Haverty Furniture Companies Inc (HVT.A) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Haverty Furniture Company's Fourth Quarter and Year-End Conference Call.

At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero, and a conference coordinator will assist you.

As a reminder, this conference is being recorded Wednesday, March 2 of 2005.

At this time, I'd like to turn the presentation over to the President and Chief Executive Officer, Clarence Smith. Please go ahead, sir.

Good morning. This morning, we released earnings on our performance for 2004, as well as our February sales for 2005. I will discuss the 2004 numbers and the details behind those figures. We feel that our most recent sales are a good indicator for the upcoming year's performance potential.

February's written business was up almost exactly the reported 10.6-percent total delivered sales increase and the 6.1-percent comparative store sales figure. Our backlog of undelivered sales orders is well above year-ago levels, which bodes well for March delivered sales.

The fourth quarter for 2004 presented us with many challenges involved in executing a number of key strategies.

For the fourth quarter, we made 37 cents versus 43 cents last year, and for the year, 99 cents versus $1.08 before the accounting change last year.

In addition to some of the higher-than-normal expenses we mentioned in our press release, we had additional auditing and consulting charges related to Sarbanes-Oxley compliance of approximately $500,000.

In the fourth quarter, we closed and moved one regional warehouse in Jackson, Mississippi and prepared for the move and opening of our new Lakeland, Florida distribution center finalized in early January 2005.

We also closed 2 local market warehouses. We will complete the final moves to consolidate our distribution and to transition 5 local Florida warehouses to our new distribution centers by the end of Q1 2005.

Consolidating warehouses and opening new distribution centers accounted for approximately $1m more SG&A expenses in the fourth quarter than usual. We expect to see approximately 1m more in expenses related to these moves and closings in Q1 2005.

These moves are important to our gaining an upper hand to our competition with improved service and capacity to add new markets and stores. We believe we will show sales and market share gains, improve gross margins, and reduce distribution costs as a percent of sales by the end of the second quarter 2005.

We do believe that the execution of these strategies has helped us to be positioned to grow more profitably in the near term and the long term. However, we are disappointed with these earnings, both for the fourth quarter and for the year.

As we have discussed, we are in the midst of a changing business model where we, just a couple of years ago, relied on the majority of our shipments to be delivered in 2 to 3 weeks from North Carolina. Now, we're bringing in a growing percentage of our goods from China and other parts of Asia, with up to 8- to 12-week lead-times.

With more Havertys-branded product being made exclusively for us, the manufacturers don't have as much of these groups in finished inventory or scheduled for production as when we shared more items with other retailers.

These changes in our sourcing and in the timing of the supply chain have caused huge adjustments and demands sophisticated analysis of the flow of the merchandise. Our sourcing and flow of goods and containers has caused us to reevaluate our storage capacities at the distribution centers.

Due to the additional demands of importing directly from Asia, we do plan to expand the storage capacity of our leased Braselton, Georgia distribution center by approximately 140,000 square feet, which will take our main DC to over 650,000 square feet. This will give us more capacity to store imported goods to supply our Eastern growth and the recent moves in the Midwest. Additionally, it will help us supplement the flow of domestic -- or key domestic upholstery suppliers for the Florida region. We expect this expansion to be complete by late 2005. We plan to start an additional phase, which will take the building to approximately 800,000 square feet, which we'll complete in 2006.

We're excited about the new stores and new markets planned for 2005 and 2006 and believe that they will start being accretive to earnings within 90 days of opening.

Late this year, we plan to open in Columbus, Ohio; Indianapolis, Indiana; and Fort Lauderdale, Florida -- all new markets for Havertys. We're expanding 3 of our best stores -- Fairfax, Virginia; Woodbridge, Virginia; and Lubbock, Texas. We are very pleased with our recently opened Dulles, Virginia store outside Washington, D.C., which opened with strong sales this past weekend.

We announced 6 store openings for 2006, including Stonecrest Mall, east of Atlanta, a replacement store in the Cedar Hill area south of Dallas, and Boca Raton, Florida. We plan to add 3 other Florida stores in 2006.

Our capital expenditures for 2004 were 45.3m plus 12.8m in purchases of previously leased properties. We expect that CapEx for 2005 will be approximately 46m plus 7.1m in repurchased leases.

With our debt to capitalization right at 20 percent, we feel comfortable with our cash flow and our balance sheet to be able to handle these expenditures. Much of the investments for 2005 will be for stores to open in 2006.

Our recent initiatives to begin direct importing with a focus on China and Asia is bringing exciting new product to our stores. Three of us will be leaving tomorrow to visit some of these key factories in China and Vietnam to help us develop Havertys' collections going forward.

We realize there are increased risks in direct importing from Asia, and we intend to move deliberately. Our main strategy is to partner with the largest and most experienced manufacturers in China, many of whom we've had previous experience, to become important customers to these suppliers. We'll be working with some of these factories to warehouse our goods in China.

Building the Havertys brand is our top marketing priority. It is the majority of our line-up, and we expect it will continue to grow in importance on our floors. We do expect to continue to sell key top-selling bedding brands of Sealy, Serta, Stearns & Foster, and Tempurpedic. Additionally, Lane, Broyhill, Bernhardt, and La-Z-Boy are important brands to us and because of their acceptance by our customers.

