Haverty Furniture Companies Inc (HVT.A) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Haverty Furniture Companies' year-end earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, February 12, 2004. I would now like to turn the conference over to Mr. Clarence Smith, President and CEO. Please go ahead, sir.

I would like to comment on the key trends in our business strategy and our focus for 2004 and 2005.

The real star for the fourth quarter and for all of 2003 was the success of our Havertys Collections. We increased our overall gross margins by the sales of our branded product at higher margins and by fewer markdowns and less discounting.

In the past three years we've developed our Havertys Collections to be one of the largest selling brands in our market. We will continue to capitalize on that strength this year with the introduction of the Havertys branded bedding program in March 2004. This line will offer a unique selling story, featuring exclusive premium foam bedding priced in the upper middle of our lineup. Simmons will produce this Havertys branded bedding. Adding this program to our fastest-growing product class should produce immediate returns.

We're expanding our premium assortment in all classes with new arrivals throughout the first half of 2004. This includes new Bernhardt groups in addition to our Havertys Collections. In the premium upholstery area we've added quick ship, custom order packages with additional fabric selections which are delivered from the manufacturer within thirty days. We believe this will increase sales without increasing inventory dollars.

We're supporting Havertys Collections with upgraded point of purchase materials, expanded training programs, and supplemental magazine advertising in Southern Living. We will increase the mix of Havertys Collections in all of our product areas, growing from approximately 30 percent of sales at the close of 2003 to a 50 percent sales run rate by the end of 2004.

As the Chinese bedroom anti-dumping issue becomes clearer, we're protecting ourselves and our source of bedroom product with several alternatives. Our suppliers have already secured production capacity in several countries including Vietnam, Malaysia, Indonesia, Mexico and South America. Our merchandising team is traveling overseas next week to review product and production facilities in Asia. We believe that we will weather the anti-dumping storm and be stronger than our competition when it finally plays out.

In the fourth quarter we did see a slight decrease in our expenses as a percent of sales, but we expected to see more of a reduction in our total distribution and warehouse costs. Delivery expense was higher than we anticipated and we've worked to increase our efficiencies by higher utilization of our truckloads to individual markets. We expect to see better performance in reducing our expenses as a percent of sales in these areas as we utilize systems to fine-tune our transportation costs and leverage our distribution with additional volume. We strongly believe that as our methods continue to be refined and rolled out to the rest of our regions, we will have a significant operating advantage over our competitors.

Our larger distribution and processing facilities have allowed us the opportunity to become a significant importer of quality furniture increasingly under our brand, and to serve our customer by providing more value and quicker delivery. We have closed 24 local warehouses, reduced inventories and markdowns thorough consolidation and better supply chain processes, and began going outside of our footprint of Southern states. With the opening of our new Florida Distribution Center in Lakeland in the fall of the year, we will be better able to support that growth and more efficiently source Florida-specific product by flowing import merchandise in containers directly to ports near that location.

In the past few years we've put together a store operating program which allows our managers to dedicate more of their time to serving the customer and working more closely with our sales teams versus concentrating on operational issues. We've completely rewritten and installed an entirely new store operating system, a fully integrated distribution system and opened a centralized automated customer service facility for the East, serving seven Southern states. We've invested multi-millions in the latest new technology of communications and computer hardware that will allow us to leverage our current associates. For example, we will be able to add the Florida stores to our customer service system without adding new customer service agents.

In the last few years these combined processes of reducing inventories, outsourcing sales under our riskiest customer financing promotions, and steady operating performance has allow us to dramatically deleverage our balance sheet. We ended the year at 24 percent debt to cap, and we expect to remain below 30 percent for the foreseeable future. We have built significant cash balances for the first time in our history, which positions us for strong growth in the next several years.

The main advantage of our new systems distribution and investments in our enhanced operations is better service to our customers, which we believe will lead the growing market share. We know that the most profitable growth is through increasing comparable store sales. Additionally, our distributed delivery format gives Havertys a proven platform for growth in the new markets and surrounding regions. With the further new opportunities to assume existing big box retail sites we believe we have the resources, personnel, and the expertise to speed up our average square footage growth from about four percent a year to approximately six percent annual growth, starting in 2005. We believe that we will continue to have good new store opportunities in Maryland, Virginia, Delaware, Florida, Ohio, Indiana, and South Texas that can all be served from our existing distribution system. We intend to grow our business by closely evaluating the opportunities that we can serve from our expanded distribution base, and moving to gain market share in some of the best markets in the country. We believe that our service levels, our merchandising expertise, our 119 years of proven ability to execute at retail, and our professional team of managers presents us with strong profitable growth potential in the next several years.

