NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A - Business and Basis of Presentation
Haverty Furniture Companies, Inc. (“Havertys,” “the Company,” “we,” “our,” or “us”) is a retailer of a broad line of residential furniture in the middle to upper-middle price ranges. We operate all of our stores using the Havertys brand and do not franchise our concept. We operate within a single reportable segment. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes required by United States of America generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The Company believes that the disclosures made are adequate to make the information not misleading. The financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. We believe all adjustments, normal and recurring in nature, considered necessary for a fair presentation have been included. We suggest that these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our latest Annual Report on Form 10-K.
The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from those estimates.
The Company is subject to various claims and legal proceedings covering a wide range of matters, including with respect to product liability and personal injury claims, that arise in the ordinary course of its business activities. We currently have no pending claims or legal proceedings that we believe would be reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows. However, there can be no assurance that either future litigation or an unfavorable outcome in existing claims will not have a material impact on our business, reputation, financial position, cash flows or results of operations.
Note B – COVID-19 and Economic Conditions
The novel coronavirus disease (“COVID-19”) pandemic, its contributory effects on the economy and general economic conditions continue to impact our business and results of operations. During the nine months ended September 30, 2022, we experienced, among other things, rising product prices, volatile transportation costs, rising labor costs and labor shortages, and supply chain disruptions. Furthermore, discretionary consumer spending has been adversely impacted by rising inflation, including fuel costs, and interest rates. Many of these factors impacted our business in the third quarter of 2022. The extent and duration of any future impact resulting from the COVID-19 pandemic or general economic conditions is not fully known, and we may experience additional significant economic and COVID-19 related disruptions in the future as a result.
NOTE C – Stockholders’ Equity
The following outlines the changes in each caption of stockholders’ equity for the current and comparative periods and the dividends per share for each class of shares.
For the three months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Common Stock | | Class A Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
Balances at June 30, 2022 | $ | 30,006 | | | $ | 1,806 | | | $ | 105,674 | | | $ | 375,234 | | | $ | (2,212) | | | $ | (243,782) | | | $ | 266,726 | |
Net income | | | | | | | 24,551 | | | | | | | 24,551 | |
Dividends declared: | | | | | | | | | | | | | |
Common Stock, $0.28 per share | | | | | | | (4,214) | | | | | | | (4,214) | |
Class A Common Stock, $0.26 per share | | | | | | | (334) | | | | | | | (334) | |
| | | | | | | | | | | | | |
Acquisition of treasury stock | | | | | | | | | | | (4,997) | | | (4,997) | |
| | | | | | | | | | | | | |
Amortization of restricted stock | | | | | 1,836 | | | | | | | | | 1,836 | |
| | | | | | | | | | | | | |
Other comprehensive income | | | | | | | | | 41 | | | | | 41 | |
Balances at September 30, 2022 | $ | 30,006 | | | $ | 1,806 | | | $ | 107,510 | | | $ | 395,237 | | | $ | (2,171) | | | $ | (248,779) | | | $ | 283,609 | |
For the nine months ended September 30, 2022:
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(in thousands) | Common Stock | | Class A Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
Balances at December 31, 2021 | $ | 29,907 | | | $ | 1,809 | | | $ | 102,572 | | | $ | 342,983 | | | $ | (2,293) | | | $ | (219,008) | | | $ | 255,970 | |
Net income | | | | | | | 65,620 | | | | | | | 65,620 | |
Dividends declared: | | | | | | | | | | | | | |
Common Stock, $0.81 per share | | | | | | | (12,403) | | | | | | | (12,403) | |
Class A Common Stock, $0.75 per share | | | | | | | (963) | | | | | | | (963) | |
Class A conversion | 3 | | | (3) | | | | | | | | | | | — | |
Acquisition of treasury stock | | | | | | | | | | | (29,998) | | | (29,998) | |
