Haverty: The Status-Quo Isn't Ideal, But Things May Turn For The Better (Rating Upgrade)

seekingalpha09-17

Haverty Furniture, a premium retailer with 120 stores, offers dual-class shares: HVT for liquidity and dividends, HVT.A for superior voting rights and flexibility to convert to HVT.Haverty appears to ...

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Crucially, HVT.A owners always have the option of converting their stake to HVT  at any time, but this conversion flexibility is not afforded to the holders of HVT. Regardless, this year has proven to be a challenging year for holders of both classes of shares. On a YTD basis, when other small-cap discretionary stocks have held up with positive gains of almost 4%, HVT and HVT.A have plummeted by -21% and -26% respectively.   YChartsIs","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4178":"家庭装饰零售","HVT":"哈弗蒂家具"},"translate_title":"哈弗蒂：现状并不理想，但情况可能会好转（评级上调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HVT":1,"US10Y.BOND":0.85,"US12M.BOND":0.85,"US2Y.BOND":0.85,"US30Y.BOND":0.85,"US3Y.BOND":0.85,"US5Y.BOND":0.85,"US6M.BOND":0.85,"US7Y.BOND":0.85,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"Haverty Furniture, a premium retailer with 120 stores, offers dual-class shares: HVT for liquidity and dividends, HVT.A for superior voting rights and flexibility to convert to HVT.Haverty appears to have lost market share this year, with its sales decline in H1 coming in at 2.2x the sales decline of the home furniture and furnishing market.Despite challenging market conditions, Haverty's gross margins remain stable, are expected to stay that way on account of its premium positioning, and stable inventory position.The Fed's potential rate cuts could revive the housing market, benefiting Haverty as it enters its strongest quarter in Q4 while Q3 comps are not tough.An attractive valuation, strong dividend yield, growing institutional support and favorable risk-reward on the charts, prompt us to revise our rating from a HOLD to a BUY.   alvarez/E+ via Getty ImagesIntroduction Prospective 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 across 17 states in the Southern and Midwest regions of America. Most of its products are priced in the middle to upper-middle price ranges, and the company refrains from stocking up on promotional price-driven products that typically characterize the product portfolio of most regional and national retailers. The premiumization theme is driven home by the fact that, unlike quite a lot of other retailers, Haverty does not outsource its delivery function, and it also offers in-house designer services for customers looking for a more in-depth personalized experience. To get exposure to Haverty, investors can go down two routes, as it has a dual-class share offering. If you’re looking for greater liquidity and superior dividends, you can opt for HVT, but if you’d like to more keenly influence matters concerning the company, HVT.A would represent a more appropriate bet. To elaborate further, the bulk of Haverty’s investor base consists of holders of HVT, as they comprise around 98.2% of the total shareholder base. When it comes to dividends, HVT holders also get 105% of the dividends that are paid to holders of HVT.A. As an aside, it’s worth noting that Haverty Furniture has been paying cash dividends for 89 years on the trot now! However, holders of HVT.A have superior voting rights of 10:1 for all matters subject to a shareholder vote, and specifically, when it comes to the election of 75% of the board of directors, they get to vote separately. Crucially, HVT.A owners always have the option of converting their stake to HVT (in proportion of 1:1) at any time, but this conversion flexibility is not afforded to the holders of HVT. Regardless, this year has proven to be a challenging year for holders of both classes of shares. On a YTD basis, when other small-cap discretionary stocks have held up with positive gains of almost 4%, HVT and HVT.A have plummeted by -21% and -26% respectively.   YChartsIs the worst over, or could we see further weakness take hold as we inch towards the final quarter of the year? The Status-Quo Haverty management has been repeatedly beating the drum on how an inimical interest rate environment and a frozen housing market (sales in the recent Spring season were the worst in 12 years) has dampened sales momentum for them. In fairness, they aren’t the only home furnishing retailer that has had to take it on the chin. Industry data would show that this segment is contracting, but there’s every reason to believe that Haverty may be losing share in a falling market. For instance, cumulative monthly sales data for 2024 from Census shows that furniture and home furnishing stores have been witnessing sales contraction to the tune of 7% for H1, but Haverty alone has seen its reported sales fall by a larger margin of 16% for the same period (comp store sales for H1 have fallen by a similar threshold). Haverty’s woes are compounded in a down cycle because it seeks to position itself as a premium furniture business, and this is not typically where customers would choose to shop from when money is tight. In fact, at last month’s quarterly event, management noted that whilst store traffic saw some sequential improvement, their closing rates still continue to slip. This essentially suggests that whilst the appetite for home furnishing is ticking up slightly, one isn’t likely to get the best value proposition at Haverty Furniture. How is Haverty Coping? During difficult markets such as this, it is common to see businesses take out costs to cope with a topline slump, but whilst Haverty is doing so in some areas, it is also taking the bold approach of making some strategic investments in expanding to new locations (the goal is to open five stores each in FY24 and FY25), upgrading stores, website improvements, etc. As a result, there hasn’t necessarily been a meaningful shift in the cost base.   