Haverty Furniture Companies Inc (HVT.A) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Haverty Furniture Companies Second Quarter Earnings conference call. (Operator instructions) I would now like to turn the conference over to Clarence Smith, Chief Executive Officer and President. Please go ahead, sir.

Good morning. We are pleased to report an increase in net profits for the second quarter to $3.7m, or 16 cents per share, compared to the 2003 net income of $2.1m or 10 cents a share.

The second quarter is historically our toughest of the year, and our comparative to last year was at the low level. Our recent sales momentum which has been good, starting with Memorial Day weekend, has continued through a strong Fourth of July and a strong solid July sales performance.

Comp sales trends thus far for July are approximately 4 percent positive, both for incoming orders and delivered sales. The sales increases we report for the full month will be positively impacted by this year’s extra Saturday at the end of the regular July calendar.

Comp sales increases were positive for all our regions for June, and are expected to be again for July. We are pleased to see the balanced performance, and believe that we are gaining overall market share with particular strength in several of our key, larger markets.

For the second quarter, our average delivered transaction was up approximately 3.8 percent, and our average price per SKU was up slightly. The positive reaction to our expanding Havertys collections has moved into the important categories of recline and motion upholsteries, and a form core bedding program in the past quarter. We are ahead of the schedule to reach our reported goal of a 50 percent of total sales run rate in Havertys collections by year end. Havertys branded product has helped us gain share because of the strong values and its strong acceptance by our customers and our sales staff.

In merchandising trends, we are seeing a shift to more transitional looks in both case goods and upholstery. Leather continues to be strong with traditional styles selling best, with transitional looks increasing in upholstery. Softer tone colors such as corals, pinks and teal are gaining, section seating and entertainment centers and casual dining are strong sales producers.

Imported fabric is beginning to have an impact on our upholstery plans. Universal’s large introduction in upholstery was well-received, and as more import fabric mills such as [Culps] gets up and running in turn the value will be very competitive.

Better techniques in designing, sourcing and improving the logistics of an expanding import program are a key focus of our merchandising group. We believe we have the team, the talent, the systems and the distribution to be a leader in selling top quality import merchandise throughout all product categories.

We did see an increase in inventories this past quarter, particularly in bedroom furniture as we plan for the summer sales promotions, and protect it against possible disruption in shipments from Asia.

We also significantly strengthened our premium collections presentations in several categories, with particular emphasis on upholstery. We’ve already seen the positive effect of the high quality product on our recent sales. We expect that we will bring down our inventory levels back closer to last year’s levels by the end of the third quarter.

We believe that our current in-stock position, our strong in-stock position, has helped us to gain sales from some of our weaker competition, which are struggling with line up changes, sourcing issues and credit problems.

The construction of our Florida distribution center in Lakeland is behind schedule, but we expect that it will be operational by year end. Consequently, we do not expect to experience a significant start up cost impact this year. We believe the additional time will allow us to transition more effectively while operating without interference during the stronger sales periods of the fourth quarter into the first quarter of 2005.

The conversion to our new methods in software for our Western distribution center in Dallas is planned for the first quarter of 2005, which will then complete the roll out of our new distribution system to all regions. We expect that this operating base will allow us to better serve our customer, provide a more suitable platform for handling imported product, give us a strong foundation for store growth and allow us to leverage our distribution costs going forward. We believe these ongoing investments in our store support and operating systems give us a significant strategic advantage in our markets.

The recent news about increasing consumer confident and the record existing home sales are positive indicators of our business that we expect in the second half. We are excited about our three additional new stores opening later this year, and we believe it will have excellent opportunities for growth in our regions. We are especially focused on new growth opportunities in South Florida, the Washington Baltimore area and Ohio. I would now like to turn the call over to Dennis Fink to discuss our financials.

Thanks, Clarence, and good morning everyone. I’ll just briefly draw attention to two items in this morning’s press release. First there was a table provided to allow for a comparison of this year’s versus last year’s gross profit as well as SG&A expenses. Allowances are being classified differently this year. Using comparable figures, gross profit percent increased by 8 basis points for the second quarter versus last year, and SG&A costs were slightly lower than last year’s second quarter on a comparable basis. Both of these P&L line items are obviously moving in positive directions for earnings.

The second thing is we are now required to present separate EPS calculations for each of our two classes of stock. The table is shown at the end of the release that recaps the make up of the shares used to compute the diluted EPS for the common stock. This per share figure of 16 cents for the quarter and the figure of 43 cents for the six months is consistent with the calculation used previously when we presented the single diluted EPS amounts.