Restricted stock issuances | 96 | | | | | (1,778) | | | | | | | | | (1,682) | |
Amortization of restricted stock | | | | | 6,032 | | | | | | | | | 6,032 | |
Directors' Compensation Plan | | | | | 684 | | | | | | | 227 | | | 911 | |
Other comprehensive income | | | | | | | | | 122 | | | | | 122 | |
Balances at September 30, 2022 | $ | 30,006 | | | $ | 1,806 | | | $ | 107,510 | | | $ | 395,237 | | | $ | (2,171) | | | $ | (248,779) | | | $ | 283,609 | |
For the three months ended September 30, 2021:
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(in thousands) | Common Stock | | Class A Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
Balances at June 30, 2021 | $ | 29,903 | | | $ | 1,813 | | | $ | 99,016 | | | $ | 338,341 | | | $ | (2,462) | | | $ | (177,199) | | | $ | 289,412 | |
Net income | | | | | | | 24,233 | | | | | | | 24,233 | |
Dividends declared: | | | | | | | | | | | | | |
Common Stock, $0.25 per share | | | | | | | (4,164) | | | | | | | (4,164) | |
Class A Common Stock, $0.23 per share | | | | | | | (297) | | | | | | | (297) | |
Class A conversion | 3 | | | (3) | | | | | | | | | | | — | |
Acquisition of treasury stock | | | | | | | | | | | (19,493) | | | (19,493) | |
| | | | | | | | | | | | | |
Amortization of restricted stock | | | | | 1,800 | | | | | | | | | 1,800 | |
| | | | | | | | | | | | | |
Other comprehensive income | | | | | | | | | 50 | | | | | 50 | |
Balances at September 30, 2021 | $ | 29,906 | | | $ | 1,810 | | | $ | 100,816 | | | $ | 358,113 | | | $ | (2,412) | | | $ | (196,692) | | | $ | 291,541 | |
| | | | | | | | | | | | | |
For the nine months ended September 30, 2021:
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(in thousands) | Common Stock | | Class A Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
Balances at December 31, 2020 | $ | 29,600 | | | $ | 1,996 | | | $ | 96,850 | | | $ | 304,626 | | | $ | (2,560) | | | $ | (177,545) | | | $ | 252,967 | |
Net income | | | | | | | 66,497 | | | | | | | 66,497 | |
Dividends declared: | | | | | | | | | | | | | |
Common Stock, $0.72 per share | | | | | | | (12,142) | | | | | | | (12,142) | |
Class A Common Stock, $0.65 per share | | | | | | | (868) | | | | | | | (868) | |
Class A conversion | 186 | | | (186) | | | | | | | | | | | — | |
Acquisition of treasury stock | | | | | | | | | | | (19,493) | | | (19,493) | |
Restricted stock issuances | 120 | | | | | (3,014) | | | | | | | | | (2,894) | |
Amortization of restricted stock | | | | | 6,456 | | | | | | | | | 6,456 | |
Directors' Compensation Plan | | | | | 524 | | | | | | | 346 | | | 870 | |
Other comprehensive income | | | | | | | | | 148 | | | | | 148 | |
Balances at September 30, 2021 | $ | 29,906 | | | $ | 1,810 | | | $ | 100,816 | | | $ | 358,113 | | | $ | (2,412) | | | $ | (196,692) | | | $ | 291,541 | |
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NOTE D – Interim LIFO Calculations
Inventories are measured using the last-in, first-out (LIFO) method of valuation using an annual LIFO index. Accordingly, interim LIFO calculations must necessarily be based on management’s estimates of inventory levels and inflation rates. Since these estimates may be affected by factors beyond management’s control, interim results are subject to change based upon the final year-end LIFO inventory valuations.
NOTE E – Fair Value of Financial Instruments
The fair values of our cash and cash equivalents, restricted cash and cash equivalents, accounts payable and customer deposits approximate their carrying values due to their short-term nature. The assets related to our self-directed, non-qualified deferred compensation plans for certain executives and employees are valued using quoted market prices multiplied by the number of shares held, a Level 1 valuation technique.
NOTE F – Credit Agreement
At September 30, 2022, we had a $60.0 million revolving credit facility (the “Credit Agreement”) secured primarily by our inventory and maturing on September 27, 2024. Availability fluctuates based on a borrowing base calculation reduced by outstanding letters of credit.
At September 30, 2022 and December 31, 2021, there were no outstanding borrowings under the Credit Agreement. The borrowing base and net availability was $55.7 million at September 30, 2022.
In October 2022 we amended the Credit Agreement to, among other things, increase the revolving credit facility to $80.0 million, extend the maturity date to October 24, 2027, and replace the LIBOR Rate with the SOFR Rate as the interest rate benchmark.