We've just begun pricing our Havertys collections on the Web, and we've just significantly increased our Web traffic in recent weeks. We're working towards the goal of selling most of our Havertys line over the Internet by the end of the second quarter next year.

Even though we had a disappointing finish to 2004, we do believe that we're very well positioned to have a strong 2005 even after the expected challenging first quarter. Our team is energized, and we have the best field managers, as well as the best home office management team I've ever been associated with.

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

Good morning, everyone.

First, I'd like to talk to you about our gross profit margins, and for that purpose, please refer to your press release on page 3. There is a table that adjusts for the treatment of vendor allowances, which we had reclassed to cost of goods sales -- cost of goods sold under the EITF 02-16. This was not reclassed in every quarter in total, so the table is helpful to see exactly what amounts were changed and how they compare to this year's results.

On a comparable gross profit margin basis, we showed 1.29 percent of net sales' decrease in the fourth quarter this year compared to last year. Twenty basis points of that reduction is due to markdowns and closeouts of inventories from vacated warehouses, as we said in the text of the release. That was 38 basis points that was due to LIFO provision for modest inflation in 2004 versus deflation and the LIFO benefit in the prior year's quarter. The remaining 71 basis points is due to competitive pressure on pricing. We had mentioned in our November sales release that we were matching prices often in markets on identical and certain similar looking merchandise groups carried in our store.

Full-year comparable gross profit margins were 19 basis points lower than last year, and about half of this decrease was due just to the LIFO provision. The preliminary indications for the first 2 months of the first quarter show 30- to 40-basis-point lower gross margin than we had in the first quarter of 2004. Those margins in the first quarter of 2004 were the best of the year and will make for the toughest comparisons this year. As Clarence stated, we're targeting gross margin increases as 2005 progresses.

Fourth quarter SG&A expenses were also up by 1.29 percent of sales versus last year's fourth quarter, and again, I refer to the table on page 3 of the press release.

The text of our earnings release discusses 4 expense items impacting this year's quarter by a total of $3.1m, which is 1.43 percent of sales.

The first of these items mentioned was $1m for distribution transition expenses. This will occur again in a similar magnitude in the first quarter of 2005.

The $600,000 of new market start-up expense portion of this total does routinely recur from time to time. It's part of our ongoing geographic store expansion, and therefore, it can be predicted.

Just as a reminder, we had entered 2 new markets in 2002 -- that's Washington, D.C. and Orlando, Florida -- and in 2003, we started up the San Antonio, Texas market. All of these involve noticeable start-up overhead expenses, and all of them have proven to be excellent investments in the subsequent years.

For 2005, we're entering 2 new markets in the Midwest. Both of these are in the fourth quarter, so we're expecting the same type of expenses to be incurred again in that period.

For purposes of projecting the future quarterly total expense run rates, it's appropriate to back out the other 2 expense amounts that were covered in the earnings release. That's the $418,000 lease accounting adjustment and the $1.1m additional costs recorded in the fourth quarter for our group medical plans.

The effective tax rate was lower for 2004. The Company appropriately adjusted the deferred tax rates based on changes during the year, and since we are in a deferred-asset position, it reduced the overall income tax expense to an effective rate of 37.1 percent for the full year of 2004.

Going forward, we expect to return to our previous effective income tax rate of approximately 37.3 to 37.4 percent, although there may be changes in that rate on a quarterly or annual basis due to discrete events that take place.

There are no gains on sales of properties expected in the first quarter of 2005. We do anticipate having gains on sales of properties that will be approximately $1m in the last 9 months of 2005, and that gets recorded on the Other Income line item.

Just to clarify, the expansion for this year will have an impact on our weighted-average retail square footage of 4 percent for the full year of 2005. Oftentimes, you can just add the expected comp store sales increase to that weighted average square foot number and come to a number that is very close to our total sales increase expected.

Clarence mentioned our total debt to total cap. It was just under 20 percent at year-end 2004. The cash flow for 2005 is expected to be sufficient to cover the capital expenditures without increasing this financial leverage figure.

I'd like to also introduce to you, who's here with us today, Clancy Ridley, our Chairman, and he will be available to help us answer any questions that the audience may have.

And, Operator, could you go ahead and open up for questions at this time.

Thank you, sir. [Caller instructions.]

Todd Schwartzman, Sidoti Co.

Could you talk a little bit about the promotional activity levels in Q4 versus a year ago?

We really didn't have any unusual promotional activities. I think Dennis mentioned some competitive pricing issues. That's really specific product that we would just match in marketplaces. So I don't think we had any unusual, any particularly different promotional activities. Our credit promotion was similar to the one the previous year, delayed payments and also deferred interest or no interest, so nothing unusual.

In which product categories or areas are causing -- are you experiencing particularly competitive pricing?

Well, the most competitive pricing is in branded merchandise other than Havertys' that we're competing with in local markets, and so that's generally in case goods, probably more focused in the bedroom area than any other category. So it's not that we haven't been competitive before; it's just that many people are using those goods to football around, and we make sure we're under their pricing. So we see less of that going forward; I will say that.

And as far as Q1 thus far, what about the store traffic? What are you seeing -- what did you see in February versus January?