So that is one that we are referring to principally, and we believe that others will primarily look to that figure as well.

Our accounts receivable rose slightly in the second quarter, with [lower] by approximately $8m since the end of 2003. We did expect further reduction in accounts receivable by the end of 2004 as we will likely follow last year’s trend of generating more second half volume from the outsourced credit promotions that are handled by a third-party finance company.

The expense of the outsourced credit promotions were flat in dollars for the second quarter and slightly lower as a percent of sales. Our debt on the balance sheet is about $58.8m, and that has declined steadily. We are now less leveraged, 21.6 percent is the total debt as a percent of total capitalization, which is well under our target. In fact, the receivable portfolio we have, which is a net of about $90m is about 50 percent larger than the total debt on our balance sheet. Most retailers don’t carry [inaudible] at this point, but our comparative leverage is even less than it might first appear.

As far as our retail square footage goes, [inaudible] about the three additional stores. We’ve already opened one store, so for the year our footage is up by about 41,000 square feet. We expect to add for the whole year 167,000 square feet of net retail space, that is an increase of 4.3 percent. Since so many of these openings are later in the year, the effective weighted average increase in square footage is about 2.6 percent and that is a figure some people like to refer to when they are doing their sales models, the effective increase for the square footage on a whole year basis is 2.6 percent.

Our capital expenditures as we talked about in the 10Q for the first quarter are in a range, we would say they are $46m but there were several projects that we are lining up that might take that figure 10 or 20 percent higher, and we still do estimate that we are running at the mid to high end of that range, which would be $50-$56m. That is the expectation right now for the total year’s capital expenditures. That is going to be funded largely in the second half. Just with store openings and the distribution center we are in the process of building, the construction costs are very heavily weighted to the fourth quarter and some of the third quarter. But we have the cash balance that you see of $21.8m and we still have bank lines in place that are $80m, and we also expect that in the second half of the year profits were normally stronger, quite a bit stronger and also as I had mentioned before, we think receivables will be coming down. So we do not expect to incur much if any additional debt in funding these expenditures for this year.

We have the bank line there in the event that we do need to enter it, and we will keep you posted on that.

As you all know, we have adopted a policy of not giving guidance on future operating results. It’s been in place for about a year-and-a-half now. However, on these calls we do talk about forward-looking statements and there is a disclaimer, a disclosure about that in the press release, and SEC filings that I draw your attention to.

Obviously we are doing everything we can to increase our margins, our gross margin expansion is important to us, a very integral part of our improvement and profitability that we expect to have going forward. The other part is the SG&A costs which we are finally seeing some positive momentum on as we have now set in place a very fine and state-of-the-art distribution warehouse structure that is supported by very up-to-date systems. We have spent heavily on our systems in the last year, upgrading hardware and also improved our techniques significantly, and we look for that to help us along with additional volumes in the second half of this year as well as next year in keeping our SG&A costs in check and improving our efficiencies.

Otherwise I would like to just mention that we also have with us this morning Clancy Ridley, our chairman, who will join us for questions and answers. Operator, go ahead and open up the call to questions at this point.

Thank you, sir. (Operator instructions) Your first question comes from Charles Grom; JP Morgan.

Good morning, guys.

Good morning.

Relative to a year ago and to last month, I was wondering if you could comment on traffic levels from your stores and buyer conversion rates. Are we seeing any sort of a pickup in those metrics?

I’d have to say we really don’t have good metrics on that for buyer conversion rates. We are in the process of putting in a traffic counting system. We have it in about 30 percent of our stores, so I really can’t give you good numbers. I would say, based on the stats I gave you this morning about our average transaction up about the same as our comp sales that it is about equal to what we have been seeing.

I am encouraged by our recent trends and I think that we may be getting a little bit of a pick up since the Fourth of July and so we are encouraged, but I would say it is not up dramatically, it hasn’t changed dramatically.

Okay, fair enough. Given the weakness in overall industry trends over the past few months, I was wondering if you had seen the domestic manufacturers begin to discount some of their products in order to move inventory, particularly from maybe furniture brands, Bernhart, Lazy Boy, et cetera.

No discounting that we’ve noticed. I think there is enough pressure to keep price increases from going up, which had been previously floated. We are bringing in more imported product which is putting pressure, the whole industry is. I haven’t seen discounting, to answer your question.

Just a last question, as you look towards the back half of the year, what kind of comps do you need to throw off in order to maintain the margin performance that you were able to demonstrate in the last two quarters of last year?

