Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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 ended December 31, 2020 (the “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 the SEC. All forward‑looking 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.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted in significant economic disruption and impacted
our business. We closed our stores and ceased delivery operations in the second half of March 2020. Affected team members were paid during this period and most corporate personnel transitioned to working
remotely. On April 1, 2020, we extended our store closure for another 30 days and furloughed 3,033 team members or approximately 87% of our workforce. Given the dramatic shock to the economy caused by the pandemic and uncertainty of the ongoing
impact, we made a permanent reduction in our workforce of approximately 1,200 team members effective April 30, 2020 and extended the furlough of approximately 730 team members until June 1, 2020. We reopened 103 of our stores on May 1, 2020 and the
remaining 17 were opened by June 20, 2020 and deliveries restarted on May 5, 2020.
We took several steps to strengthen our financial position and maintain financial flexibility by reviewing operating expenses, evaluating merchandise purchases, reducing
capital expenditures, temporarily borrowing $43.8 million on our credit facility (which was repaid within 96 days), and completing a $70.0 million sale-leaseback transaction in May 2020.
Our business has been very strong since reopening. Consumers not negatively impacted financially are spending more money on furniture and accessories as they spend more
time at home. Demand is outpacing product availability in certain categories. Manufacturers are challenged to ensure safe work environments and have encountered some raw material shortages and transportation capacity issues, resulting in product
shortages and delays in a number of product categories. We are continuing to assess our staffing needs and have encountered difficulties in increasing our distribution and delivery capacity due to labor shortages in some of our markets.
The COVID-19 pandemic is complex and continues to evolve with sporadic resurgences, new shutdowns and disruptions of vendor operations, new virus variants, and the
vaccine rollout. At this point, we cannot reasonably estimate the duration of the pandemic’s influence on consumers, the “nesting” economy, and our business.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. Stores closed due to COVID-19 were excluded from comp-store sales. 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 lag time between customers
placing orders and delivery has grown in 2021 due to demand outpacing merchandise supply. 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 are not substitutes for net sales presented in accordance with US GAAP.
The following outlines our sales and comp-store sales increases and decreases for the periods indicated:
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
Net Sales
|
|
|
Comp-Store Sales
|
|
|
Net Sales
|
|
|
Comp-Store Sales
|
|
|
Period
|
|
|
Total Dollars
|
|
|
%
Change
|
|
|
$
Change
|
|
|
%
Change
|
|
|
$
Change
|
|
|
Total Dollars
|
|
|
%
Change
|
|
|
$
Change
|
|
|
%
Change
|
|
|
$
Change
|
|
|
Q1
|
|
|
$
|
236.5
|
|
|
|
31.8
|
%
|
|
$
|
57.1
|
|
|
|
11.5
|
%
|
|
$
|
15.4
|
|
|
$
|
179.4
|
|
|
|
(4.2
|
)%
|
|
$
|
(7.8
|
)
|
|
|
11.6
|
%
|
|
$
|
13.8
|
|
|
Q2
|
|
|
$
|
250.0
|
|
|
|
127.3
|
%
|
|
$
|
140.0
|
|
|
|
46.9
|
%
|
|
$
|
48.8
|
|
|
$
|
110.0
|
|
|
|
(42.7
|
)%
|
|
$
|
(81.9
|
)
|
|
|
(15.2
|
)%
|
|
$
|
(18.4
|
)
|
|
Q3
|
|
|
$
|
260.4
|
|
|
|
19.7
|
%
|
|
$
|
42.9
|
|
|
|
17.7
|
%
|
|
$
|
38.4
|
|
|
$
|
217.5
|
|
|
|
3.9
|
%
|
|
$
|
8.2
|
|
|
|
4.0
|
%
|
|
$
|
8.4
|
|
|
YTD Q3
|
|
|
$
|
746.9
|
|
|
|
47.3
|
%
|
|
$
|
240.0
|
|
|
|
22.5
|
%
|
|
$
|
102.6
|
|
|
$
|
506.9
|
|
|
|
(13.9
|
)%
|
|
$
|
(81.5
|
)
|
|
|
0.8
|
%
|
|
$
|
3.8
|
|
Although we closed our stores and paused our operations mid-March of last year, our business has been strong since reopening in May 2020. Our stores are operating with a
smaller staff and are open fewer hours. Our delivery capacity is improving but remains slightly behind our prior year pre‑pandemic level due to labor shortages and supply chain disruptions. Many manufacturers continue to be challenged by raw material
shortages, transportation logistics, labor shortages, and lingering health and safety issues. Many of the manufacturers in Vietnam and Indonesia that produce our products paused their operations in July due to a resurgence of COVID‑19. Fortunately,
most began reopening in mid-October and are operating at various levels of capacity. However, these shutdowns may impact our merchandise available for delivery in future quarters.