February was better than January, clearly. We mentioned our written business was equal to the double-digit sales that we reported in total for February, so traffic was very good. It was very good over the holiday. That was a very strong weekend for us. It actually kicked us to the finish we had. So, certainly, I would say that the second half of the month was stronger, and we're very pleased with it.

And my last question is regarding the Internet, you'd mentioned that your goal is to sell, if I heard you correctly, most of the Haverty-branded line over the Internet?

Yes.

By a particular point in time? I didn't catch the time horizon.

We said second quarter of next year. There are a lot of details we're working through. It's a complicated process. We do want it fully integrated through all of our systems so that it's transparent through our distribution and customer service and that we can handle it to the same extent that we handle our current customers.

The pricing has caused a lot of interest right away, which we just started this past month, pricing all the Havertys' goods. And we think it's going to be a factor in our business. We don't know how big, but we think it will be an added feature, added benefit, for our customers.

And what is the percentage right now?

We're not selling over the Internet now. It's zero now.

Okay. So you feel you're going to get from zero to a majority?

No. A majority -- no, we believe it will be significant enough to us to support it. You know, we -- what we've heard from other people is that it's about equivalent to a store's volume, one store, single-store volume. We think it's going to be a little more important than that, but that's probably a pretty good number. And we don't know whether it takes from people who would be going in the stores or if it's completely a plus, but we think it's something we need to be doing.

So your initial statement was that the majority of the Internet business would be of Haverty-branded merchandise. Is that correct? I guess I misunderstood.

Well, that is correct in that the majority of our current business is Havertys' branded. We expect to price only Havertys' product initially. That's what we're pricing now over the Net, the Internet, only Havertys' product.

I see.

And --

But it's an availability issue, so to speak?

In some regards, and also, some of our vendors don’t want us to price over the Internet. So --

Gotcha.

-- some of the name brands, we won't price over the Internet.

Okay. Thanks.

Okay.

John Baugh, Legg Mason.

I'm sure Havertys has done some great business in Florida with the hurricane recovery. Could you elaborate a little bit on that and, in particular, describe how the other key markets are doing?

We had a good balanced performance last month. All regions were positive. Yes, Florida was the strongest region, but we had good balance, and overall, it was just a very strong month for us. But, again, right now, this is Florida's season. We are feeling some of the positives from the fallout of the hurricane last year. We're well positioned in Florida, so it's good for us.

Okay. Any sense -- I know it's hard -- but as to how long Florida can ride the wave? And, obviously, they're doing great before the hurricanes, so it's not to say that the boost is due to the recovery, but clearly, there's a little bit of a wave, if I can use that word.

Well, I think there is, but, John, you saw the numbers this week about the hottest markets in the country, and they're Florida. And these are the markets we're in, some of them growing at 35 percent a year in value. These are very strong markets. We do not see it slowing down in our near term. Might someday. We want to be in the best markets down there, and we're going to continue to invest.

Okay. My second question -- I don't know, maybe Dennis can weigh in on this one. But still trying to -- it's just so difficult to sort of understand -- you've been in so many transitions and you opened Braselton and now you're consolidating Florida -- as to what your distribution costs will be, let's say -- because you're still incurring some transition expenses -- will be when you're done with all this versus where they were when you began. And I don't know what point in time you'd pick, Dennis, but what's your sense of where that is? You've obviously put a lot of capital in place. Any frame of reference on the operating margin impact from distribution when you're done versus where you started would be helpful.

John, I tell you, the business has changed so much since we started that I'm not sure that it's -- if it's any longer comparable. We have -- with the huge amounts of imports and the long lead-times, we really expected some changes in that over time when we originated this idea of consolidating the distribution but not to the extent that it's happened. And we were fortunate that this direction has helped us make our -- make the whole transition possible to more of a company like all retailers have become, relying on imports and shipments of massive quantities at one time.

So I think that our warehouse and delivery costs are obviously running higher, but I don't know that they get back to the levels that they were at in the boom years of '99 and 2000, but what's -- the trade-off is is that we, as retailers of imported products, have to get a better margin. I know that we're better off than we would have been if we had the old system, and -- but that's not a real -- what your question was is compare it, you know, what we actually incurred back in those years to what we actually will incur going forward.

Well, maybe that is unfair in the sense that you obviously would have these private labels running at higher gross margin. So maybe just, again, operating margin-wise, do you think this new business model will come out ahead, about the same place you were before? What's your sense? I mean it's so hard to look at your numbers and try to understand how the business model has -- changing has affected you all with all the transition issues.

I think we will come out ahead because I think there's still room in the margin, gross margin line for improvement. And the operating costs, I think, we'll squeeze and get more efficient from where we stand now, which will happen primarily in the second half of this year. But you know, we are going to be reducing the total cost of the whole process because of having products specifically made for us. There's not a, you know, national advertising campaign paid for by a supplier, and you know, huge marketing expenses or sales expenses, and we're able to be creative and have some unique looks, and it ought to show up in the margin line item. Clarence, [inaudible] would you say?

John, I think the main point that we'd like to make about our distribution is that it now gives us the capacity to grow. We're obviously experiencing duplicate costs in the transitions, certainly fourth quarter and still in Florida in this quarter, and as we get those out of the way, we believe -- we know that it will start to come down, but will it come down below where we were 3 years ago when we started this? Probably not. Fuel's a big factor. Transportation is more of a factor than we originally thought. So we think we're going to be as efficient as you can be doing what we're doing, but I don't know if we can tell you that it will be less than it was as a percentage 3 years ago. We would like it to be. I don't know if we can say that.