Well first on the gross margin, all the costs in there are variable. We just have the merchandise costs, the inbound freight and a small part of distribution costs in there. All of those basically are variable, so that volume is not going to impact the margins on the gross profit line item. On of course the SG&A, it is largely fixed and your question probably relating to pre-tax margin or operating margin, and we definitely have to have positive comps to see increases in that margin and the exact number is difficult to predict, but it is definitely at least low single-digit comps to see the kind of progress we expect, and we think that we are set up to leverage very well if we can get beyond that.

We do have difficult comparisons in the second half of the year from the standpoint of comp store sales. Actually on orders, this month was extremely good, July was extremely good last year, we are pleased that we are tracking ahead of that because our delivered sales were excellent in August and September last year. So we do need to have positive comps is the answer, and fortunately we are tracking ahead against a tough comparison right now.

If I could ask one more, are you guys completely transitioned out of the Thomasville product line at this point?

Yes we are.

All right. Good luck, and thanks.

Our next question comes from Joel Havard; BB&T Capital Markets.

Thank you. Good morning, guys.

Good morning, Joel.

This is probably more specific to Dennis, the $200,000 - $264,000 that you had in other income in the quarter, we had been supposing there was $200-$300,000 of maybe sort of last of the real estate games hanging out there. Did you all sort of bring that forward, Dennis, or is this some unexpected business, can we still see a little more in the second half?

That really isn’t related to real estate, it is some other items. We do still have a potential for some payments in the third and fourth quarter. My guess is they would probably be in the fourth quarter, and we are going to be moving out of one warehouse this year as the Florida distribution center, we call it our regional warehouse now, and moving to the new facility which is the Florida distribution center. We don’t know when that is going to sell and if it did sell in the fourth quarter there could be $1m plus of change on that.

The other warehouses that we are talking about selling probably wouldn’t happen until next year, and we do have some things coming on those as well. That is the line item it will show up on, and we will disclose those to you as they happen. It’s a little difficult to predict the exact timing on them.

Okay, so Florida – and I don’t want to beat up on this one, tiny line item – but Florida is the last remaining transaction of the old warehouse, or is there another couple of little ones in there.

There will be some related to the move to the Western facility, but most of what we have closing is Florida. We will be closing six warehouses in Florida and converting into one.

Okay, that makes sense. And where was the store that you opened in this quarter?

Maryland.

Maryland, okay. And so you are still looking at San Antonio and Cincinnati, Ohio?

Cincinnati, Baton Rouge and San Antonio will open this year.

Okay.

Joel, let me come back to that one question to clarify something. We do have the mid-Florida regional warehouse that is closing and will be sold. The other five warehouses that we are talking about in Florida we probably won’t be vacating until the first quarter of 2005 because of the delayed construction. We are getting into the new warehouse just very much at the end of the year, the last few weeks of the year and we won’t have transitioned everything and closed down those other warehouses. So there are some startup costs and training costs as we move those, and there are also some gains on real estate, and those will probably be next year.

The other thing that we think we have a significant gain is our mid-south regional warehouse that we have in Mississippi. We are still using that facility until sometime next year, but we would be open to selling it and doing a short-term lease back. We just don’t know when it is going to sell, exactly. But there are some good things going on in the economy there with auto plants in Mississippi and we are hoping that we fetch a nice price for it.

Okay, so somewhere in that mix you may see a little bit more in the latter part this year, but maybe a couple million more next year?

Yes, that’s fair enough.

Okay, sorry to take too much time on that. The capex remainder, that break out, how much of that is related to the distribution of facilities versus the IT systems that are supporting it? And maybe you can give us an update on how that whole customer management program is working. I believe you all got it up and running out of Georgia and are carrying it into the new markets, is that correct?

Yes, we’ve consolidated our customer service into our [Hazleton] facility up here for the east, and when Florida is converted it will be operating out of that operation. So we are operating about half of the companies on that right now and what I was referring to in my comments was that by the end of the first quarter next year, we will have converted our western facility to those new systems, we will have converted Florida and we will be operating completely on it.

So we are very pleased with it, it is getting us a lot more efficiencies. Customers have transparency to their transactions through the phone system and eventually we want to get that to the Internet. We think it is giving us some service advantages.

Could you put a little color on that maybe from the sense of less returns or less people getting put out while they are waiting for an initial delivery, is there some measurable performance?

