2023-07-16 01:12:12 ET
Summary
- Haverty Furniture Companies' shares have marginally outperformed the broader market despite recent weakening of its top and bottom lines, making the stock still look attractively priced.
- The furniture industry is currently facing a decline due to rising interest rates and a weak housing market, but it is expected to grow at an annualized rate of 5.2% between 2023 and 2028.
- Despite expected further weakening, Haverty Furniture is likely to deliver value to its shareholders due to its cash balance and zero debt, and its plans to continue returning cash to shareholders.
Over the past 15 years that I have built up investment experience, I have discovered that the most powerful form of investing if you want attractive returns involves the marriage of value investing with contrarian investing. Buying fundamentally cheap stocks that go against the grain can result in rather attractive upside. This is because the market often overreacts when it becomes clear that pain is around the corner. One company that has done reasonably well over the past couple of months that fits in this category is Haverty Furniture Companies ( HVT ) ( HVT.A ). Shares have outperformed the broader market marginally. And even with that outperformance and in spite of recent weakening associated with its top and bottom lines, the stock still looks attractively priced, both on an absolute basis and relative to similar firms. Given these facts, I would argue that further upside for the company is still in order. And as such, I have decided to keep the company rated a ‘buy’ for now.
Market conditions aren’t the best
So far, the picture for the furniture industry is not exactly great this year. Take data from the US Census Bureau as an example. In the first five months of this year, sales associated with furniture stores came in at $55.63 billion. This is down 2.9% compared to the same time one year earlier. What's interesting, however, is that the picture does seem to be worsening. In May, for instance, overall revenue totaled $11.46 billion. That's 4.5% below the roughly $12 billion reported one year earlier. On an adjusted basis, the situation is even worse, with sales down 6.4% nationwide.
This decline should not be all that shocking to those who follow broader economic conditions closely. Furniture and related products happen to be some of the most expensive items that people buy. Obvious exceptions would be homes and cars. Expensive items often require financing from the perspective of consumers. And with interest rates rising in an attempt to combat inflation, and with significant weakness in the housing market, there's less appetite for furniture. The high vacancy rates amongst office properties might also be a contributor to this decline. The good news is that this is not how things will always be. The current forecast , for instance, it's for the furniture market to grow at an annualized rate of about 5.2% between 2023 and 2028.
Looking at Haverty Furniture again
In the long run, this is good for any company in the furniture space. But in the short run, it can result in some pain. This is the kind of pain that we are currently seeing when it comes to Haverty Furniture. During the first quarter of the company's 2023 fiscal year, overall revenue came in at $224.8 million. That's 5.9% below the $238.9 million in revenue generated the same time last year. Management attributed this drop to a 6.7% plunge in comparable store sales, with the same issues of inflationary pressures and rising interest rates being added to stock market volatility as managements explanation for why sales are down during this time.
This is not to say that everything for the company is suffering. Management did say that its free in-home design service continues to expand. During the most recent quarter, the company generated 26% of its revenue as a result of these activities. This compares to 23% in 2022. The company also saw a 4.1% rise in the average transaction value that it processes. This grew from $3,066 to $3,192. This, management said, was largely the result of higher prices aimed at pushing inflationary pressures onto the company's clients.
Unfortunately, the firm did not have the pricing power possible to achieve this entirely. Net income, for starters, totaled $12.4 million during the first quarter of the company's 2023 fiscal year. That was down from the $19.4 million generated one year earlier. Other profitability metrics followed suit. Operating cash flow dropped from $20.6 million to $11.1 million. If we adjust for changes in working capital, we would get a decline from $24.1 million to $17.9 million. And finally, EBITDA for the company fell from $29.9 million to $18.8 million.
Given the data that we are looking at today, I have no doubt that the business will see some further weakening. But this won't necessarily stop the company from delivering value to its shareholders. As of the end of the most recent quarter, the company had $127 million worth of cash and cash equivalents on its books. This includes the $6.9 million that's collateralizing worker's compensation obligations and that may or may not be needed depending on claims. It also enjoyed zero debt. In the past, the firm's cash balance was even higher. However, management has been very active when it comes to returning cash to shareholders. In 2022 alone, the firm allocated $30 million toward share repurchases and another $33.9 million toward dividends. It seems as though management plans to continue returning cash to shareholders. But this won't stop the company from opening five new stores this year, closing one store, and maintaining its existing locations, all at a combined cost of $28 million.
Management has not provided any guidance when it comes to the current fiscal year. But if we annualize results experienced so far, we would get net income of $57.1 million, adjusted operating cash flow of $85.3 million, and EBITDA of $84.8 million. In the chart above, you can see how shares are priced on a forward basis and how they are priced using data from 2022. Even if we use the 2023 forecasted figures, the stock looks very attractive on a forward basis. In the table below, meanwhile, I decided to compare the company to five similar firms. Using both the price to earnings approach and the EV to EBITDA approach, I found that only one of the five companies ended up being cheaper than Haverty Furniture. Meanwhile, using the price to operating cash flow approach, two of the five were cheaper than our target.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Haverty Furniture | 5.8 | 4.5 | 2.9 |
The Aaron's Company ( AAN ) | 23.9 | 2.2 | 1.1 |
Hooker Furnishings ( HOFT ) | 25.3 | 7.4 | 228.6 |
Sleep Number ( SNBR ) | 14.8 | 22.5 | 7.0 |
Kirkland's ( KIRK ) | 3.7 | 3.4 | 9.8 |
Arhaus ( ARHS ) | 10.2 | 33.4 | 5.1 |
Takeaway
Back when I last wrote about Haverty Furniture in early May of this year, I concluded that the company was cheap enough and fundamentally attractive enough to warrant the ‘buy’ rating I assigned it previously. Since then, shares have outperformed the broader market, but only marginally. While the S&P 500 is up 6.5%, shareholders of Haverty Furniture have seen upside of 7.1%. I do expect that recent weakness will continue for the foreseeable future. But I would also make the case that shares are cheap enough to still justify optimism in this environment. Given these facts, I have no problem keeping the company rated a ‘buy’ for now.
For further details see:
Haverty Furniture Companies Deserves To Climb Even In Light Of Recent Pain