The above chart outlines our sales for the quarters and year to date. Our stores were closed and we did not make any deliveries in April 2020. Our written sales for the
quarter ended September 30, 2021 were up 2.0% compared to the same period in 2020 which was up 22.8% over 2019.
Ours sales by merchandise category are impacted by product availability. Long production lead times for our custom upholstery orders, which were four to six weeks
pre‑pandemic and are currently averaging 16 weeks, have negatively impacted our business in this category. Consumers’ desire for faster fulfillment has overtaken their “pandemic patience” and are shifting to purchases of available merchandise. Custom
upholstery orders were 28.0% of total written upholstery sales for the pre-pandemic first quarter of 2020 and a high of 29.8% in the third quarter of 2020 but have steadily fallen to 20.0% in the third quarter of 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Profit
Gross profit for the third quarter of 2021 was 56.8%, up 60 basis points compared to the prior year period of 56.2%. We have judiciously adjusted our pricing in response
to product price increases and higher inbound freight costs. Gross profit for the first nine months of 2021 was 56.8%, up 130 basis points compared to 55.5% for the same period of 2020. Our focus on retail pricing and our sales mix have offset the
negative impact to gross profit from increases in our LIFO reserve.
We estimate gross profit margins for the full year of 2021 will be 56.5% to 56.8%.
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 third quarter of 2021 were 44.6% versus 46.0% for the same period in 2020. This change reflects the leveraging of costs
on increased sales and the impact of the operational changes implemented in 2020 under our business continuity plan. SG&A dollars increased $16.1 million for the third quarter of 2021 and increased $68.0 million for the nine months ended
September 30, 2021 compared to the same prior year periods.
During April 2020, virtually all team members in our store and distribution operations were furloughed and warehouse and corporate office personnel were furloughed to a
minimum level for necessary operations. We covered the health benefits premiums for those furloughed which totaled approximately $2.1 million. Salaries and wages associated with the furloughed team members was approximately $9.9 million. We reduced
our workforce by approximately 35% effective April 30, 2020 and paid severance costs of approximately $1.7 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 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 September 30,
|
|
|
Nine Months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
(In thousands)
|
|
|
|
|
% of
Net Sales
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
|
|
% of Net Sales
|
|
|
|
|
|
% of Net Sales
|
|
|
Variable
|
|
$
|
43,708
|
|
|
|
16.8
|
%
|
|
$
|
37,678
|
|
|
|
17.3
|
%
|
|
$
|
126,374
|
|
|
|
16.9
|
%
|
|
$
|
93,685
|
|
|
|
18.5
|
%
|
|
Fixed and discretionary
|
|
|
72,448
|
|
|
|
27.8
|
|
|
|
62,419
|
|
|
|
28.7
|
|
|
|
211,941
|
|
|
|
28.4
|
|
|
|
176,596
|
|
|
|
34.8
|
|
|
|
|
$
|
116,156
|
|
|
|
44.6
|
%
|
|
$
|
100,097
|
|
|
|
46.0
|
%
|
|
$
|
338,315
|
|
|
|
45.3
|
%
|
|
$
|
270,281
|
|
|
|
53.3
|
%
|
The variable expenses in dollars were higher in the third quarter and first nine months of 2021 compared to the same periods in 2020 due to the increase in sales.