Times is certainly something we can measure and we are seeing some improvements there. I think a lot of it is just quick response time. The ability to react to the customer for what she needs, to make a quicker delivery, for her to get more information for us to follow up immediately within minutes after delivery to her home to make sure everything is okay, all of this is within our automated system and supported by staff. It’s just an improved service level from the point of sale all the way through delivery through service and the fact that we are using technology and systems to consolidate it I think we get better information and better reaction times.

Okay, so the enhanced service, an intangible but maybe that should feed into better satisfaction, returning customers going forward? Is that the thought?

Without a doubt, particularly if we can serve the customer quicker, get the product to her within days as opposed to competitors who might take weeks or even months. So we think this does help us to gain share, if we can service the customer better.

Okay, and Dennis, if you could translate the thoughts on the DC, the systems and the retail space into what the percentage fall out of this $45-55m capex for the full year would look like.

Sure. The Florida distribution center is in the $13m range, and all of that will be spent primarily in the late third quarter, early fourth quarter when those expenditures go up. The information systems, I first have to mention that we spent more money last year being ready for just an increase in infrastructure and bandwidth throughout the company, and we spent about $6m, this year it is a little over $4m. Most of that has been spent already. We [inaudible] those expenditures. There are other distribution expenditures that total around $5m that have to do with the trucks that we have decided to purchase, the trailers actually, and some drop zone sites that we are buying for dropping off the mountable trucks in the big metro locations. The rest, other than the $13m and $5 or $6m in Florida is all related to stores. So the bulk of our expenditure is on new stores.

The bulk of the remainder will be on these three, four locations for the year?

Actually there are quite a few of them that are going to open in 2005.

Upfront, okay.

That we have to carry it over across the fiscal year end, so the spending on the stores that was upfront was land and site work.

Of course.

But we have expectations to open five to seven stores next year, and we are working on all of those and assuming they will come through. Some of those will require big upfront expenditures in the fourth quarter.

Okay. Do you have a rough handle on the total number of retail square feet at quarter end?

At this quarter end we had 959,000 square feet.

That’s a nice rough number. Thanks guys. Good luck.

Thank you. Our next question comes from Margaret Weelan; UBS.

Good morning, guys.

Good morning, Margaret.

A couple of questions. The first one relates to the [inaudible]. Are you seeing any opportunity to go into the Mid-Atlantic maybe and look for stores there?

Well we are in the Mid-Atlantic since we are in Maryland now, and we will be looking at whatever comes available. We have grown primarily in the last several years by picking up other retailers, big boxes that failed. Stores like Home Life and Home Place, we opened a number of those, so we will be looking at these real estate opportunities like any other, and we are getting the information and it is something that we can reach from our Virginia facility, some of those stores.

It is an opportunity, but we need to make sure it makes sense as far as the real estate, and it is purely a real estate play.

Okay, so you may have the distribution set up to get the product there?

Yes, I mean we are into most of Maryland, even into Delaware on a weekly basis now for our stores currently. We are looking at those opportunities.

The second question relates to the anti-dumping duty now is lower than most people expected, and I would imagine that you are getting more opportunity to import product. Would that be the case – I know you mentioned in the upholstery you are starting to accelerate. On the case goods are you getting different [inaudible] or has there been any disruption or anything?

Well, I think we got through it pretty well and really, as you mentioned, we were in some respects pretty surprised from initial results. We did get hit from some of our vendors, but those are being moved and I think we are going to get some great values. As you have pointed out in the past, Margaret, basically the anti-dumping petition created more capacity in Asia, and we are now importing products from Vietnam that wouldn’t have been there if it wasn’t for that. So there is going to be a lot of value, there is a lot of value, and our folks will be there next month again. We are expending a lot of energy to make sure that we are able to handle this import program professionally.

Other than upholstery, how is the quality and the value in line with your expectations?

Well it has just started, and I referred to the Universal one because that was the biggest. We haven’t committed to anything yet, we are looking very closely at it. Our folks came back from talking to the [Coca] people and they are very impressed with what they are doing. I think there is going to be value in fully made upholstery coming from China, maybe more than we expected in the past.

So it is new, we are just getting into it, and I think the quality is going to be almost as good and catch up very rapidly, as they have in case goods.

In terms of what you are doing right now in upholstery, what is the price point that you started at which you break even or you make a better margin?

Coming from China?

Yes.

Well you know, you really have to go to the better quality merchandise because of the freight factor. I would say the $999 price point is probably the price point that would make the most sense.

$999 is the breakeven, okay. And then the Florida distribution center, it is just a [inaudible] or is that something we should worry about?