I'd like to now turn it over to Dennis Fink, CFO.

First I'm going to comment on additional items on the fourth quarter P&L.

Gross profit for the fourth quarter of 2003 included $340,000 as a credit for the LIFO method of inventory of valuation. Our calculations were finalized for the year and there was a slight deflation in cost for merchandise.

Credit service charge revenue was lower, as expected, with a lower level of in-house accounts receivable and fewer credit offers which carry interest charges. This revenue is going to continue to fall in the months ahead unless the nature of big-ticket retail credit promotions changes.

The SG&A items that Clarence had mentioned rose as a percent relative to last year's fourth quarter, specifically as the discounts on the third party credit promotions added 70 basis points to the SG&A cost compared to last year's fourth quarter. We've had in the press release dealt with a reclass of vendor credits of 40 basis points, which is in line with the accounting pronouncement but does make for lack of comparability to last year. And also, there were group medical and general insurance cost increases that added about 25 basis points to SG&A, again versus the fourth quarter last year. Those three items together rose 140 basis points. Occupancy costs in the SG&A line item were down due to less warehouse square footage. And overall SG&A cost was 10 basis points lower than the fourth quarter last year.

Moving to interest expense, it was down 44 percent due to the lower debt outstanding. The provision for doubtful accounts was down 38 percent due to less usage of the in-house credit promotions and the resulting lower accounts receivable balances. The net accounts receivable portfolio was down below $100 million from just under 200 million three years ago. The credit profile of our customers remains very good. Delinquencies and bankruptcy issues at the lower levels are as expected with a smaller portfolio.

The other income item we have is a positive $700,000 figure for the fourth quarter and the main component of this was restoring property held for sale to full original costs. The property had been written down previously, but now the commercial real estate market in this specific area has improved and we've received offers on the property. We are required to restore the carrying value. Last year there was a bigger gain in the fourth quarter (indiscernible) items which was $1.25 million.

The income tax rate for the year has been adjusted from 37.5 percent which was used for the first nine months of the prior year to 37.3 percent for the full year. That's after the normal year-end analysis of our tax position. The fourth quarter rate was therefore reduced to 37 percent to make the full year come out at 37.3. And we're planning to use this 37.3 rate throughout 2004. It is, of course, subject to further refinement as the year progresses. We're pleased that our pre-tax income as a percent of sales for the fourth quarter rose to 7.6 percent from the 6.7 percent last year.

Now looking at our expansion, net retail square footage increased 111,000 square feet for year of 2003 to 3,919,000 square feet at the end of the year. Four larger stores averaging 41,000 square feet of net retail space were opened and we closed two smaller, older, less productive stores.

The 2004 store growth is now expected to include three new stores and two physical expansions of existing stores. The new locations will be in San Antonio, Texas; Columbia, Maryland; and our first Ohio store. The total square footage is expected to be 133,000 square feet, which is about 3.5 percent of the beginning square footage. It appears that two other stores in the Greater Washington D.C. Metro market which might have opened late in 2004 under the fastest track scenario will now be opened in early 2005.

Capital expenditures for the year of 2004 -- right now we're expecting that to be about $44 million in total. About half of the total is for store growth and improvements; the other half is for distribution and information systems. Approximately $6 million of the half that is for stores are for sites that will not will not open until 2005 -- the spending will be in 2004 for the 2005 openings.

In 2004 towards the end of the year we're also going to but out two leases that we use approximately $20 million of cash. One of these is a capital lease for distribution a facility opened in 2002 presently on our books for $7 million that was capitalized midway through 2003. The other lease package of three stores is accounted for as an operating lease. For right now that shows up as rent expense. And we will be buying that package out so it will show up then as property and equipment in fixed assets.

Funding for the capital expenditures will come from the cash position we presently have plus (ph) earnings from operation and to a lesser extent from sales of existing property.

As a reminder, we adopted a strict policy of not giving guidance on future operating results over a year ago. However, we will try to promptly communicate actual results and trends to all of you at the same time in our four annual conference calls, like this one, and through our 16 financial press releases per year -- that's 12 sales releases we give with comments and 4 earnings releases.

Speaking of business trends, more recently we announced our 4.4 percent January comp store sales results last week. Incoming orders for January were modestly better than the delivered sales results we announced. Early February orders in the stores are somewhat below last year's level. We believe it's mostly due to the price discount oriented sales we had run in early February of 2003. Comparisons for the last half of the month are easier since there was severe winter weather last year when two different storm systems moved through.