Note G – Revenues
We recognize revenue from merchandise sales and related service fees, net of expected returns and sales tax, at the time the merchandise is delivered to the customer. We record customer deposits when payments are received in advance of the delivery of merchandise. Such deposits totaled $79.7 million and $98.9 million at September 30, 2022 and December 31, 2021, respectively. Of the customer deposit liabilities at December 31, 2021, approximately $1.2 million have not been recognized through net sales in the nine months ended September 30, 2022.
The following table presents our revenues disaggregated by each major product category and service (dollars in thousands, amounts and percentages may not always add due to rounding):
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(In thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
2022 | | 2021 | | 2022 | | 2021 |
Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales |
Merchandise: | | | | | | | | | | | | | | | |
Case Goods | | | | | | | | | | | | | | | |
Bedroom Furniture | $ | 46,068 | | | 16.8 | % | | $ | 41,438 | | | 15.9 | % | | $ | 118,953 | | | 15.5 | % | | $ | 121,848 | | | 16.3 | % |
Dining Room Furniture | 31,793 | | | 11.6 | | | 29,047 | | | 11.2 | | | 82,971 | | | 10.8 | | | 84,965 | | | 11.4 | |
Occasional | 23,874 | | | 8.7 | | | 21,955 | | | 8.4 | | | 60,881 | | | 7.9 | | | 66,128 | | | 8.9 | |
| 101,735 | | | 37.1 | | | 92,440 | | | 35.5 | | | 262,805 | | | 34.3 | | | 272,941 | | | 36.5 | |
Upholstery | 112,682 | | | 41.1 | | | 109,375 | | | 42.0 | | | 333,507 | | | 43.5 | | | 305,842 | | | 41.0 | |
Mattresses | 22,646 | | | 8.3 | | | 23,616 | | | 9.1 | | | 64,389 | | | 8.4 | | | 68,257 | | | 9.1 | |
Accessories and Other (1) | 37,432 | | | 13.6 | | | 34,947 | | | 13.4 | | | 105,957 | | | 13.8 | | | 99,818 | | | 13.4 | |
| $ | 274,495 | | | 100.0 | % | | $ | 260,378 | | | 100.0 | % | | $ | 766,658 | | | 100.0 | % | | $ | 746,858 | | | 100.0 | % |
| | | | | |
(1) | Includes delivery charges and product protection. |
NOTE H – Leases
We have operating leases for retail stores, offices, warehouses, and certain equipment. Our leases have remaining lease terms of 1 year to 13 years, some of which include options to extend the leases for up to 20 years. We determine if an arrangement is or contains a lease at lease inception. Our leases do not have any residual value guarantees or any restrictions or covenants imposed by lessors. We have lease agreements for real estate with lease and non-lease components, which are accounted for separately.
Certain of our lease agreements for retail stores include variable lease payments, generally based on sales volume. The variable portion of payments are not included in the initial measurement of the right-of-use asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. Certain of our equipment lease agreements include variable lease costs, generally based on usage of the underlying asset (mileage, fuel, etc.). The variable portions of payments are not included in the initial measurement of the right-of-use asset or lease liability due to uncertainty of the payment amount and are recorded in the period incurred.
Lease expense is charged to selling, general and administrative expenses. Components of lease expense were as follows (in thousands):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | $ | 11,517 | | | $ | 11,440 | | | $ | 35,230 | | | $ | 35,140 | |
Variable lease cost | 1,706 | | | 1,739 | | | 5,183 | | | 4,856 | |
Total lease expense | $ | 13,223 | | | $ | 13,179 | | | $ | 40,413 | | | $ | 39,996 | |
Supplemental cash flow information related to leases is as follows (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 29,601 | | | $ | 35,428 | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 22,231 | | | $ | 24,213 | |
NOTE I – Income Taxes
Our effective tax rate for the nine months ended September 30, 2022 and 2021 was 24.6% and 23.1%, respectively. The primary difference in the effective rate and the statutory rate was due to state income taxes and the impact from vested stock awards.
NOTE J – Stock Based Compensation Plans
As more fully discussed in Note 12 of the notes to the consolidated financial statements in our 2021 Annual Report on Form 10-K, we have awards outstanding for Common Stock under stock-based employee compensation plans.