No, it is just getting buildings built in Florida, to be honest. This is a green field warehouse built on sand, as it all is down there, and we had trouble getting the land to settle properly before we could start construction. There were just delays in getting the settling properly done. It is nothing other than a speed bump. We would have preferred to have it open before the selling season, but we are going to be able to handle our business. The new stores that we are trying to get going won’t be happening until next year, so I think we will be fine.

Okay, just finally going back to imports for a second. We hear there are a lot of power shortages and outages and China, have you seen any disruption to any of your supply?

I’m not familiar with that.

You’re not hearing about it.

I’m not, but that doesn’t mean it isn’t happening. I’m not familiar with power outages.

Well hopefully you won’t be. Thank you very much.

Thank you, Margaret.

Our next question comes from Budd Bugatchi; Raymond James.

Good morning. Settling in Florida is probably an oxymoron.

Well you do know that area, don’t you, Budd?

I do, I do. Let me talk on a couple of areas. One, can you talk a little bit about the SG&A expense? It came in better than we expected and I would like to know what areas? Maybe there were some efficiencies in the warehousing? Could you maybe give us a little more color on that?

Budd, the biggest thing was in the warehousing area in the month of June, actually. As you know, the quarter had an irregular pace to it, we had a shift in the holiday, Memorial Day, so our deliveries were fairly weak relative to last year in May, and then we delivered very heavy in the month of June. So a couple of months into the quarter we had costs in our P&Ls that weren’t absorbing the overhead, and we made up for that and then some in June. So we were pleased to finally push the volume through. We tested the people’s productivity and I suppose it was very predictable. It is one thing to expect it, another thing to see it and count it.

So that helped us. We also, as we noted, saw less credit sales in total. People are using their credit card or Visa and MasterCard more often, and American Express and while there is a fee associated with that, it is less than the fee to pay for an outsourced discount of a credit for commercial free interest. So that drop helped keep the credit costs going down instead of going up.

Those were two things. We also did a good job in reducing some clerical work in the stores themselves in the field. Part of that was helpful with the automation and just the experience of the customer service area that is connected with our distribution operation. And it is really post-store visit sales. Arranging delivery as well as dealing with any issues that arise.

We’ve gotten more automation in there and the outbound call campaigns confirming deliveries and we’ve got people using voice prompts to get to the right people they need on the inbound side, and it has just become a lot more efficient and it is finally showing up in our head counts. So those come together a little better than we had figured.

[inaudible] three items, how sustainable are they?

They are as sustainable as good sales volume is. We just, as you pointed out, we’ve got a higher [inaudible] operation now changing to this new model and when we leverage it, when we run it and put volume through it, we can see good results. We are talking 10 basis points or so, 10 to 15 basis points for each of the items mentioned. I could have imagined credit easily being 10 to 20 basis points higher, the clerical being probably 10 to 20 basis points higher and also the other leverage costs, just from efficiencies, being in that neighborhood as well. So we did come out, although we still think we have room to go and are focused on getting SG&A down, we are glad with the steps in the right direction and the progress that was being made.

I think the big issue with us for the quarter was just again the timing of the months and seeing the volume come through in June finally. It was more likely fourth quarter rate type of volume, at least a third quarter type of rate of volume in June, and that was a good opportunity for us to show what we could do.

So at what level do you start to leverage the expenses? What is the sales level requirement?

We talked about that earlier. We need to see some positive comps, low single-digit comps would probably allow us to leverage the operating expenses. The only thing I am hedging on is all the regulatory costs with the Sorbain Oxley and those are still somewhat unknown as we go through the first year. Everything we’ve seen is the costs keep coming in higher than we would expect it to go through all of the intro control certification – it is a lot of work and it takes time of professionals to help out. But we should see leveraging of our fixed costs and SG&A costs in the second half. We are already off to a pretty good start and we are expecting that to come through.

Have you already spent the money on SorbOx or do you have to continue to spend? What’s the delta in Q3 and Q4?

It’s a good question, I think it is going to be probably between the two borders, probably $400,000.

Each quarter?

Between the two, second half of the year about $400,000 and that is a number that is difficult to control because it is to some extent based on the audit firms and how far they want to do it. There has already been a lot of work done on that, but we’ve gotten an approach from our outside auditors in the second half where we have expenses, secondly.

About $400,000 over the first half.

I’d say so, and over last year as well.

Thank you very much, Mr. Politician. Okay. A couple of other quick questions. The extra Saturday, how much of comps does that impact in July and does it go away in August?

