Haverty Furniture Companies Inc (HVT.A) 2005 Q3 法說會逐字稿

Welcome to the Haverty Furniture Co., Inc. third quarter earnings release conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, November 2, 2005. I would now like to turn the conference over to Clarence Smith, President and Chief Executive Officer. Please go ahead, sir.

Good morning. Thank you for joining us for our third quarter conference call. The 1% decline in comparative store sales did not allow us to leverage the significantly higher transportation costs and the higher occupancy expenses. We just announced our October sales with comp store sales slightly positive and total sales up 3.9%. The October written orders were down 2.8% total and 6.2% comparative. This compares to last October written business, which was up 20% in total and comps of 16%. Some of that was the hurricane comeback from the September hurricanes in Florida in 2004.

While we struggle to produce consistent positive same-store sales, we do believe that we have invested in a significant strengthening of our position in the marketplace. We've continued to develop our exclusive Haverty's branded product, and I believe we have the best merchandise lineup in our history on our floors. Recent research has supported the strength of our brand, and sales of these collections continue to grow. We have a commitment to invest market research to refine and develop more tightly focused merchandise assortments to the better customers in our markets.

Recent studies show that we're gaining significant share of the shoppers with 100,000 plus household income in our largest markets, which speaks well for Haverty's collections appealing to the better customer. We believe that the markets we cover recognize that Haverty's collections represent significant values with distinctive styles.

We just completed sending out our first-ever catalog, 80 pages of our best exclusive collections, and we've had very positive reception to the presentation. We'll have more statistics on the success of our direct catalog efforts within the next few weeks. In the coming months we will be working with designers to create more product directly from our Asian suppliers, as well as import agents.

In October Haverty's collections represented 65% of sales, excluding bedding, and we have a goal of reaching a run rate of 80% of sales by year end 2006. We believe the development of our Haverty's brands will allow us to have higher gross margins while offering great value and exclusive new designs to our customers.

As we announced at the last conference call, we have significantly improved our supply chain area with the addition of Steven Langer. Steven has added several key associates with extensive experience in supply chain field. We have just announced a major contract with a new freight forwarder, Hellmann Worldwide Logistics, with an arrangement which we feel will greatly improve our efficiency and reduce costs employing containers from Asia. Hellmann is a $2 billion company with extensive experience in global logistics and a proven track record. This new contract will provide lower rates, increased reliability and dramatically reduced demurrage. We realize that our ability to operate state-of-the-art distribution systems and sourced product from overseas requires us to have the best supply chain in the furniture industry. We believe that we're very close to having the best of field team in place.

We have recently had difficulties with timely deliveries of product to our customers related to challenges in the flow of goods to our facilities and some limited space in our key distribution centers. This has affected delivered sales in the third quarter and continues to cause problems. In addition to our focus on our supply chain, we're dedicating energies to enhance systems and narrowing our merchandise lineup so that we can better serve our customer needs.

Backing up our steady move to imported product, as well as quick turning domestic upholstery and supporting store growth, we will be completing the first phase of the expansion of our eastern distribution center in Braselton, Georgia by late this year. The second phase will be complete in spring 2006 and will bring the size of this key East Coast facility to over 800,000 square feet. We believe that this will allow us to significantly grow our volume and much better support the move to more exclusive Haverty's collections merchandise.

Our focus is to be the best furniture retailer in the country. We have committed the resources to build Haverty's as the brand for quality furniture in the markets we serve. We have provided our store managers online tools which provide real-time access to sales productivity by individual and by SKUs. We believe that our reputation for delivering in a timely manner and backing up sales with customer service is our strength. And we are dedicated to making this competitive edge even stronger.

We are continuing our reach into the Midwest with the recent opening of our Indianapolis store and the late 2005 opening in Columbus, Ohio. We do expect to see fill in growth opportunities throughout the regions we serve due to the availability of big box retail sites, and we are aggressively evaluating many opportunities. We expect to grow at approximately 4% square footage in 2006 with expected annual net new sales going forward of 40 million.

For 2005 square footage will be up about 2% due to three late year closings to close in Shreveport, which will be replaced by one store, and one closing in central Austin expected to be replaced next year. In the near-term we plan to grow with fill in locations in the regions we currently serve to leverage the existing distribution system.

The current turmoil in our industry can be disconcerting. Dramatic changes are underway in many retail and manufacturing organizations. We believe that this turmoil plays to our strengths. The bankruptcies, store liquidations, plant closings and brand transformations from manufacturer to retailer have caused confusion with the customers. Haverty's has a clear position in our markets providing top-quality value and service to the middle, upper middle customer. We have the balance sheet, professional personnel, the infrastructure and the right merchandise presentation to succeed in this new world. I would now like to turn it over to Dennis Fink, our CFO.

Good morning, everybody, and thank you Clarence. First I would like to mention this conference call includes forward-looking statements which are subject to risk and uncertainties. Factors that might cause the actual results to differ materially from any future results expressed or implied by any forward-looking statements today include, but are not limited to, general economic conditions, consumer spending environment for large ticket items, competition in the retail furniture industry and other uncertainties detailed time to time in our Company's reports filed with the SEC.