At this time we would like to open it up for questions. Also here with us from the Company available to answer your questions is our Chairman, Clancey Ridley. Jeff, would you go ahead and poll the audience please?

(OPERATOR INSTRUCTIONS) Joel Habberd (ph).

I guess the main one for us is to look at the favorable margin trends and ask if you all can split the impact between the private-label and import inside of the equation and the distribution efficiency side of the equation. I realize everything is interrelated, but can you point to where the emphasis lies?

The distribution efficiencies would not go into gross margin. It would just be the pricing discipline and the Haverty brands, the Haverty Collections margin. So it's a little difficult to split them. Part of our ability to be a little more consistent in pricing is, in fact, because of the Haverty Collections. So I'm not sure I can help you out. But do recall that we moved 40 basis points, as it was put in the press release, and as I mentioned, from what would have been a reduction in SG&A in prior years, we moved that into gross margin for the fourth quarter of this year.

I will comment, though, on the distribution side, the fact that we have fewer pools of inventory and we are getting better flow of the goods -- we are not marking them down like we had to in the past, we're not closing out warehouses, we don't have as many clearance sales and frankly we're not discounting as much as we did in the past. So there's a threefold combination that has helped us work -- fewer markdowns, higher margins, and less discounting. So overall, it's been up more dramatically than we thought. We certainly want to encourage that trend and we think there's a little more room there.

From the store growth plan we've heard from kind of out in the field that the new distribution system would support perhaps a more cost effective in-fill model, but then you also referenced, Clarence, in your remarks that you all are looking for some bigger box opportunities. How do those two thrusts or possible thrusts jive with the --?

In-fill would be certainly Florida, and that's a major area of growth for us in the past several years and will continue to be. This new facility we're going to open up there will actually allow us to grow faster than we've been able to -- add stores particularly in the Southeast Florida. I don't know if you consider that in-fill.

What it's doing is reaching the zones that we are in more appropriately. For instance, our main growth in the East has been in Washington, and now Maryland, and soon-to-be Baltimore. So I consider that in-fill, even though it's on the limits of what our historic reach has been. So I think most of our growth will be Maryland, Virginia, Florida, and now we're talking about Ohio. But we're in Ohio now. We go across the river every day. We're in Louisville now. We're a major player up there. I consider that in-fill.

As we reach further in the new states, then our distribution program with this distributed delivery where we can drop trucks overnight, all we're doing is running trucks to the marketplace. It's not putting any more infrastructure in place. As long as we don't outrun that, which is about 250 miles from our home delivery centers, then I consider that in-fill. And I don't think that what we described here is moving outside of what our distribution is already in place to handle.

Is the model in place that these would be similar sized stores, larger stores? Is it a smaller footprint as you --?

I would say that most of our stores going forward are going to be in the 35 to low 40,000 square foot range. That's what we like. We may have some stores that are in the 30s just because we can't get a better location, but we like it to be 35 to low 40s. And I would anticipate that going forward. There may be some dense markets where you can't get that big that we would consider -- let's say, for instance, in the city of D.C. itself or something like that -- but otherwise, I think the 35 plus will be what we want.

Is it that that's more of a square footage play or a unit play that gets you from the four to six percent growth rate going through '05?

It's a combination. (multiple speakers) mostly units. In the past we've been closing smaller stores and opening bigger stores; now we're opening the same sized stores going forward. So it's going to be units mostly.

Thanks. Good luck.

Margaret Whelan.

Congratulations -- great year, really, when you look at the improvement in the balance sheet each quarter. One of the things I guess that jumps out is the real strength in the working cap management, which was something we had been worried about because of the investment in infrastructure and the balancing trick with the imports. Can you just talk about your inventory turns now are getting higher, DSOs are getting lower, and are these improvements going to be sustainable? Or what should we be looking for?

I will comment that I think the likelihood is that the receivables will come down some more so that the DSO will come down. We aren't sure about, of course, what the credit environment will be insofar as promotions go. We will remain competitive and the more aggressive the credit promotions, the more likely we are to outsource all of those. So it kind of is determined by what sort of promotions we're running. We're very comfortable with the portfolio of the $100 million that we have right now. We're not really anxious to make that any larger and the likelihood is it could go smaller.

Insofar as inventory goes, I think we will get better sales per square foot productivity, which is the largest part of our inventories in our showrooms. And the model we have right now with buying in US dollars delivered into the US is a very favorable one for an importer. So I don't really know what really may happen in the future with that. We think that that's a fine way to continue, but there are a lot of issues surrounding imports. So assuming that stays the same I would think our terms would only get better.