It is going to impact at the end of July, it is not in the 12 percent number so far, as Dennis mentioned, but it is probably going to be 3-5%, 4-5% is more likely. We are going to be an extra day on our calendar and we are on a regular calendar, not the four-week retail calendar. It does come back the other way in August.

It goes away in August.

Reverses, yes.

Okay. The impact of [inaudible]. What will that – you said it will reduce costs expected in the second half of the year. Can you quantify that?

Well compared to what we had expected three months ago. We thought we had some higher transition costs that were put off until the first quarter. Those costs have been pushed out.

But then again, as we’ve pointed out to Joel’s question, we also won’t have those real estate transactions which will help offset it until next year. We did expect to have some start up costs, its just been moved to very late in the year and more into next year.

Well we don’t have the extra cost in SG&A, but will we have an operating gain in the other income line? Is that the way you read it?

There will be potentially one warehouse that will be gained in the fourth quarter before we have potential for some more warehouses, so yes, we will have less gain in the fourth quarter and less extra to net.

And a couple other quick questions. Import organization. You mentioned, Clarence, in your opening comments something about the import strength and you were looking at I think devoting more resources to it, did I read that right?

Yes, we are looking at devoting more resources to it. We think we have to. We are in the process of that. We haven’t flushed it out completely. We think we have to have people on our payroll that work for us that know the ins and outs of Asia, not only for working with the different factories but ultimately for QC. We might work and are working to contract some of that work initially. But we believe we have to have our own people, and we can’t firm up our merchandising team going over there for perhaps a year or more. So we are looking at beefing that up and we will have more on that in the coming months.

Any idea of timeframes.

I would expect to have something started this quarter.

The change in accounting, two sides. One the receivables split off and also in the separation of the EPS for Asian and Asian regular common, two questions. One on the split off of the EPS, if you converted all of the shares to common, does that change any other metrics?

No. It wouldn’t. There would be a higher dividend paid because there would be more shares in that class, but that would be it.

So no, there would be no, some quirk that would come back and be surprising? And on the long-term receivables, I think this is the first I’ve seen that split off?

Exactly. We got that position clarified with the SEC as to how they would like that treated, so we have traditionally used the trade practice for retailers who have their own receivables to leave it in current. It is a minimum payment, and based on a minimum payment you have figures actually that would be higher that would be due beyond – and the SEC’s clarification was that we could use our historical experience in payments and apply that to the various credit promos that we run in house and then come up with those figures.

So you are right, that is the first time it has been put out like that.

So let me make sure I understand that. Is it a receivable that is totally classified as long term, or it is a portion of the receivable that will be paid outside of 12 months?

It’s the latter, just the part that we expect, based on history, will be paid further out than 12 months from the balance sheet date.

Thank you very much, I will let someone else jump in.

Thank you, Budd.

Our next question comes from Richard Diamond with Inwood Capital Partners. Please go ahead with your question.

Good morning. On the imported upholstered furniture, it is said by the domestic manufacturers that the consumer wants an individual choice of fabric. Are you seeing a little push back from consumers on imported furniture that they want customized furniture?

We have just started working with bringing in upholstered fabric, from fully made upholstered fabric and upholstery from China. We do know that it is important that you be able to react very quickly in upholstery. What we are hearing from the mid players is they are trying to get it down to a four week, five week kind of timetable or sometimes even less, I don’t know how they do that, but that is what they are saying.

We don’t do a whole lot of special end upholstery, most of our upholstery we either stock or have available within three weeks through some kind of program with our vendor or a different color for a particular fabric, so we are willing to special order out. Most of what we have sold in upholstery we have or have flowing. We are expanding our better upholstery to that kind of program, but that would be stock for a three to four week program coming from the factory. So you know, quick shipment is very important in upholstery. What we are seeing from the new players overseas is that they recognize that and believe they can react within a matter of weeks compared with what you could get domestically.

I think that the domestic players are trying to provide product within two weeks, and that’s what we are starting to see as a huge advantage. If they can do that and even shorten that, then that is their competitive advantage and we certainly hope to see that.

On the retail upholstered furniture, do you think imports will move down and take share, or do you think that all things being equal it is just hard to overcome that freight differential?

The Chinese have figured it out in case goods, they will figure it out on upholstery. The freight differential, and it has gotten up as high as $150 per sofa, freight coming from China. When it is that high, obviously compared to $25 from Mississippi for us, $25-30, they’ve got a huge differential to overcome. I predict they will figure it out in a number of years and they will be a player in most every price point.

