Executive Summary / Key Takeaways

• Havertys (HVT) is a financially robust, debt-free specialty furniture retailer leveraging its 140-year history, regional brand strength, and efficient operational network to navigate a challenging housing and economic environment.
• Despite a 1.3% net sales decrease and 4.8% comparable store sales decline in Q1 2025 driven by market headwinds and weather, the company demonstrated operational resilience with improved gross margins (61.2% vs. 60.3%) and controlled SG&A expenses (59.0% of sales vs. 59.4%).
• Key strategic initiatives, including investments in its free in-home design service (driving 33.2% of Q1 written sales with a high average ticket of $7,422) and enhancements to its in-store and digital customer experience, are differentiating HVT and contributing to higher average tickets.
• HVT maintains a strong balance sheet with $111.9 million in cash and no funded debt, providing significant liquidity and flexibility to fund strategic store growth (targeting 5 new stores annually, with a focus on Houston) and other capital expenditures ($24 million planned for 2025, adjusted for market uncertainty).
• While facing risks from continued economic uncertainty, housing market weakness, and tariff volatility, HVT's proactive supply chain management, cost controls, and strategic investments position it to potentially capture market share, particularly from struggling lower-end competitors, and benefit from an eventual market recovery.

A Legacy of Resilience: Havertys' Foundation in a Challenging Market

For 140 years, Haverty Furniture Companies, Inc. (HVT) has been a fixture in American homes, establishing itself as a specialty retailer focused on the middle to upper-middle price ranges of residential furniture and accessories. Operating exclusively under the Havertys brand across its network of stores primarily in the South and Midwest, the company has built a reputation grounded in service, quality, and a deep understanding of its regional markets. This enduring legacy provides a crucial foundation as HVT confronts the current economic climate, marked by significant headwinds in the housing market, elevated interest rates, and cautious consumer spending.

The furniture retail landscape is intensely competitive, featuring a mix of national luxury players like RH (RH), mid-tier manufacturers and retailers such as Hooker Furnishings (HOFT) and Bassett Furniture Industries (BSET), quality-focused retailers like Ethan Allen Interiors (ETD), and a growing array of online pure-plays like Wayfair (W) and Amazon (AMZN). Within this environment, HVT strategically positions itself by emphasizing a differentiated customer experience, particularly through its robust design services, and leveraging an efficient, integrated retail and distribution network. While competitors like RH command higher price points and margins (RH TTM Gross Margin: ~44%) and are often seen as leaders in digital innovation, HVT competes effectively in its target demographic through value, service, and regional density. The lower end of the market, in contrast, is described by management as facing significant distress, presenting a potential opportunity for HVT to gain share by appealing to customers seeking quality and service beyond the promotional segment. HVT's TTM Gross Profit Margin stands at a solid 60.95%, reflecting its product mix and pricing strategy, which compares favorably to HOFT (~22%) and BSET (~54%), though below ETD (~61%) and RH.

Operational Edge and Technological Differentiators

HVT's competitive strategy is significantly bolstered by its operational efficiency and targeted investments in customer-facing technology and infrastructure. While not a technology company in the traditional sense of developing proprietary product hardware, HVT utilizes technology and process innovation to enhance its customer journey and streamline operations, creating tangible benefits.

A core differentiator is the company's free in-home design service. This service is not merely an add-on but a significant driver of sales and customer engagement. In the first quarter of 2025, design consultants were responsible for an impressive 33.2% of total written sales, an increase from 32.4% in the prior year period. Crucially, the average written ticket for design-driven sales reached $7,422 in Q1 2025, up over 9% from $6,782 in Q1 2024. This demonstrates the service's ability to capture higher-value transactions and deepen customer relationships.

Furthermore, HVT is investing in enhancing the in-store experience through a new point of purchase and tagging program, expected to roll out by Labor Day 2025. The stated goals are to improve the ease of choice for customers, particularly with special order fabrics, and simplify the presentation of available configurations. This initiative, along with enhanced design centers featuring more options and better tools, aims to improve conversion rates by providing clearer information and a more engaging experience.

On the digital front, HVT has implemented new technology on its website, including Adobe (ADBE) tech, which management reported led to a double-digit lift in organic traffic after implementation on the homepage. Plans are underway to roll this out to product listing and display pages. While competitors like RH may have more advanced digital platforms, HVT's focus on improving its online presence and integrating it with the in-store experience is a strategic step to remain competitive in an increasingly omnichannel retail environment.

Operational efficiency is also a key strength, particularly in its supply chain and distribution network. Management highlights the ability to flex staffing and control expenses in warehouse, delivery, and customer service areas. The integrated distribution network supports the company's store growth strategy, allowing new locations to leverage existing infrastructure. This efficiency contributes to managing costs, as seen in the reduction of variable SG&A expenses in Q1 2025.

Financial Performance: Navigating Headwinds with Stability

HVT's recent financial performance reflects the challenging macroeconomic backdrop while also highlighting the company's underlying stability and operational discipline. In the first quarter of 2025, net sales decreased by 1.3% to $181.6 million compared to $184.0 million in Q1 2024. Comparable store sales saw a larger decline of 4.8%. Written business, an indicator of future delivered sales, was also down 2.6% overall and 6.3% on a comparable basis. Management attributed this weakness primarily to the persistent issues in the housing market (operating at 30-year lows), inflationary pressures, cautious consumer sentiment, and even the impact of atypical winter weather in the South during the quarter.