I know in the third quarter -- I think it was the third quarter -- you had an issue with some deliveries that you didn't get the product on time. SO you don't expect to have to build inventory in your warehouses?

We did have some issues, and I think you know who those were and what was involved there. Some of that was some production some glitches.

But in imports we recognize it's a different formula. We've been able to reduce inventories while growing our import business. I would think that there are not going to be a whole lot of gains and turn over there as we play this thing out, just because we're bringing a larger percentage of goods from Asia now and the lead-time is longer. However, we're working with our suppliers to try to shorten up as best as possible. So we were pleased with the improvement. We think there's some room there, but probably not a lot with the unknowns.

When you look at the stuff you can control, like Dennis had referenced the inventories actually on the store floors and then you had mentioned a couple of times in your prepared comments that you are running fewer discounts and markdowns, is that going to be a sustainable strategy because the value is so much higher that's an inherit in the Havertys brand products? Or is that just a onetime issue?

I think we are putting better values on the floor than we have in the past, and I think we're able to flow it and present it better than our competition which justifies margin and also our quicker delivery. I think there's some room to grow that. I don't think it's a onetime deal. Some of this -- the fact that we moved away from, to be frank, the lower margin Thomasville goods was a onetime deal, but I think what we're doing is moving more of our line to products that can warrant the larger margins.

And when you said that you're targeting the Haverty brand (indiscernible) 50 percent of sales by the end of this year, what percent of your floor space would it represents then?

It's probably going to be moving more above that percentage of square footage because we are changing very rapidly. I would say, though, it's going to be close to that. It should be -- clearly, if it's producing it should produce (multiple speakers)

Who will you be displacing as (indiscernible) that 50 percent number?

The displacing part, that question has been brought up in the past. We really are moving to our existing vendors and having them brand it for us. Now those vendors change, as they do every year, as to who is able to execute, who is able to get us the goods on time. And I will say that that's one of Tony Wilkerson's real focus this year, is to make sure that the people we do deal with get us the goods in a timely manner. If they can't do it, we're going to go to other vendors. I would say we're not necessarily displacing people; it's just having them brand it for us, and making it exclusive for us, and working with them directly with designs.

But they're US branded manufacturers and they're going to rebrand their products to Havertys private label?

Yes, there are certainly those, particularly in the upholstery part. A lot of our upholstery suppliers will brand it for us. But some of the brands we still want to carry and be important with. The ones we mentioned -- Broyhill, Lane, Bernhardt, La-Z-Boy -- all important for us. And I think that adds to the overall mix there.

Is the growth plan still about four to five percent in square feet?

I'm sorry?

Your growth plan in terms of the stores, is that still to grow by four to five percent in terms of net square feet a year?

Since (ph) we can ramp it up to, as I mentioned earlier, to six percent and that's what we like to have targeted for 2005. This year Dennis mentioned we will probably be in the 3.5 percent range because of some projects we couldn't get in this year. We really want and believe that there are opportunities for us to move that up to a six percent range next year and we should be able to sustain it.

Do you plan just in existing market or contiguous markets?

Contiguous markets.

How do you react to that sense of strategy from some of the manufacturers like Thomasville -- margins weren't great so you phased it out and now they are trying to open their own stores? How do you react to that?

We're opening our stores in the best markets and we do well against most manufacturers. They're a great line and a good company, as well as the others, and I think we do well against manufacturers. We are retailers. We know what we're doing. We've got the infrastructure in place. We can make the deliveries. We've got the credit. We've got the management (multiple speakers) I wish them all the luck in the world.

Finally, in terms of managing the inventory and protecting the production capacity that is in Asia, we've heard that some of the bigger importers are giving ultimatums to their Chinese counterparts, telling them that they will need to have capacity outside of China, say Vietnam or wherever it is, by the middle of the year or they're going to stop buying from them. Are you doing that or are you --?

We are not into ultimatums, but we are working very closely with our suppliers over there. I mentioned that our team, Tony and (multiple speakers) will be out in next week. We're working to have it moved, particularly the bedrooms, to other parts of the world where it makes sense. And I think we can get the production we need. We've been able to do it and I believe that we will be able to do it going forward.

Great job and good luck.

Anand Krishnan.

My first question relates to your new Florida Distribution Center. I was wondering what was percentage of your business will be served through that facility when it is fully functional.

I don't think I have that. What was that Dennis?

I would think it would be around 20 percent.