Thank you very much.

Our next question comes from Michael Cox of Piper Jeffrey.

Thanks guys for taking my question. Just from recent sales trends perspective, have you seen any variability across demand across your price point spectrum?

No, I would say we’ve seen pretty good balance and we are pleased we are able to show more premium product as we phase out of our Thomasville program we’ve brought in new premium goods and that’s been well-received, and I think we are starting to see some new impact there, new growth in our premium product. So that is a huge deal for us.

I do think we probably skipped a beat or two in the first half as we phased out of Thomasville in our better markets. We spent a lot of time, energy and market building that aim and people came to us looking for better product and we weren’t able to execute that due to the transition. We are now putting that in place, our new products have been very well received so I think we are starting to see some better merchandise helping to drive our overall business.

And from a modeling perspective, the Cincinnati and Baton Rouge stores, are those late fourth quarter? What is the timing on those?

They are late – Dennis, what is the date on that?

Cincinnati is mid-November and Baton Rouge is early December.

And are those comparable to the Maryland store that you just opened in terms of square footage?

They are both going to be around 37-38,000 square feet net retail and we actually had a little bigger store in Columbia that was 41,000 square feet retail. San Antonio is about 40,000 square feet. It opens before Labor Day.

Okay, great. That’s all I’ve got. Thanks a lot, guys.

Thank you. Our next question comes from Laura Champine; Morgan Keegan.

Good morning. Clarence, when you mentioned 4 percent, tracking of 4 percent comp in July, does that count the benefit that you expect to get from the calendar change, or is that additive?

It does not count that benefit. So as I think Dennis has pointed out, it could be 4-5 percent or even higher, on top of that for that one time.

And then it goes away in August.

Exactly.

On your private label bedding, is there a difference in the importance for brands in the bedding category that makes the percentage of bedding you sell under the private label different than what you can do in furniture?

I think the bedding brands are much more important in our business compared to the furniture brand names, because they spend a lot of money advertising, all of them are well-known. But we’ve had a very good reception to our private label program. It is different, a new thing we have on our floor I mentioned it was a foam core program, so it is well received.

We still expect and want to have the main name brands on our floors, and those are Sealy, Serta and Sterns. Those are all name brands and we do very well with them. It is a different deal. You are correct. Bedding name brands are much more important.

One more question on the possibilities in imported fabric. On your private label brand, you said in the past that you get 2 to 4 percentage points incremental margin. Your private label upholstery right now I would imagine is all domestic. If you start using imported upholstery on the fabric side, does that create opportunity for incremental margins ahead of that 2 to 4 percent range, or does it just allow you to put a better value on the floor?

I think it could, but there is competition out there. I do want to mention in upholstery, leather is a real driver. It has taken a lot of share from the upholstery category. Leather is over 40 percent of everything we sell in the upholstery category, and I think continuing to grow. So I think it is important that we get better values, because what has happened is that the leather price points have come down to cannibalize our fabric upholstery, and I think bringing in more values could stimulate the category more.

Hopefully we could make some higher margins, but I think it is mainly just being able to offer better value for the customer.

While we are on percentages, do you have a percentage of your upholstery orders that are custom orders or special orders?

It’s in the low teens, and that would also include what we call our custom tracers or programs that we’ve worked out with our vendors for quick ship on an alternative color or fabric. So in many ways that is really not special order, it is just choosing a different color. That’s really been our permanent driver. What we are looking at, we don’t have in place now, is across the board a true special order program, but it has not been our core business.

Thank you.

Our next question comes from Scott Hellenick; Ferris, Baker, Watts.

Good morning.

Good morning, Scott.

I was wondering, are there any states or any particular markets that might be performing better than anything else? I know you mentioned some of the larger markets.

Well I specifically mentioned that we were pleased to see a balanced – we had positive comps in our regions that we showed in June and are expecting in July. That has not been the case in the last couple of years, we have been hurt in the several key markets. It is great to see the returns of balance across our regions. We have done well with our new introductions, our new stores we opened up the last several years have done very well, the comps are positive. On top of positive comps, a move into Washington/Baltimore has been good. Our move into Florida has been good, and that’s primarily where we opened our stores. They have been driving a lot of our business, but now we are seeing Dallas, and that is really important to us. We are glad to see it.

Okay. And looking ahead for next year, you are building some larger stores coming online as far as square footage. Are you seeing higher sales per square foot for your larger stores versus your smaller ones? Is that kind of what is driving that, or was that just an opportunity that maybe you saw?