Okay. And then my last question was just clarifying this gross margin guidance that you gave for Q1. You said 30 to 40 basis points lower than Q4; is that right?

No, the Q1 last year.

The Q1 last year, okay.

Right.

And then, Clarence, you referenced less of this price discounting going forward. Does that mean that you have seen in the months of January and February less of this need to price discount?

We're going to be moving away from the goods that we have to football. That's really what it means.

Okay. So it's still occurring?

We don't need to do that now, and we've developed our own product that we can get margins on that are being well received by our customers, and we're going to not be having to discount goods just to be competitive in the marketplace, as we have with some branded goods in the past.

Gotcha. Thank you. Good luck.

Thank you.

Budd Bugatch, Raymond James and Associates.

I've got a couple of questions. One, on this discounting, just want to make sure I understand that 70-basis-point delta. Are you saying pretty much, Clarence, it was not Haverty-branded goods; it was all what we would know as either trade brand or --?

No, it's not all. Some of it. Clearly, we have some merchandise that might be perceived as similar that we would price to be competitive. So there's certainly some Havertys'-branded goods that we've brought down to be more competitive, but the deepest discounting is in the name-brand goods that everybody can recognize.

Can you parse that 70 basis points that way? Do we --?

Well, it's also -- some of the discounting, some of the margin pressure has been in closing out merchandise in the warehouses that we're closing.

[Inaudible] basis points, right?

Yeah, this -- that was for the 20, correct.

Right. So you had 20 basis points in that. We had 38 basis points for the LIFO charts. By the way, what was the LIFO credit at the end of Q4?

The reserve, Bud?

Yeah.

Yeah, it was around $16m.

That's an exact number that we'll see in the K, Dennis, or is it [indiscernible]?

It's an exact number you'll see in the K. That's correct.

Okay.

Closer actually to 17m.

Okay. So I'm just trying to make sure I understand that we don't have anything that's in the Haverty-branded goods that you've got to move away from and take some dislocation, too, but you said you do have a little bit of that. Is that right, Clarence?

Well, it's really closer to what's the generic merchandise that -- we may have to, in some places, price a bookcase that looks similar to another bookcase to a level that's less than we had originally priced it. So there are some issues there. I mean we have to be competitive in every place we're selling. So we decided to be a little more aggressive in the fourth quarter, but as I mentioned earlier, the real items that are very low margins, we're moving away from.

Yeah, well, we've watched the margins go up a couple a hundred basis points over the last couple of years as the penetration of imports in Haverty-branded goods has gone up, but I guess what I'd like to get a sense of is what's the high-water mark? Where's the sustainable margin level? What do you think it is?

It's a good question. We do think there's margin to be gained by direct importing. We're eliminating some of the middlemen, some of the different costs, and we expect to get that back in margins. So --

That's true. If you're going to take the -- if you're going to take the inventory risk, you better.

Yes, sir. And we totally agree with that. So we think that we can get back to gaining like we did in the past. For a couple years there -- you mentioned it -- we gained up to a half-point a year. We've got to get back to where we were and then move forward from there, and I think that we will see that.

What do you think the inventory is? You're going to put on, what, a couple a hundred thousand square feet just to the DCs in Braselton. I guess, what, another 300,000 over the next couple of years?

We're being -- we want to be prepared to be able to support direct importing, and that facility we've chosen so that it can theoretically beat others. We want to be an importer that's significant and be able to carry that through our system. So that particular facility is a leased facility. The CapEx on it is primarily just racks, but you're correct; it's also going to add to some of our overhead. But we think it's necessary to support our plan going forward.

Well, just my simple math looks right. I mean 300,000 additional square feet, that's probably $20m of inventory you could actually store in that facility.

If we fully racked it. The first part that I mentioned, I think it was 140,000, will be fully racked, and we think that will support about 10m additional.

The second expansion for next year won't be racked. It's going to allow us to ship and stage, and it will allow us to put in more doors. This first expansion is no doors. It's going straight back. It's all racks.

So, yeah, if you don't rack it, that certainly limits what you can store there.

A couple of other quick questions. Advertising, the sales ratio, what do we see this year for 2004 in the Q or in the K?

The number without the vendor allowances is a little over 7 percent.

And that's the number that actually will be in SG&A?

That is correct.

And the $300,000 of new -- of pre-opening expenses per new market, how much of that's advertising? How much of it's just background overhead that -- market overhead?

I would say most of it is just overhead, getting people in there, getting it up and going. We don't really advertise till right before we open. So the weekend we open is when we start advertising, and we expect to get some return on that, not our normal return, but some return. So almost all of that would be in overhead.

Okay. And my last question is just do we have a number right now for fourth quarter or for the year of what Haverty-branded goods were, percentage of revs?

We're going to quit talking in percentages on Havertys' brand. It is over 50 percent, and we think it will continue to grow. We plan for it to grow. It's the majority of what we sell and will be.

And you want to stop talking about it for what reason, just --?