But what's interesting about that area is that that is the fastest-growing part of our Company. It's been growing in that range per year too, so a lot of it is putting in place the opportunity to continue to grow the business, particularly as we move into Southeast Florida. So it's about 20 percent and (multiple speakers) could be more. Right now I think it just turned to be our largest region in the Company, so we want to continue to support it.

My second question is when do you anticipate to gain all of the savings from the new distribution system that is currently in place?

I don't know when we will get all the savings. A lot of it is just putting in place what we know we need to do to serve our markets. Florida is the next focus and I think we will get the most savings out of Florida because we've got six warehouses we will be closing and last we looked the real estate costs of the new facility will be offset by those we closed, and that should be clearly a productive move.

Beyond that, we would need to consolidate or in the last around our Dallas facility, and that's planned for 2005 -- I would say first half of 2005. And so when we would probably see the full effect of it across our entire Company would be in the third quarter of 2005. And what that would be at that time, I'm not sure. We will give you a better idea on that.

We will know what will reduce our warehousing costs, we know we will reduce our cost involving real estate. What has been something that has been tough to manage is the transportation costs, and we're working very closely on that. Some of that is just shipping trucks that are not full. And that's what has been the real fine-tuned challenge in the East and I think we are doing a much better job on that.

Also, can you comment on the fully finished upholstery product line that you're carrying that is imported from China in terms of quality and customer response?

Most of what we're bringing in fully upholstered from China is leather and we have done very well with it. I would say the challenge is flowing it, getting it in fast enough. We've done very well with it. The quality has been well accepted. The fully upholstered merchandise that's not leather, we've done a little bit with. We will be doing more of that. But the real success is in leather right now, which, by the way, I mentioned in an earlier call leather is now 43 percent of all of our upholstered business so it's a real important growth area.

Finally, can you give some additional color on FIN 46 and what would be the impact for this year?

I think Dennis is my FIN 46 guy.

FIN 46 is unusual for us because we have this lease that we have consolidated the special-purpose entity into our books. It was structured with 50 percent amortization over a twelve year life. Many of the vehicles that have been put out there were five-year vehicles and they had no amortization on them. I'm speaking of what traditional retailers would have used over the last ten years. And we decided we wanted a longer-term lease and one that amortized because the purpose of it was not to help earnings per share when we did the original transaction, it was to fund out over a twelve year or longer period at the time what seemed like expensive projects. By today's standards, they don't.

Butt what we have is an unusual gain from the accounting adjustment, and we think there will be modest gains this year and in future years. I think they run in the neighborhood probably of 0.25 to $0.5 million, in that sort of range, interest and depreciation expense lower than the rent expense was under the prior methodology -- or the stray expense (ph) methodology care methodology. So it's not a major difference, but it's somewhat unusual that I think a lot of people are facing the opposite as they try to apply this very, very complex technical standard to their off-balance sheet lease arrangements.

Thanks a lot and best of luck.

Rick Henderson (ph).

One, I wanted to follow-up a little bit about the transportation costs and how long you think -- you say that there's still some inefficiencies in the transportation systems and how long you think it's going to take to work through those and get some leverage on -- in the areas of the country where you already applied that, how long it takes to get those costs in line and get the leverage on them.

I think we've gotten some leverage. I believe that most of that is being done in place -- it's happening now. We think by the first half of this year you'll start to see more. It's not something that affects our largest markets. It's really more in our smaller markets where we're running trucks more often the necessary, for instance, and we're adjusting that. We've done it already. We might have to do more of it, but it's really adjusting to the service levels. We came out full bore with this thing and I think over-served some markets. So frankly, most of the leverage has already been put in place. It's just common sense adjusting to what the business is.

I think it might be safe to say the real opportunity to leverage this is going to be the next strong quarter. Seasonally the third and fourth quarter are the strongest. We also have some other efficiencies in just the routing software that is optimizing the home delivery scheduling, the sequencing of stops, and the black box that goes through a lot of equations and analysis that will come up with the most efficient routing every morning -- I would say every day -- as the trucks are being scheduled for the next day and loaded for the next day's delivery. And we've got systems that are in place right now. We're just using it in a few routes. And sometime in the next month we will probably put that throughout the chain. We think that could save us miles driven. And the other thing Clarence was talking about is to load up the trucks so that when you do drive you have bigger loads.

So it's hard to tell. Some of those we thought we would have gotten by now, but we're being extremely careful not to try to save a tremendous amount of money and hurt service with any of our customers. To that extent we've been very successful. But it's going to take a while longer.

