are currently forecasting weakness on both the top and bottom lines, though there is room for optimism.
• Given how cheap shares are, the company does seem to offer some nice upside from here.

To many, the furniture market may not seem to be all that appealing a place to allocate capital. High levels of competition, commoditized products, and low margins, not to mention susceptibility to economic uncertainty, makes this a space that has many downsides to it. At the same time, however, there are some players in this market that are trading at levels that just don't make sense. Some of them, such as Haverty Furniture ( HVT ), look to be significantly undervalued. Of course, this picture can change from time to time. Despite ending the 2022 fiscal year off on solid footing, analysts expect the enterprise to experience some weakness when the company reports financial results for the first quarter of its 2023 fiscal year. It is obviously unclear if this will come to pass. But absent a significant amount of pain, it's difficult to imagine a scenario where the company could be anything worse than fairly valued. This would create, in theory, a favorable risk-to-reward prospect that warrants a bullish outlook for the foreseeable future.

Analysts have a negative outlook

When you consider all that's going on with the economy, it would make sense for some people to turn bearish on the furniture market. During times of economic pain, consumers can hold off on buying new furniture for months, or even years. When you add in the fact that we are dealing with a difficult inflationary environment, and high interest rates that are aimed at combating inflation, it wouldn't be a surprise to see additional weakness in this market this year. But this sentiment does not exist across the board. One source , Furniture Today, estimated that sales in the US furniture market would come in at around $126.3 billion for 2023. This would represent a 1.9% increase over what was seen last year.

When it comes to Haverty Furniture, analysts are forecasting revenue for the first quarter of the company's 2023 fiscal year, a quarter that the company is supposed to announce results for after the market closes on May 2nd, of $232.1 million. This would represent a modest decline compared to the $238.9 million reported one year earlier. Given continued inflationary pressures, combined with the fact that inventory levels of the company were up just 5.6% at the end of 2022 compared to the same time one year earlier, it's likely that pricing for the company will remain strong. If there is any weakness, it will come in the form of a reduction in volume.

On the bottom line, the expectation is for earnings per share of $0.70. This would represent a significant decline from the $1.05 that the company reported one year earlier. In absolute dollar terms, this would take net profits from $19.4 million to $11.9 million. On an adjusted basis, earnings should be slightly higher at $0.78. That would represent a reading of 13.3, which would still be substantially lower than what the company saw during the first quarter of its 2022 fiscal year. Analysts have not provided guidance when it comes to other profitability metrics. But for context, operating cash flow in the first quarter of 2022 was $20.6 million. If we adjust for changes in working capital, then this was slightly higher at $24.1 million. And finally, EBITDA for the company was $29.9 million.

Shares are cheap

Truth be told, there really hasn't been too much up to this point to indicate that Haverty Furniture should experience any meaningful weakness. In the chart above, for instance, you can see financial results for the final quarter of the company's 2022 fiscal year and how those figures stack up against the same time one year earlier. And in the chart below, you can see data for both 2021 and 2022. The first thing you might notice is that revenue continued to be fairly strong. In the final quarter of 2022, for instance, net income was $23.7 million. That was down from the $24.3 million one year earlier. Although operating cash flow grows year over year, the adjusted figure for this, as well as EBITDA, experienced downside. This kind of relationship can largely be seen when looking at 2022 as a whole relative to 2021.

The real pain here came from an elevation in the company's selling, general, and administrative costs. This metric rose from 45.1% of sales to 46.4%. At first glance, this may not sound significant. But it actually works out to $14.56 million in missed pretax profits. The company experienced issues across the board here. For instance, advertising expenses grew by $2.3 million. Selling expenses, driven mostly by higher sales commissions, benefits, and third-party financing costs, shot up $13.5 million. Other issues like occupancy costs were also problematic.

Given that we don't know what to expect when it comes to the 2023 fiscal year, I do think it would make the most sense to value the company based on data that we do know. Using figures from both 2021 and 2022 makes the most sense to me. In the chart above, you can see this in progress, using a price to earnings approach, a price to adjusted operating cash flow approach, and an EV to EBITDA approach. Pricing looks almost identical irrespective of the year that you use. Meanwhile, in the table below, you can see how the company is priced relative to five similar firms. In each scenario, only one of the five companies was cheaper than Haverty Furniture.

It is true that economic uncertainty could result in some pain for the company moving forward. But even in the event that financial performance does worsen, it's difficult to imagine a scenario where the company is overvalued. Even if multiples were to trade twice as high as where they are today, I would say that the company looks reasonably attractive. Even if the picture were to worsen for a time, the company has a tremendous amount of flexibility thanks to its balance sheet. It has no debt on its books and enjoys cash and cash equivalents of $129.93 million. This is a massive amount of capital that the company can rely on during tough times, or can even use to buy back stock or to acquire other companies on the cheap.

Takeaway

At this moment, I understand why investors might be a bit concerned about anything to do with the furniture market. So far, analysts do seem to be cautiously optimistic. But when it comes to Haverty Furniture specifically, there is definitely some pessimism at play. But given how cheap shares are, and when factoring in its robust balance sheet, I cannot help but to keep bullish on the company for now.

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