It's most of everything we sell now. If we do have the vendors I mentioned that are going to be important, as their product holds its place on our floors -- certainly, bedding is still primarily branded. I mean we sell some of our own, but the brands are still important in bedding. We just -- it's a number that's going up, and where it ends is going to be determined by how it's received in the marketplace and how well our branded goods compete for that.

Thanks, Clarence. Good talking.

Thank you, Bud.

[Susan Melarchy][ph], UBS.

Can you talk a little bit about -- you commented that you are trying to move some of your storage over to China so that you can kind of balance your inventories better. At the same time, you're increasing your Braselton facility. Can you talk a little bit about how you're just looking at imports, and, in general, what you're seeing?

Well, Susan, we're going over tomorrow to meet with some of these people. We do think it's probably going to be important that our suppliers are able to warehouse, if not here, in China, and taking it back to China probably starts to make some sense. We recognize there's some costs related to that, but we're moving more goods from overseas, and almost all of our case goods now are imported, and we don't see that changing. So we're being proactive in developing the best values and the good relationships there to be able to supply better than anybody else.

And can you talk a little bit about -- are you seeing any change on the upholstery side of imports, anything there?

Well, leather's still very strong, and almost all of that's imported from somewhere, either from Mexico or from Asia. We are bringing some upholstery in, and it's doing okay. We will see more values, I'm sure. We're looking at other countries, too, for bringing in upholstery, but we're still primarily domestic, and it's coming from Mississippi and North Carolina. The quick shift's important, and it's probably even more important in upholstery business than case goods. The colors change. The fabrics change. So we're still primarily domestic, but we're looking at the commodity-type items very closely, which would include leather and possibly recliners coming from imports.

Okay. And then just kind of going back to the margins. I know you talked about this earlier, but you're definitely getting, you know, better benefits than we do on the private label side, but it seems like your SG&A is coming up. And as you continue to expand your warehousing and expand the businesses, you know, that seems like it's going to continue. Can you give any sense of the kind of volume growth that you are building into the assumptions in order to see the operating margin expand?

Well, we think the second half of this year is going to be very good. We think the second quarter is going to be better than this first. We were very encouraged, as I started off my comments, about February and our significant backlog, which we think possibly could be an indicator for the potential we have. We're doing very well in our new markets. We're starting to see some life in our key major markets, so if we get the kind of comps that we just reported in February, we will see some leverage that is necessary to produce the profits that we've been expecting. It's going to be important that we get these comp sales, and we believe the potential's there.

Okay, thank you.

Thank you, Susan.

Joel Havard, BB&T Capital Markets.

A lot of good questions so far. I just want to get our hands dirty here with the store opening forecast, where you -- I guess, do a little quick history first -- what you actually -- if you would review, please, and I noticed -- I think that's in the press release what you did in Q4 and what -- that schedule for '05 and '06. Did we gather that it was 6 each this year and next?

No, it's 6 in '06 and 5 in '05. So the reason we announced those 6, which is unusual for us, is because we're spending so much capital to put those online, and a lot of them are going to come on early '06. We had hoped some of them would fall into '05, but it is a bit unusual for us to announce that. We have -- we've signed these. We're moving on them. Some of them are going to be buildings that we construct, so this is -- if you look at the 2 years together, then we're going at a rate that's a little more aggressive than we have in the past, and we think we're going into some really good markets for us.

Joel, this is Dennis. In the fourth quarter, we opened 2 stores, fourth quarter of 2004.

Right, [Cincy][ph] and Baton Rouge.

That's right.

And, Dennis, I’m sorry, what was the -- I got a little confused in our notes here on what you were saying that that pace of '05 looked like. Did you say it was Columbus, Indianapolis and a Florida store?

Yes, yes, and then we just opened the Washington, D.C. metro area store near Dulles Airport.

Okay.

And that -- so we have one first-quarter opening this year, and the other openings -- the 4 stores are going to open in the fourth quarter to make 5 total stores.

And I'm sorry again. That was Columbia --?

Columbus.

Columbus, Indianapolis --

Then a Fort Lauderdale area store. And we have one other store we haven't announced yet, but it's a store in another state that's a new store that will replace 2 small, older stores. In addition to that, we have 3 physical expansions taking place, 2 in the second quarter and one in the third quarter. So for -- the total expansion for the year is expected to be 160,000 feet, just slightly less than 4 percent.

There it is, okay.

And the net by quarter, just to give you another sense of that, it's 39,000 feet in Q1, 14,000 square feet expansion in Q2, 8,000 feet in Q3, and 99,000 feet in Q4.

Okay. That'll let us fine-tune a little bit here.

I appreciated Bud's remark on why you wouldn't be talking about the private label anymore. I guess over the course of '04, you guys were talking about getting to at least a 50-percent run rate. It sounds from your remarks as if you did accomplish that in Q4 and you do see that increasing.

Yes, we still [inaudible - multiple speakers].

I assume -- yeah, I assume that's at a slower pace? I guess just to maybe kind of finish Bud's question, from our standpoint, do you feel comfortable that that -- another one of your quotes in here was that you were predominantly or nearly completely import driven in wood. In response to another question, you talked about it being probably more domestic oriented in upholstery. Are we starting to settle into the product balance? You know, I guess another question earlier was you've been in such transition over '04, and even back into '03, that we're trying to get a sense of where we get to the sort of core margin potential here.