The following table summarizes our award activity during the nine months ended September 30, 2022:
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| Service-Based Restricted Stock Awards | | Performance-Based Restricted Stock Awards |
Shares or Units (#) | | Weighted-Average Award Price ($) | | Shares or Units (#) | | Weighted-Average Award Price ($) |
Outstanding at December 31, 2021 | 219,082 | | | $ | 27.10 | | | 328,267 | | | $ | 23.96 | |
Granted/Issued | 153,681 | | | 28.86 | | | 103,104 | | | 28.86 | |
Awards vested or rights exercised(1) | (122,080) | | | 27.12 | | | (34,940) | | | 20.28 | |
Forfeited | (3,900) | | | 31.86 | | | — | | | — | |
Additional units earned due to performance | — | | | — | | | 59,249 | | | 31.39 | |
Outstanding at September 30, 2022 | 246,783 | | | $ | 28.10 | | | 455,680 | | | $ | 26.54 | |
Restricted units expected to vest | 246,783 | | | $ | 28.10 | | | 455,680 | | | $ | 26.54 | |
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(1) | Includes shares repurchased from employees for employee’s tax liability. |
The total fair value of service-based restricted stock awards that vested during the nine months ended September 30, 2022 was approximately $3.3 million. The aggregate intrinsic value of outstanding service-based restricted stock awards was approximately $6.1 million at September 30, 2022. The restrictions on the service-based awards generally lapse or vest annually, primarily over one-year and three-year periods.
The total fair value of performance-based restricted stock awards that vested during the nine months ended September 30, 2022 was approximately $1.0 million. The aggregate intrinsic value of outstanding performance awards at September 30, 2022 expected to vest was approximately $11.3 million. The performance awards are based on one-year performance periods but cliff vest in approximately three years from grant date.
The compensation for all awards is charged to selling, general and administrative expenses over the respective grants’ vesting periods, primarily on a straight-line basis. The amount charged was approximately $6.0 million and $6.5 million for the nine months ended September 30, 2022 and 2021, respectively. Forfeitures are recognized as they occur. As of September 30, 2022, the total compensation cost related to unvested equity awards was approximately $8.0 million and is expected to be recognized over a weighted-average period of two years.
NOTE K – Earnings Per Share
We report our earnings per share using the two-class method. The income per share for each class of common stock is calculated assuming 100% of our earnings are distributed as dividends to each class of common stock based on the contractual rights of the classes.
The Common Stock of the Company has a preferential dividend rate of at least 105% of the dividend paid on the Class A Common Stock. The Class A Common Stock, which has ten votes per share as opposed to one vote per share for the Common Stock (on all matters other than the election of directors), may be converted at any time on a one-for-one basis into Common Stock at the option of the holder of the Class A Common Stock.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Common: | | | | | | | |
Distributed earnings | $ | 4,214 | | | $ | 4,164 | | | $ | 12,403 | | | $ | 12,142 | |
Undistributed earnings | 18,498 | | | 18,424 | | | 48,398 | | | 49,713 | |
Basic | 22,712 | | | 22,588 | | | 60,801 | | | 61,855 | |
Class A Common earnings | 1,839 | | | 1,645 | | | 4,819 | | | 4,642 | |
Diluted | $ | 24,551 | | | $ | 24,233 | | | $ | 65,620 | | | $ | 66,497 | |
| | | | | | | |
Class A Common: | | | | | | | |
Distributed earnings | $ | 334 | | | $ | 297 | | | $ | 963 | | | $ | 868 | |
Undistributed earnings | 1,505 | | | 1,348 | | | 3,856 | | | 3,774 | |
| $ | 1,839 | | | $ | 1,645 | | | $ | 4,819 | | | $ | 4,642 | |
Denominator: | | | | | | | |
Common: | | | | | | | |
Weighted average shares outstanding - basic | 15,015 | | | 16,794 | | | 15,347 | | | 16,862 | |
Assumed conversion of Class A Common Stock | 1,283 | | | 1,290 | | | 1,284 | | | 1,344 | |
Dilutive options, awards and common stock equivalents | 518 | | | 478 | | | 507 | | | 506 | |
Total weighted-average diluted Common Stock | 16,816 | | | 18,562 | | | 17,138 | | | 18,712 | |
| | | | | | | |
Class A Common: | | | | | | | |
Weighted average shares outstanding | 1,283 | | | 1,290 | | | 1,284 | | | 1,344 | |
| | | | | | | |
Basic earnings per share: | | | | | | | |
Common Stock | $ | 1.51 | | | $ | 1.35 | | | $ | 3.96 | | | $ | 3.67 | |
Class A Common Stock | $ | 1.43 | | | $ | 1.28 | | | $ | 3.75 | | | $ | 3.45 | |
| | | | | | | |
Diluted earnings per share: | | | | | | | |
Common Stock | $ | 1.46 | | | $ | 1.31 | | | $ | 3.83 | | | $ | 3.55 | |
Class A Common Stock | $ | 1.40 | | | $ | 1.25 | | | $ | 3.66 | | | $ | 3.38 | |
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, 2021 (“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.