Also, as we convert to the Florida facility there's going to be some duplication. There will be some transition there. We are more comfortable we know how to do it now. But it won't show completely until we've got that fully operational, which we're expecting to have by the fall.

Second area I wanted to cover was your sourcing from China and how much of your merchandise mix could be affected by a tariff if it goes into effect in April or May. And how quickly can you get sourcing from other countries? How fast can you make the change on those types of (indiscernible)?

This is Clancey Ridley. As Clarence said, we're planning ahead right now for the contingency -- which we hope does not occur -- but for the contingency there could be a prohibitively high anti-dumping duty imposed on one or more of our vendors. We import from China a high percentage of our bedrooms. We are looking elsewhere and are talking to our best suppliers to put us in the position so that we don't get injured as retailers trying to serve the public real little value on our floor in the bedroom category. And as Clarence also said, in fact we're attending to that. Next week we're sending a three person team of officers to Vietnam, among other places. None of us know what's going to happen on April 28th at the earliest or June 17th at the latest.

Do you think that if there's a tariff imposed that by June you can have those alternative sources in place? Or will there be a lag period where you may have to eat some costs or pass on some higher costs --?

Tony Wilkerson, our principle officer, our Senior Vice President for marketing, which includes merchandising, has been asked -- and he didn't need to be asked -- but Clarence and I have asked him to search by suit (ph) for our Chinese bedrooms to show us where the substitute product would come from. He is well along in the process and I'm confident that we will not be in the position of suddenly finding ourselves with product that doesn't work price-wise after anti-dumping duties. But it is a real challenge for us. That's why our well-managed large company with excellent relationships with vendors is in a better position than many to weather this storm.

Thank you very much.

John Baugh.

Number one, CapEx -- 44 million. Was I mistaken? Wasn't that number in the low to mid 50s before? And is it lower because you're moving some stores now into '05? Or were there other factors that lowered that number?

I think we're just defining it a little differently. We're breaking out the purchases of these operating and capital leases that will show up when we expend cash. They will show up then as an investment in the investment section of the cash-flow statement. And adopting the trend we've seen from others, other companies have been breaking those two out separately, so we have capital expenditures and then we have these purchases of leased assets. Previously we had included $7 million in the number and also have, as you pointed out, we have cut back a little bit on the spending just because we're not going to be able to get the projects done quite as quickly as we had hoped.

So am I right? Should I add -- I think you said 20 million in terms of cash on top of the 44 million of CapEx to sort of get a -- whatever you want to call it -- outlay?

That's correct. Between (indiscernible) it will be the 44 and the 20.

Can you -- you went through it quickly -- quantify for me again the 140 basis points SG&A that you made reference to, Dennis?

The discounts on the third party credit promotions impacted SG&A in the fourth quarter of 2003 70 basis points higher than it was in the fourth quarter of 2002. And the group medical and general insurances together were up 25 basis points. And the other was this reclass of 40 basis points from advertising credits going into gross margin. And together those add up to -- actually it's 135 basis points.

Do all those continue on into '04 basically? The reclass does obviously.

The reclass amounts we will have to get back to you on. We entered into a lot of the contracts or arrangements with our vendors for cooperative advertising and we have to analyze those and determine exactly how we're going to treat those under this EITF 02-16. So we will have to get a little further into the quarter before we can give you guidance. It will be simply a reclass between those two places on the P&L. So it is a little hard to predict right now, but we will try to come out with something. This was begun -- this accounting treatment -- in January of 2003. You didn't have to apply this Emerging Issues Task Force pronouncement to contracts that had already been put into place at that time. So now we have a whole new round of contracts, and we've got to determine the appropriate rate of (multiple speakers)

What about the other two items? You're going to continue to use third party credit heavily and I assume medical expenses aren't going down in the next year.

You're exactly right. Both of those will likely continue just like they were in the fourth quarter.

What I'm trying to drive at here -- and several people have asked the question in many different ways -- but you had spoken to a number a while back about what the distribution center in Braswell (ph) would do. Forgetting Dallas and forgetting Florida, I'm curious once you sort through this transportation issue, are you going to hit those numbers? And you remember what those numbers are I am sure. I would have to go back and dig them out.

I think we said one percent reduction SG&A related to distribution.

Is that still going to happen? Is that still targeted to happen, say, by the -- I think you said the middle of the year?