Well, I think I answered some of those questions to Bud about the potential in margin. We think there's an up side there.

As far as the Havertys brand, what percentage are we going to, we moved the majority of our line-up. Obviously, I've mentioned some brand names that we carry on our floor. For competitive reasons, I don't think we need to be saying what percentage each vendor gives our floor. We're not going to get into that. So we've got supplier relationship reasons here, but our suppliers know that we're focused on growing the Havertys brand, and some of these brands are making goods that we brand. So it is our direction. Once we get to majority, I don't see the advantage of saying 60 percent or 65 or whatever number.

I got you. Let me -- and, Clancy, please echo in here, too, the -- I guess those transitional issues that, at least from our perspective, that you all have been dealing with these last couple of years were this shift to an import-driven, private label-driven product mix, the DC and logistics or delivery transition, and then the credit transition. As we look at this, you're telling us that these are mostly done. There's a little bit of clean-up left on the DC logistics delivery side this year, and maybe that -- you know, you have to take care of the import side in conjunction with the DC expansion. But aren't you mostly done? Is that kind of what we can gather, especially as you talked about the second-half outlook getting a lot stronger?

A lot of our original plan to consolidate distribution into 3 or so DCs and some home delivery centers is largely -- will largely be in place at the end of the second quarter. However, the dynamics of bringing in direct imports and the inventory issues and the storage issues are unfolding at an increasing rate. We are learning a lot. And we've got more to learn about trying to deal with being a direct importer and having to warehouse goods either at the source or here because unlike when we used to call North Carolina or Mississippi, we can't say, "You store it for a while because --" or, "We don't want any more of it. It's not selling at the pace that we thought it would." If we buy it in China, we own it.

Right.

Has to be stored somewhere, and those dynamics are unfolding, and we are learning more about how to deal with it, but we've -- we haven't painted that picture adequately enough yet to know what all the implications are as far as distribution assets and places of warehouses, if that makes sense.

Clancy, I understand where you're coming from, and I guess maybe that's one that I've missed here a little bit. We were under the impression that you were doing a pretty significant percentage of your import-driven -- you know, the private label, wood especially, that that was very direct already. Was that a misunderstanding on my part?

Well, no, there's a lot of container direct that we've been purchasing, but we haven't, until recently, been in the business, and we're only getting into it in a limited way now of actually designing products to be made for us in China or elsewhere.

Okay.

And doing the QC inspections ourselves or through firms that will report directly to us and then buying a major cutting and having to take it with no other layer of cost and, hence, service involved, and the impact of that on our distribution and warehousing requirements just isn't fully developed yet. We're learning as we go, and Clarence, who's heading over to China, as he said, with a couple of our other colleagues tomorrow, will be experiencing on the ground some of the -- acquiring some of the knowledge we'll need to refine our approach to distributing and warehousing our own direct imports.

That's a great clarification, Clancy.

Does this mean that Clarence has yet more jobs to worry about and this will be another one of his many duties, or do you all have a team that you're building or in place already that's going to be managing this process for you, or are you looking at it that way yet?

Well, we are looking at it that way. Clarence is studying Mandarin at night, be assured. But, Clarence, you might want to respond.

Yeah, we last year acquired a guy, [Matt Scalf][ph], who is head of our Import Services. Spends a lot of his time over there. He's helping us work this through. At one time, he was VP of La-Z-Boy Global, and he worked for [Ladd][ph], also, doing the same thing. So he knows it. He's our lead over there. He works for Tony Wilkerson, our head of Marketing and Merchandising, and our team is doing this. I had -- I went over there 2 years ago, so, no, I’m just -- I’m over there to meet some of these people and get back. So that's not going to be my job, just trying to be aware of it.

Okay, thanks, guys. This was very insightful. Good luck.

Thanks, Joel.

Laura Champine, Morgan Keegan.

Could we -- let's forget about the late '90s for the moment and just talk about the changes in the distribution system and the impact it's having on the SG&A expense line.

In 2004 with SG&A expense as a percentage of revenues at 46.8 percent, how much improvement do you think you can get from that level over the next couple of years?

We have some internal goals, but I might let Dennis answer the detail there.

Thank you, Clarence. He delegates well, for Joe's question previously.

Laura, we -- I think the proof's going to have to be in the pudding, and there -- as Clancy had talked about, there's a lot of moving parts and things that are changing. We recognize the path to better profitability that we wall want. It's going to be better gross margins and lower SG&A, and we are -- we're really not prepared to give you a timeline of the types of expenses.

Clarence did mention something earlier that is really the most important point. We've really built this Company, grown the Company, to be able to leverage costs as comp store sales increased, and for the last few years, that's been a tough challenge, and if we can get low- to mid-single-digit comps consistently, we will improve our SG&A expenses. We're -- as a percentage of sales, of course, is how we would look at that or you would want to look at it. We're not in a position that we're giving specific guidance anyway, but the truth is that it's very difficult to predict it.

That's good enough for me, Dennis. But something else you mentioned that surprised me a little bit is that in the Other Income line, which has naturally been pretty tough to project, you only expect $1m benefit in Q4. I'm not sure I heard that right because I know that you're closing a substantial number of local cross-docks and some warehouses this year. You only expect to sell one, and that will happen in Q4? Is that right?