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 disruptions to our supply chain have resulted in lower inventory in certain categories, and out-of-stock merchandise delivery times can be 8 to 12 weeks. 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 none are substitutes for net sales presented in accordance with US GAAP.
The following table outlines our sales and comp-store sales increases and decreases for the periods indicated:
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| | 2022 | | 2021 |
| | Net Sales | | Comp-Store Sales | | Net Sales | | Comp-Store Sales |
Period | | Total Dollars | | % Change | | $ Change | | % Change | | $ Change | | Total Dollars | | % Change | | $ Change | | % Change | | $ Change |
Q1 | | $ | 238.9 | | | 1.0 | % | | $ | 2.5 | | | 0.2 | % | | $ | 0.4 | | | $ | 236.5 | | | 31.8 | % | | $ | 57.1 | | | 11.5 | % | | $ | 15.4 | |
Q2 | | $ | 253.2 | | | 1.3 | % | | $ | 3.2 | | | 1.1 | % | | $ | 2.7 | | | $ | 250.0 | | | 127.3 | % | | $ | 140.0 | | | 46.9 | % | | $ | 48.8 | |
Q3 | | $ | 274.5 | | | 5.4 | % | | $ | 14.1 | | | 6.3 | % | | $ | 16.2 | | | $ | 260.4 | | | 19.7 | % | | $ | 42.9 | | | 17.7 | % | | $ | 38.4 | |
YTD Q3 | | $ | 766.7 | | | 2.7 | % | | $ | 19.8 | | | 2.6 | % | | $ | 19.3 | | | $ | 746.9 | | | 47.3 | % | | $ | 240.0 | | | 22.5 | % | | $ | 102.6 | |
Total sales for the third quarter of 2022 increased $14.1 million, or 5.4%, compared to 2021. Our comp-store sales increased 6.3%, or $16.2 million, in the third quarter of 2022 compared to 2021.
Our free in-home design service continues to grow, and designer sales were 25.2% of our total written business for the third quarter of 2022 compared to 24.7% for 2021. COVID-19 disruptions to our supply chain are beginning to abate, and case goods inventory received is helping to reduce our customer back orders. Sales in this category as a percent of our total sales were 37.1% in the third quarter of 2022 compared to 35.5% in 2021.
The declines in in-store traffic and written business, which began in March 2022, continued through September 2022. Written business for the third quarter of 2022 was down 7.2% compared to 2021. We continued to experience a return to increased consumer interest around traditional shopping events and had very strong business for the Labor Day holiday. Our written business for the third quarter of 2022 compared
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
to the "normal" pre-pandemic second quarter of 2019 was up 15.8%, as customers are still investing in their homes. In the fourth quarter of 2022, we expect that our business will continue to be affected as rising inflation, including fuel costs, stock market volatility, higher interest rates, and recessionary concerns, impacts discretionary consumer spending.
Gross Profit
Gross profit for the third quarter of 2022 was 57.1%, up 30 basis points compared to the prior year period of 56.8%. The increase is primarily due to pricing discipline and merchandise mix.
We expect annual gross profit margins for 2022 will be 57.7% to 58.0%. Gross profit margins fluctuate quarter to quarter in relation to our promotional cadence. Our estimated gross profit margins are based on anticipated changes in product and freight costs and their impact on our LIFO reserve.