We are seeing a higher sales per square foot in the newer stores, which is great to see. We’ve opened up the new markets and those are helping driving our comps and sales per square foot. Any other color on that, Dennis?

I don’t think it relates as much to the size of store as it does to the new market. The location and what is going on in that particular market. Just generally, if you have a great location, a great market and it is a little smaller store, the sales per square foot is going to look higher, but you are leaving sales behind by not having a wider assortment.

We like the size that we are building, from the high 30’s to the low 40’s. That is the size we think really fits our core and allows us to have some of the better product. Those sizes are some of our best, more productive –

Can you share what some of the stores might be for ’05? Some of the same markets you talked about at the beginning?

I mentioned in the comments that we want to move aggressively in Florida, Baltimore and Ohio, those are our focuses for new markets, new stores. We also will be doing some [inaudible] to our better markets, as we have to, but that is where we are going to be focusing on.

Any store relocations planned for the next year or two?

Yes, probably Dallas and that is probably the only one we have planned.

Lastly, have you heard any impact on retail prices in bedroom furniture because of the duties? Have your prices changed at all because of that or your competitors?

I don’t know about our competitors. We felt like we planned well, we got through this pretty well, we brought in inventory in the right areas. It hasn’t impacted us yet and I don’t think that it will significantly going forward. I think we will transition through it. Our team spent nine months working on it and did a very good job in protecting us, preparing to move to areas where they had to in areas like Vietnam. I think that we will come through this and take share from people who didn’t do as well as we did.

Okay, that’s all I had. Thanks.

Thank you.

(Operator instructions) You have a follow up question from Budd Bugatchi/

[Inaudible] any specific locations yet?

The only one that we’ve announced I believe is [Dulas], which is a store that we are building in Northern Virginia, it is being constructed now and it will open early next year. I don’t believe we’ve announced any other ones.

Early next year, Clarence, meaning?

February.

Okay. When will you announce the others?

When we finalize them.

And the timing of the openings?

The timing, we have one in the first quarter is really it. I think there are actually between five to seven we said. More than half of them are in the third and fourth quarter.

I think we said 6 percent and we expect to do that, and we believe there are going to be a lot of opportunities that we will look at very closely, so we are getting prepared to look at all of those too, but we think we are comfortable with the 6 percent square footage growth, that’s our plan and as we get these leases signed and worked out we will announce them.

I just wanted to clarify one thing. I thought you could go up into Pennsylvania for not extending your distribution, but can you go as far as New Jersey?

We could certainly get into Pennsylvania, New Jersey would be a stretch without another drop spot. We certainly can reach Delaware right now. That is another step, frankly. I would say that is moving into another territory which we are not saying we won’t do, but it is not within our current reach.

Got you. Thanks, Clarence.

Okay, thank you, Budd.

Our next question is a follow up question from Joel Havard.

Close enough. Dennis, on debt you all prepaid or repaid 4, 4.5 roughly? What did that come out of?

You mean which debt was reduced?

Yes.

Mostly the institutional debt we have. We have a [inaudible] company and a bank. Two separate loans that have scheduled payments on them. One is floating rate, one is fixed rate.

I’m sorry, is that more than 6 percent?

There are three pieces, all in the 7 percent range, the fixed rate one, fixed coupon. The biggest piece is out of that, and then there was a floating rate, LIBOR plus 70, there was also a couple million dollars I believe out of that one.

Okay. And you said you all didn’t have anything drawn on the revolver for Q2?

That’s correct, none throughout the quarter. We haven’t been drawing since – it’s been a year since we’ve drawn on our revolver.

I thought that, then the notes in the first quarter Q’s it talked about LOC funding. I didn’t know if that was just sort of daily – didn’t really count.

We have some letters of credit. It is a commitment it is not actually a –

So it is just backed by the revolver separate?

Yes, actually a good point though, because it does use up the availability. There is about $5m outstanding of letters of credit, and those are for insurance plans.

Right.

So that uses up the availability, but it is not actually a drawn amount on the balance sheet.

Okay. That’s all I had. Thanks, guys.

Thank you.

Thank you. At this time, there are no further questions. Please continue with any further remarks that you would like to make.

I just want to thank you for being on the call and we really appreciate your interest in Havertys. Thank you very much.

Ladies and gentlemen, this concludes the Haverty Furniture Company Second Quarter Earnings Conference Call. If you would like to listen to a replay of today’s conference, please dial into 1-800-405-2236 and use the access code of 11003285. We thank you for your participation.