No, it's not going to happen in Q1 is what I said. The last 9 months of the year, we'll sell one warehouse that we own and expect to make about $1m gain on it. The other warehouses in Florida are leased, so --

We're getting out of a lot of leases, Laura. And we probably have a warehouse or 2 that we won't -- we'll get out of or sell that we won't have gains on. This is what we're anticipating gains on. So we have stripped the cupboard bare of warehouses that we can sell and make a profit on, other than that $1m.

Okay, so we should, other than that, see much less volatility below the operating income line, is that right?

That's correct.

Last question. Your Other Current Assets line was up substantially on the balance sheet on a year-over-year basis. What drove that increase?

We have some properties that were involved in [10/31] exchanges that are in that line item. That's the single-biggest increase there.

Okay, great. Thank you.

Yup, thank you, Laura.

[Mike Blanek][ph], Piper Jaffray.

Just a couple of detailed questions. First of all, do you have a breakdown of traffic versus ticket for Q4?

Our traffic, we are just now getting a good handle on. We put in traffic counters in all of our stores, and we're -- it's really helpful for us, but we don't have a good comparison of the previous year. Our written business is probably as good an indicator as our traffic that we could give, and that has been slightly above our sales that we've delivered. So that's really as good an indicator as we have right now.

Okay, and then where is bedding now in terms of a percentage of overall mix?

That will probably be out in our Q. It's right about 9 percent of sales, and it has been growing. It's been a positive category for us for a number of years, in number -- in size of ticket, as well as in overall volume.

Okay. And is the private label growing within that percentage?

It is growing, and we expand -- we plan to expand that.

Okay, great. And, finally, on the import front, is it fair to say that the deliveries from China have been more reliable than elsewhere in Southeast Asia? And as a result of the lower tariffs, might you be consolidating some of that production back into China?

That is a fair statement. We had some real trouble, as you know, late in the third quarter last year, summer last year. It is coming better. Of course, there's Chinese New Year, which was a little bit of a hitch, but it is coming better, and certainly, we're expecting to move some of the bedroom back to China that might have moved to Vietnam. So there are a lot of opportunities for us in Asia to move it.

Okay, great. Thanks a lot and good luck.

Thank you, Mike.

[Justin Morris][ph], [Lord Abbott][ph].

Clarence, in regard to -- I just want to drill down a little bit on this accounting issue, go back to that for a second. You said, I think, a 70-basis-point hit to gross margin primarily from that. I didn't get the sense in the business that there was all that much shopability, if you will, other than, you know, the [Bogart][ph] collection or Thomasville or some of the more high-profile-type introductions. But, generally, to compare like to like, it seems to be, particularly with you guys moving more towards private label, to become more difficult over time.

I would agree with you. I think it is going to be more difficult over time. We -- some of our best sellers over the last several years have been branded suits that are carried by name brands, and we're moving away from those where we can't make the margins or where they're used as items that people want to make a statement with. I agree with you. I think it, going forward, will not be near the factor that it has been in some categories, and I'll mention specifically bedroom because it's a noticeable product. It's easy to compare. So right now, our line-up is strong in product that's exclusive to us that we can make margins on, and we think that's going to continue to improve.

Are you guys disappointed, though, just relative to your ability to hold on to the margin gains? And I would think you guys should be as cost competitive as anybody, you know, on like product from a quality standpoint, that, you know, like you said, you're having to do a little bit here and there, it sounds like, and in your own branded stuff, that you know, where you're picking up 50 basis points a year, you're now having to give some of that back.

Well, we gave some of it back last year or last fourth quarter certainly. We expect that we'll get it again. I don't see this as a long-term problem. I think we're going to get margins, gross margins in all of our classes. We had some competitive issues, but, frankly, a lot of it was related to the closeouts and that type of thing in our own system. So I think we'll be able to get the margin increases back.

And just relative to the source and the direct sourcing issue, how much -- do you guys have any guess that you're willing to share with us at this point as to what the hoped-for cost savings there is as you start to do some more of that direct? I guess I was a little bit confused as to what percentage. Are you guys doing any of that today, or is it all going through sourcing agents?

We have done most of it historic -- the last several years through agents, and we're now moving to do some of it direct. We'll still deal with agents, and we're working with them to try to bring some of the -- their costs in the product down. So it's an evolution. We want to be competitive with other retailers who are doing some of the same thing. And we're also helping, as Dennis pointed out, design the product, getting designers involved, and we want to make sure we have exciting looks and then better price.

Okay, and then just, lastly, sorry, on the margin issue, just looking at your website, I see you guys have no interest until '07. And you mentioned in SG&A some of that was related to credit promos. Obviously, one of your other public competitors is trying to go in a different direction relative to lack of sales and/or at least on the surface, discounting, but it's using some interest promotions, those type of things. I mean is it getting incrementally worse even on the interest and financing sides, and not only are you guys giving up a little bit of margin here and there on some discounting but that, you know, apparently there's some guys going out to '08 in 2010 and so on. I mean at some point, you've got to wonder how much you're pulling forward in that stuff, too, right?

Well, we don't plan to extend what we're offering now. There's some people that are playing those games, and they're -- they cover them in other ways. But as far as our cost, in credit, we do partially in-house, and some of it we outsource.