I really don't know. We would hope that with all the advantages of what we're doing that we will be able to do that. I think some of these things that we anticipated would be pluses of the new distribution have come through, and that is primarily on the other side. That's in increased gross margins because of the fewer markdowns, lower inventories, and those type of things. So I think as we refine the distribution and get our warehouses that are in place now closed -- for instance, like the ones in Florida -- and get the leverage on the top side -- in other words, more volume out of these facilities -- they're designed to do more volume, that we will get those savings. But when that will happen, I really can't outline any further than I have.

So between the gross margin and SG&A, you're still comfortable you a pickup 100 basis points at some point in time?

Absolutely.

Back on these tariffs, the preliminary decision is out April or June, but when does it go "into full effect" if there's a dumping fee?

You probably know that there are a number of steps that will occur this year. For example, once the VSE (ph) has made the preliminary determination -- let's say it makes it on June 17th, because they're probably going to take -- this is speculation -- they're probably going to take as much time as they can because this is one of the most complex cases they have ever had -- then the ITC will -- if all the deadlines move back the ITC will make a final determination on December 16th. The DOC would make its final determination on November 1st. I think that -- and of course, a year later they will take a retrospective look at it. But I think we will probably plan -- our Company will plan on being prepared to get our imported bedroom goods from places that aren't going to bear whatever tariff is imposed. And if it's a zero tariff from our principal suppliers, that will be great news because I'm sure they would rather supply us from China than from a combination of China and Vietnam, or China and Indonesia, or China and the Philippines.

My question is simply this -- unless you significantly reduce in the interim -- the interim being, say, June to December if December is when you have the final pronouncement -- unless you make a significant change in your ordering pattern, my understanding is that the tariff doesn't go into effect fully until the final. Is that correct? Unless you, obviously, change you're ordering patterns dramatically to avoid --

We would not wait until the final determination by DOC of dumping to have -- because we just can't take that chance.

I understand, but when would you incur the increased costs?

It would be as of whatever the preliminary determination date is. So we need to set up reserves at that point and we need to be prepared for April 28th to have no goods coming in this country that would bear a potentially ruinous duty. And that is a heck of an order, as you can imagine, but we're working on it full blast.

Would you comment on what would you call ruinous? That's a strong word. Does five percent cause you to go to Vietnam? Obviously it's good to diversify period, so you're going to do that. But I'm curious at what number roughly where it becomes noncompetitive overnight?

It was announced recently that the Chinese may reconsider letting their currency float a bit (ph). I don't know what effect that will have, so exclude considerations of that. I think that anything over -- I'm picking a number now -- it's Tony's final call -- 15 or 20 percent would be tough on us. Anything 30 percent or above would be very difficult.

Thank you very much.

Michael Cridadulou (ph).

Regarding the private-label mix that you talked about moving to 50 percent, I think in January of '04 you were at 30 percent, up from 15 percent in January of '03. I just wanted to clarify, is that 50 percent going to be in maybe some of the latter months of '04?

We said by the end of the year. So I would say at the run rate at the end of the year will be at the 50 percent and in January with a 30 percent run rate. So it has been moving up rapidly. And mainly that mix is because we're just adding more to programs -- for instance, the bedding where we didn't even have any branded.

Is there any mix you could give us, what percentage would be private-label of case goods and what would be private label of upholstered goods around that 50 percent number?

I don't have that exactly. I would say now that most of our case goods would be -- a higher percentage of case goods would be private-label than upholstered.

I know you freed up some floor space with that mutual decision to not carry Furniture Brands product. Could you just recap for us, is there a benefit there in terms of freed up floor space?

Furniture Brands is still our largest supplier. Broyhill is our number one supplier, Lane is our number two. So the agreement was that we don't have an alliance that required us to carry up to 50 percent of our floor. We have no square footage agreement with them. And in that dissolution we have moved away from Thomasville. So it is primarily Thomasville that we're eliminating from our floors. And we're replacing that with premium goods from other vendors that were branding our own brands, but also from companies like Bernhardt, from companies like Snodik (ph). And Bernhardt brand, we think, in our stores really means something and we're growing that right now. So it is already being replaced. I would say by the first half it would certainly all be replaced, and most of it by the end of this quarter.

Could you offer any further commentary -- you've mentioned same-store sales and order trends over the last several weeks and last few months. Any differentiation or additional color you could offer on upholstered goods versus casegoods?

Upholstery, we mentioned in our January release, has been very strong for us. Casegoods has not grown as much as upholstery. We've been very pleased with all of our classes -- motion upholstery, recliners, stationery -- all that is going very well (indiscernible) leather. We had growth in all of our classes, I believe, but most of it was in upholstery and bedding most recently.

Thank you very much.

(OPERATOR INSTRUCTIONS) Todd Schwartzman (ph).