The variable expenses for the three months ended September 30, 2021 as a percent of sales compared to the prior year period reflect additional leveraging of certain
selling and delivery expenses. The variable expenses for the nine months ended September 30, 2020 include payment of severance costs and health benefits for furloughed team members.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Fixed and discretionary expenses were impacted in the third quarter of 2021 primarily by increases in general and administrative expense for compensation, benefits, and
related payroll and labor costs of $3.8 million, warehouse expense of $2.8 million, and marketing spend of $1.7 million, compared to the same period of 2020.
Our variable type expenses within SG&A for the full year of 2021 are anticipated to be 17.0% to 17.3%. Fixed and discretionary expenses are expected to be
approximately $278.0 to $281.0 million for the full year of 2021.
Liquidity and Capital Resources
Cash and Cash Equivalents at End of Year
At September 30, 2021, we had $225.7 million in cash and cash equivalents, and $6.7 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. We expect capital expenditures of approximately $37.0 million for the full year of 2021.
In May 2020, we entered into the Third Amendment to our Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) with a bank. The Credit
Agreement, which matures September 27, 2024, provides for a $60.0 million revolving credit facility. Amounts available to borrow fluctuate and availability at September 30, 2021 was $15.7 million and we had no amounts outstanding.
Leases
We use operating leases to fund a portion of our real estate, including our
stores, distribution centers, and store support space.
Share Repurchases
In August 2021, our Board of Directors authorized an additional $25.0 million for
our share repurchase program. During the three months ended September 30, 2021 we purchased 537,196 shares of common stock for approximately $19.5 million under previous and current authorizations. There
is approximately $22.3 million at September 30, 2021 that may yet be used for purchases under the current authorization.
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 approximately $89.0 million in the first nine months of 2021 driven primarily by net income of $66.5
million and non-cash adjustments of $17.0 million, consisting of depreciation and amortization and stock-based compensation, and by changes in working capital inflows. The primary working capital inflows were from customer deposits of approximately
$34.0 million partially offset by outflows for inventory of $29.1 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net cash provided by operating activities in the first nine months of 2020 was $99.8 million driven primarily by changes in working capital. For
calculation of cash provided by operating activities the gain from sale of land, property, and equipment of $34.2 million is excluded, partially offsetting net income of $33.7 million and non‑cash adjustments of $18.6 million. The primary working
capital inflows were from increases in customer deposits of $58.3 million and accounts payable and accrued liabilities of $13.4 million and a decrease in inventories of $13.9 million.
Investing Activities. Cash used in investing activities was approximately $28.0 million in the first nine months of 2021 compared to cash provided by investing activities of $67.2 million during the first nine months of 2020.
The difference primarily is from $74.4 million of proceeds from sale of land, property, and equipment in 2020.
Financing Activities. Cash used in financing activities of $35.4 million in the first nine months of 2021 primarily
reflected $19.5 million of share repurchases and $13.0 million of cash dividends paid.
Cash used in financing activities of $30.9 million in the first nine months of 2020 primarily reflected $19.7 million of share repurchases and
$10.3 million of cash dividends paid.
Store Plans and Capital Expenditures
|
Location
|
Opening Quarter
Actual or Planned
|
Category
|
|
Myrtle Beach, SC
|
Q-1-21
|
Open – New market
|
|
The Villages, FL
|
Q-3-21
|
Open
|
|
Dallas, TX
|
Q-3-21
|
Closure
|
|
Austin, TX
|
Q-1-22
|
Open
|
Net selling space in 2021 is expected to be flat compared to 2020.
We purchased our Virginia home delivery center which was part of our May 2020 sale leaseback and acquired a retail location at the end of its lease
term during the third quarter of 2021. Our capital expenditures also include amounts for information technology for operations and website enhancements. Total capital expenditures are estimated to be approximately $37.0 million in 2021 depending on
the timing of spending for new 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.