Despite the top-line pressure, HVT demonstrated strength in profitability metrics. Gross profit margin improved by 90 basis points, reaching 61.2% in Q1 2025, up from 60.3% in the prior year period. This increase was primarily driven by favorable product selection and merchandising mix. Selling, general, and administrative (SGA) expenses decreased by $2.2 million, or 2.0%, to $107.2 million. As a percentage of sales, SGA improved slightly to 59.0% from 59.4%. This was a result of lower variable costs tied to sales volume (commissions, credit costs, warehouse/delivery) offsetting increases in fixed and discretionary costs related to new store openings and administrative expenses.

The company's balance sheet remains a significant source of strength. As of March 31, 2025, HVT held $111.9 million in cash and cash equivalents and $6.3 million in restricted cash. Crucially, the company carries no funded debt, providing exceptional financial flexibility compared to many peers who rely on leverage for operations and growth. A revolving credit facility of $80 million remains fully available.

This strong liquidity position is supported by solid operating cash flow, which increased to $6.2 million in Q1 2025 from $3.1 million in Q1 2024, benefiting from improved net income and favorable working capital changes, including a planned increase in inventories.

Capital expenditures totaled $6.1 million in Q1 2025. The company continues to invest in its store base, including a relocation in Daytona, FL, and planned openings and closures in markets like Houston and Atlanta/Waco, TX.

Outlook and Strategic Trajectory

HVT's outlook for 2025 reflects a cautious yet determined approach, balancing strategic growth investments with the realities of the current market. Management's guidance for 2025, which includes tariffs in effect as of April 30th but excludes potential additional proposed tariffs, provides specific targets:

• Gross Margins: Expected to be between 60% and 60.5%. This anticipates potential impacts from product and freight costs but suggests confidence in maintaining strong profitability through product mix and pricing strategies.
• Fixed and Discretionary SG&A: Projected in the range of $291 million to $293 million, an increase over the prior year primarily due to costs associated with store growth and general inflation.
• Variable SG&A: Expected to be between 18.6% and 19% of sales, reflecting anticipated continued reductions in third-party credit costs and warehouse/delivery expenses.
• Capital Expenditures: Planned at $24 million, a reduction from earlier plans, primarily due to a cautious stance on store expansion amidst tariff uncertainty. This CapEx includes investments in new/replacement stores ($19.6M), distribution ($1.8M), and IT ($2.6M).
• Effective Tax Rate: Anticipated at 26.5% for 2025.

The strategic goal remains to open approximately five new stores per year, leveraging the existing distribution network. A key focus is the expansion in the Houston market, with a third store planned for late Q3 2025 and two more targeted for mid to late 2026, aiming for a significant presence of 6+ stores. While the pace of expansion may be adjusted based on market conditions and tariff clarity, the commitment to growing the physical footprint in attractive markets persists.

Management is proactively addressing the uncertainty surrounding tariffs. With approximately 15% of total purchases historically sourced directly from China (mainly motion and stationary leather), the company has halted most direct shipments and is working with suppliers to shift production to alternative locations like Vietnam, Cambodia, and Mexico. An increase in inventories of best-selling products, initially intended to improve service speed, has also provided a buffer against potential supply disruptions from this shift. Resolving tariff uncertainty beyond the current 90-day pause is crucial for longer-term supply chain and pricing decisions.

Risks and Considerations

Despite its strengths, HVT faces several pertinent risks that could impact its performance and the investment thesis. The most significant is the continued weakness in the housing market and broader economic uncertainty. High interest rates and affordability issues directly suppress demand for home furnishings, potentially leading to further declines in sales and profitability if conditions do not improve or worsen.

Competition remains intense across all segments. While HVT's regional focus and service model provide differentiation, competitors like RH continue to innovate in the luxury and digital space, while others may engage in aggressive promotional activity, potentially pressuring HVT's sales or requiring adjustments to pricing strategy.

Supply chain risks, particularly related to tariffs and the potential for disruptions as production shifts away from China, could impact product availability, costs, and margins, although management is actively working to mitigate these effects. The uncertainty surrounding future tariff policy adds a layer of complexity to planning.

Execution risk exists in the planned store openings and technology rollouts. Successfully integrating new stores and achieving targeted performance levels, as well as effectively implementing new in-store and digital tools, are crucial for realizing the benefits of these investments.

Conclusion

Havertys stands as a resilient, well-capitalized specialty retailer navigating a challenging period for the home furnishings industry. Its 140-year history, strong regional brand, efficient operational network, and strategic investments in customer experience and store growth provide a solid foundation. While macroeconomic headwinds, particularly in housing, are currently impacting top-line performance, the company's ability to maintain strong gross margins and control expenses demonstrates operational effectiveness.

The debt-free balance sheet and significant cash reserves offer exceptional flexibility, enabling HVT to continue investing in its future growth trajectory, including expanding its physical footprint in key markets like Houston and enhancing its customer-facing technology and services, even as some competitors face greater financial constraints. The focus on the design business and higher average tickets highlights a successful strategy of appealing to a less price-sensitive customer within its target demographic. While risks related to economic conditions and tariff uncertainty persist, HVT's proactive management and strategic positioning suggest it is well-equipped to weather the downturn and is making calculated investments that could position it for significant gains when market conditions eventually improve. Investors should monitor trends in housing, consumer confidence, and the resolution of tariff issues, alongside HVT's execution of its store expansion and technology initiatives, as key indicators of future performance.