Could you talk a little bit about your growth plans in terms of store openings over the next couple of years in the Florida market?

Our main focus in the Florida market is Southeast Florida. We just opened Boca Raton -- excuse me, we opened West Palm Beach this past year. We want to be in Boca Raton. We're targeting Fort Lauderdale. We want to continue to move into that incredibly dense market down there. We started off well with our West Palm store. We remodeled our store up at Jensen Beach, which has been very good for us. So most of our growth we're seeing in Southeast Florida. We are looking at some other potential locations in the Southwest. And certainly we would like to in-fill in the good markets throughout the state, which would be back towards the Central. We opened in Orlando a year and a half ago and have done well. We like to continue to grow there. So Florida, as we mentioned earlier, is our fastest-growing state. It's now our biggest state. We want to grow wherever the population fits our customers and our mix.

Any other remodels or relocations or closures on tap for the state?

We are in the final stages of working through a remodeling at a Fort Myers store, which is our linchpin on that coast. And we're also -- you might not consider it Florida but it is pretty close to it -- Savannah is a great store for us and we will probably remodel that this year also.

Right now in Florida itself it looks like you have about 22 stores or so? Is that correct?

Dennis is that correct? It sounds right.

In Florida I believe we have 25.

Also, Dennis, excluding the debt -- the 19.5 million long-term debt was consolidated under FIN 46 -- it looks like there was a net retirement from the September quarter of about 9 or 10 million of long-term debt. Is that accurate?

Yes.

And as far as the interest rate on that, is the coupon comparable to Havertys' other (indiscernible)?

The coupon on the balance sheet is running around seven percent right now. And we paid out our bank lines earlier in the year and those were floating rate LIBOR plus 150, so those were very inexpensive. And in the fourth quarter -- I'm trying to remember exactly how we paid down. Some of them were variable rates and they were a little lower than -- it was lower rate than the seven percent that we paid down. Some of the other long-term debt that we have at higher rates have prepayment penalties. So it would not be economical for us to pay it off, even though we have the cash. So we paid down lower rate debt in the quarter.

Last question, Clarence, I missed when you named early on the producer that's going to be making the Havertys bedding for you.

Simmons.

Thank you very much.

Scott Helenik (ph).

Obviously bedding has done well. Do you know what percent of your mix in '03 was bedding versus '02? Do you have that number handy?

It is a little below 10 percent. It's like 9-something percent. I think it's up about a percent.

It is up about a percent (multiple speakers) 20 percent increase (multiple speakers) 8 to 9 really.

What do you think that can get to in '04 with the private labeling bedding?

We certainly think we can get to 10 percent. We're right at it now. That has been growing very dramatically for us and is primarily in the upper price points. So that's one of the reasons that the merchandising team chose this (ph) better program. And I mentioned the exclusive foam presentation, which is exciting -- it could go up, let's say, a half point.

Any special promotions on Presidents' Day this year that you didn't have last year? Or pretty much the same?

I would say pretty much the same. We have a credit promotion which I think extends a little further than we did last year.

The credit promotion is a little stronger. And of course, we would appreciate it if there wasn't the 100 year snowstorm in the Presidents' Day this year. We can't yet count on that, but USA Today and wheater.com says there won't be.

Is Thomasville completely off your floor yet? Or is that something that will happen at the end of the quarter?

We have until the middle of the year to get it completely off our floors. We have it in some markets, which is by mutual agreement because they don't have distribution in those markets. We have it -- I would say it's on 20 percent of our floors right now. And that is being phased out as we bring this other product in.

One last thing, the average ticket price -- do you have that handy for '03 versus '02?

Yes, the average ticket price for delivered sales was $950. It's 1075 for written (ph). So we've said it is right about 1000, and that is up mid-single digits over the previous year.

Thanks a lot.

Operator, I wanted to come back in and correct something I had said in the previous question. The payments in the fourth quarter on long-term debt were 6 million, not 9 million and most of that was just normal payments on existing long-term debt arrangements. But there was a couple million dollars of accelerated payoffs, and those were the lower cost debt that I mentioned.

So if there are any other questions, please go ahead.

At this time we have no further questions. I'd like to turn the conference back over for any concluding comments.

Thank you very much. We appreciate your interest in Havertys. Thank you.

Ladies and gentlemen, this concludes the Haverty Furniture Companies' year-end earnings conference call. If you'd like to listen to the replay of today's conference, please dial 1-800-405-2236 and you'll need to enter the passcode of 569435 followed by the pond sign. Thank you and have a great day.