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 2022 were 45.4% versus 44.6% for 2021. SG&A dollars increased $8.4 million, or 7.2%, for the third quarter of 2022 compared to the same prior year period. The increase is driven by higher costs associated with selling expense of $4.9 million, advertising and marketing expenses of $1.1 million, administrative costs of $1.5 million, and occupancy expenses of $0.5 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 and distribution 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:
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(In thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| $ | | % of Net Sales | | $ | | % of Net Sales | | $ | | % of Net Sales | | $ | | % of Net Sales |
Variable | | $ | 50,228 | | | 18.3 | % | | $ | 43,708 | | | 16.8 | % | | $ | 140,566 | | | 18.3 | % | | $ | 126,374 | | | 16.9 | % |
Fixed and discretionary | | 74,306 | | | 27.1 | % | | 72,448 | | | 27.8 | % | | 217,250 | | | 28.3 | % | | 211,941 | | | 28.4 | % |
| | $ | 124,534 | | | 45.4 | % | | $ | 116,156 | | | 44.6 | % | | $ | 357,816 | | | 46.6 | % | | $ | 338,315 | | | 45.3 | % |
The variable expenses in dollars were higher in the third quarter of 2022 compared to 2021 due to the increase in compensation costs for selling and delivery personnel and rising fuel costs.
Fixed and discretionary expenses were impacted in the third quarter of 2022 primarily by increases in warehouse and other occupancy costs compared to the prior year quarter.
Our variable expenses within SG&A for the full year of 2022 are anticipated to be 18.2% to 18.4%, an increase from our previous estimate based on increases in selling and delivery costs. Fixed and discretionary expenses are expected to be approximately $293.0 to $295.0 million for the full year of 2022, a decrease from our previous guidance based on changes in our marketing spend.
Liquidity and Capital Resources
Cash and Cash Equivalents at End of Year
At September 30, 2022, we had $137.2 million in cash and cash equivalents, and $6.8 million in restricted cash equivalents. We believe that our current cash position, cash flow generated from operations, funds
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 $30.0 million for the full year of 2022.
Long-Term Debt
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, 2022 was $55.7 million, and we had no amounts outstanding. In October 2022, we amended the Credit Agreement to increase the revolving credit facility to $80.0 million and extend the maturity date to October 24, 2027.
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 November 2021, our Board of Directors authorized $25.0 million for our share repurchase program. During the six months ended June 30, 2022, we purchased 899,890 shares of common stock for approximately $25.0 million. All funds were used under this authorization.
In August 2022, our Board of Directors authorized an additional $25.0 million for our share repurchase program. During the three months ended September 30, 2022, we purchased 187,488 shares of common stock for approximately $5.0 million. The balance on the current authorization for purchases was approximately $20.0 million at September 30, 2022.
The timing, manner and number of shares repurchased in future periods will depend on a variety of factors, including, but not limited to, the level of cash balances, credit availability, financial performance, general business conditions, the market price of the Company’s stock and the availability of alternative investment opportunities.
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 $38.2 million in the first nine months of 2022 compared to $89.0 million during the same period in 2021. This difference was primarily driven by changes associated with customer deposits.
Investing Activities. Cash used in investing activities decreased by $5.9 million in the first nine months of 2022 compared to the first nine months of 2021, as the result of less capital expenditures.
Financing Activities. Cash used in financing activities increased by $9.6 million in the first nine months of 2022 compared to the first nine months of 2021, primarily due to increased share repurchases in 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Store Plans and Capital Expenditures
| | | | | | | | |
Location | Opening Quarter Actual or Planned | Category |
Austin, TX | Q-1-22 | Open |
Atlanta, GA | Q-2-22 | Closure |
Metro DC | Q-4-22 | Open |
Indianapolis, IN | Q-4-22 | Relocation |
Durham, NC | Q-1-23 | Open |
| | |
| | |
Net selling space at the end of 2022 is expected to be relatively flat compared to 2021. Total capital expenditures are estimated to be $30.0 million in 2022 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Form 10-K. Our exposure to market risk has not changed materially since December 31, 2021.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report and provide reasonable assurance that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during the Company’s fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result of the COVID-19 pandemic, team members have shifted to a rotating work from home and office environment. We have reviewed our financial reporting process to provide reasonable assurance that we could report our financial results accurately and timely, and we will continue to evaluate the impact of any related changes to our internal control over financial reporting.