And, Dennis, do we anticipate that being significantly higher?

I don’t think that we're going to see big increases there. We'll see some increases because with interest rates going back up, there will be -- you know, there'll be more expenses for every dealer of any kind to offer these free financing promotions. So you would expect that would keep the offers in check. We'll stay competitive, and you know, competitive with the general market. We're not going to be, as Clarence said, there with the most aggressive promoter. And a lot of times, those come with new store openings and things, special events like that.

Okay, so it's not so much that you guys are extending it. It's just as rates move up, it's costing you more?

It's beginning to cost more as rates move up, yes, and we expect -- I expect rates to be moving up steadily for a few years, you know, just modestly but steadily. So I expect that these -- the discounts the dealers pay for these promos are going to be going up, yes.

Thanks a lot.

Okay, thank you, Justin.

Charles Grom, JP Morgan Chase.

Most of mine have been answered already, but just on the [6/1][ph] in February, what was in Florida?

We don't give those out by region.

Just directionally, you know, could you clarify?

It's better than that.

Significantly better or just, you know, marginally better?

It's better than that.

Okay, fair enough. And just on the store openings -- I hopped on late -- can you -- in '05, how many stores are you going to open up exactly, including the ones you may have already opened up?

We've opened up one. There'll be 4 more for a total of 5.

Okay. And when will -- when's the -- the 3 are in the fourth quarter, so the -- assume the second one is going to be in March?

Just the -- there's actually 4 in the fourth quarter.

Oh, 4 in the fourth quarter, okay, and then 6 next year.

And the last question, you know, given all the changes to your operating model, what comp do you need to spin off in order to leverage fixed costs?

It needs to be a mid-single-digit comp for this year. And for future years, we had talked about it being a little hard to determine right now, but we need to see comp store sales grow low- to mid-single-digit for a few years to really get the leverage going again.

Jeff, one of the things I commented on is we were encouraged by February's sales and comps and our backlog going into March, and if we can see those kind of numbers with a 5- or 6-percent comp, that's going to be where we -- we hit what we expect. So whether we can continue that, I don't know. We're encouraged by recent trends.

Okay, and as you look at the first quarter, is February the biggest month in terms of contribution to the top line, or is March a bigger month, or are they all even?

It's really flip-flopped over the years as to which is the biggest month of the first quarter. In several years, March has been the biggest. It kind of depends on how strong the season has been in backlog and all of that, getting caught up on orders. So I think, you know, we have a real good shot at having a terrific March.

Great. Thanks.

Bud Bugatch.

I do have a couple of questions, just -- these are more niche. Ticket -- can you give us the average ticket in the quarter and maybe for the year, Clarence? Do you -- [inaudible] got that in the past.

We have not given that dollar amount out. It was up for the year, and we haven't -- I don't have it for the quarter. It was up for the year slightly. It is near right around $1,000, and that's not changed dramatically. It's just up slightly.

Okay. And you gave us 9-percent bedding. Can we get the other maybe merchandise categories? I know that's going to be in the K, but maybe we can get it early?

Bud, I tell you, the K's only a few weeks away, so I -- we haven't got that finalized. I just as soon wait till we file that to have the exact numbers.

All right. Okay, I thought I'd try. We started depreciating Lakeland in Q4? Is that right?

No, you're talking about the warehouse?

Yes.

No, we didn't. We started when we moved in in January.

So what's the -- what will be the delta depreciation for Lakeland for an annualized basis, Dennis?

I'm thinking here about that. It's probably -- probably going to be about a half-million dollars.

Above our current level of run rate of depreciation?

Yeah. I'm a little off the cuff with that, but that's -- it's not more than that. It might be a little bit less than that.

If you want to press the pants and get back to us with a number, that's okay.

Okay, I will.

All right. And the other question then is the warehouses you're going to vacate, what's the annualized rent roll of those that will come out?

Let me go back to when we first looked at Florida, Bud, and I think it holds pretty true. The warehouses that were vacating in Florida, the rent for those or the cost of carrying those was about the same or maybe even a little less than the cost of the new DC in Lakeland. So --

Including interest.

Right.

It's somewhere close to $1m. Again, I'm -- we have that analysis, and I'd -- rather than fumble for it right now, let me try to come back to that.

Well, I'm just trying -- I mean everybody's trying to poke around what the distribution --

Yeah, well, Clarence made the right point. We feel like they -- they will be about equal in terms of the occupancy costs.

So the gains will all come from better utilization of a table of people?

Absolutely, yeah.

And, also -- also, capacity. I mean we were at our capacity. We couldn't add volume. We now have the ability to grow our business in Florida.

Okay, that certainly works for me. I hear you.

Yeah, and, Bud, we also would hope we manage inventory better and don't end up with as many closeouts in the long run with a single pool serving all the markets.

I'd like that idea. That's a good idea.

And last question. We've talked about this one before, many times before. Are customer deposits becoming a meaningful portion -- meaningful-enough portion of the balance sheet to be disclosed, may be shown and material now?

I think it will show up in a footnote at year-end, so we'll disclose it once a year, I believe.

And do you want to give us the number now?

I'm going to -- I'm going to wait until we get all the way through that 10-K process, which is ongoing pretty hectically right now.

Okay, thank you. Thank you, guys.

Thank you.

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