YChartsOverall, one can see that whilst sales have been trending lower over the last three years, the pace of SG&A decline on a YoY basis is roughly only half the pace of sales decline. Put another way, as of H1, the SG&A margin currently stands at a higher threshold of 58.6% vs. 53% as of H1-23. What investors also need to recognize is that a greater proportion of Haverty’s SG&A base consists of fixed and discretionary costs that don’t normally move in tandem with sales. As of H1-24, these stickier costs have seen their share as a percentage of sales increase by 570bps to 38.8%. Looking ahead, even though the fixed SG&A for the FY is likely to come off by $8m YoY, in H2, the pace will certainly be higher than what was seen in H1 (expected spend of $142.3m vs. $140.7m).   10QIf there’s an area of strength worth highlighting, it is perhaps with HVT’s gross margins which are up by 60bps and currently hover at 60.4%; even for FY the gross margin outlook is fairly stable with management expecting to deliver within a range of 60-60.5%. We can appreciate why this is likely to stay resilient because HVT hasn't necessarily bloated its balance sheet with unnecessary inventory that runs the risk of being sold at discounted prices and thus impacting GMs. Note that inventory which peaked in the second half of 2022 has been on a declining trend for a while, and all through FY24 it has remained flattish at the $92-$94m mark.   YChartsWhy We Are Moving Haverty To A Buy From A Hold As touched upon in the previous sections, Haverty and the residential furniture markets aren’t in the best of health, but a useful catalyst on the horizon is the Fed’s stance on policy rates. There’s still plenty of debate over how many bps (50 or 25) worth of cuts the Fed will facilitate this week, but before the end of FY25, it is still expected that rates could come off by over 200bps with the expectation of more than 100bps of cuts this year alone. This could revive some momentum in the housing market, and work nicely for a premium player like Haverty as it approaches its seasonally the strongest quarter of the year (Q4).   BloombergThe other thing to note is that sequentially, comp-store sales declines have been easing over time; in Q1 it came in at -18.5%, followed by -13.6% in Q2, and Q3 could benefit from an easy base (comp-store sales decline in Q3 last year came in at a whopping -20.7%). Then, we know that when all is said and done, FY24 will still end up as a disappointing year for earnings (expected YoY decline of 56%), and that’s why we’ve seen share price weakness all through this year. But how about next year?   Seeking AlphaWell, over the last six months, EPS estimates for FY25, have also been dialed down quite significantly by -33% to $2.75. Yet even at those levels, we're looking at fairly impressive bottom-line growth of over 86% YoY%.   YChartsThe FY25 expected EPS of $2.75 also represents a stock priced at just 9.83x 1-year forward P/E, which translates to a 17% discount over its long-term rolling average. The discounted valuation picture may see investors who specialize in small-cap discretionary stocks take a greater interest in Haverty. Do note that Haverty’s relative strength ratio versus its peer group is now approaching the record lows last seen during the pandemic lows, from where we saw a bounce. As things stand, the current RS ratio is around 38% lower than its long-term mean.   YChartsInterestingly enough, you’d be interested to note that the smart money has already been gradually lifting its stake in Haverty for a while now. All in all, over the last six months, they’ve increased their position by a double-digit percentage.   YCharts Another reason why Haverty may work well at this juncture is that you also get the support of a juicy dividend yield of 4.58%, on both classes of shares, and this could offer useful insurance during further drawdowns. Do consider that the current yield is almost 100bps more than what the stock typically yields.   YChartsFinally, we would sign off with the favorable developments on Haverty’s monthly chart. From the pandemic lows of $8 we’ve seen a strong uptrend, to the $46 levels followed by a long phase of consolidation. Within this consolidation phase, we have a sloping resistance at the sub $35 levels, with good support at the $23-$24 levels. The red triangles in the chart highlight how the stock has dropped to those levels multiple times and received some bargain-hunting support, which has propped up the share price. Considering the current share price and the upper and lower boundaries of this consolidation phase, we see the risk-reward as quite favorable.   Investing To close, Haverty is still not out of the woods, but considering the stable gross margin and inventory picture, earnings growth potential for next year, alluring valuations, attractive yield, institutional support, and favorable risk-reward on the charts, we revise our rating from a HOLD to a BUY.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2468582439"}