In the quarter earnings press release from last night we explained a reclassification of expenses that has been made between two line items on the earnings statement. This is a presentation change that doesn't have any impact in how we calculate earnings. It has been made to better disclose the way our inventory costs flow through the financial statements. In addition to the cost of merchandise charged by our vendors and inbound freight, we also include in our value of inventory and handling costs in our main distribution centers and costs for transportation to local markets.

In the past amounts shown in cost of goods sold do not include the handling and transportation costs I just mentioned. Those costs had been included in the line item selling, general and administrative expenses. For the nine months of 2005 this reclassification reduces the cost of goods sold by 2.9% of net sales, and reduces SG&A expenses by the same amount when you compare it to the old presentation. Last year figures in the press release have been reclassified for comparability, and also very importantly we have provided separately on our website schedules that show the last five years of reclassified cost of sales and SG&A expenses for comparability purposes.

We've also got quarterly figures for the last two years. These are on the website under the title impact of reclassification. It is on both the Investor Relations homepage and near the top of our financial reports homepage. So if anybody has a problem accessing that you should be able to find it there and please call me if there is any question about that.

Third quarter gross profit margins now speaking on the new basis, which is how we're looking at this going forward, they were 30 basis points lower compared to the third quarter last year and on a sequential basis over the second quarter were flat. Markup on running line merchandise improved modestly, but it was offset by higher costs of transportation and merchandise handling.

On the SG&A line we had an increase of 100 basis points versus the third quarter last year, but improved 50 basis points sequentially from the second quarter of 2005. The occupancy and delivery expenses were higher in the third quarter this year, especially fuel and utility costs.

Demurrage costs for the third quarter were $360,000, which was 18 basis points of sales, and that is versus negligible amounts for the third quarter last year. These costs are incurred when imported containers are not unloaded and return to the port within required time period. As Clarence emphasized, we expect to greatly reduce these charges going forward so they become a non-issue. Other notable cost increases not already mentioned in the quarter were group medical benefits, utilities and accounting professional fees.

During the third quarter we incurred approximately $500,000 or 25 basis points of sales of preopening expenses for new stores. We expect store preopening expenses will be about 600,000 for this year's fourth-quarter, which is about equal to those same costs incurred in the fourth quarter last year where we also had two new markets we entered. As a reminder, we begin expensing rents for new leased stores as soon as we take possession to start making improvements. This can be several months ahead of the actual store opening date.

Interest expense for the third quarter was quite a bit lower than last year. This is due to the fact that we take a discount up front on our in-house credit promotion that allows for no interest greater than one year. This is a discount calculated based on prime rate and the length of the no interest period. That discount is charged to cost of sales in the month that the sale is originated. This then turns around over the life, as we collect off that receivable and is credited to interest expense. And since we have had a lot of those programs over the last year, the turnaround phase is in full swing right now and so the credits are coming to interest expense. This just has the impact of upfronting the cost of these promotions rather than the cost being incurred over the life of those promotions. And it is again at the front end it hits cost of sales and as it turns around it is credited to the interest expense.

Gains on sale of property for the third quarter was substantially all of the other income that was reported. It was $2.6 million. Gains on property sales are expected to be about $1 million for the fourth quarter of 2005. Looking at the balance sheet, our inventories at September 30 were $6 million lower than a year ago, which is about 5.2% as we have less warehouse inventory after the consolidation of our distribution operations. Our customers are continuing a trend to use our credit promotions less frequently overall both inside and outside promotions are outsourced promotions. We've financed between the two of those about 39% of total sales for 2005 so far. That is down from 42% last year and for the five years before that it was consistently at 46%. So people started using their national credit cards Visa, MasterCard, etc. more often in the Haverty stores.

In-house credit promotions were slightly more prevalent than the outsourced credit promotions for the year to date period with the most recent quarter the outsourced promotions were higher than inside. We are pleased to report that our accounts receivable portfolio remains very stable, and we're happy with the collection experience and trends that we've seen in the portfolio. Our balance sheet is becoming less leveraged each quarter. The debt to cap is now about 15%. On the cash flow statement the capital expenditures for 2005 thus far have been 27 million. We've got up to about 20 million left in the rest of the year for a total of 47 million expected for the full year. Preliminary look at next year shows a much lower capital expenditure number, approximately half of this year's $47 million. We will provide a more specific update on that when we file the 10-Q in a few days.

Also in the cash flow you will notice the stock repurchases of $3.8 million for the quarter. That's about 300,000 shares. That concludes my prepared comments, and operator, if you would like to poll the audience for questions now, we would be happy to entertain them.

(OPERATOR INSTRUCTIONS) Susan Maklari with UBS.

In your press release you noted that you're starting to pare down some of your product lines in order to make the importing process a little bit easier. Can you just give us some more details on that?

We've looked across all the categories, and we feel like there is some areas that we have more selection than we need, specifically one that stands out is dining room, we will be narrowing our lineup there. We are looking in every region to make sure that we have the right merchandise for the region and believe that narrowing it down will allow us to better support the lineup we currently have and go with a faster turn, higher margin item. So it is just looking across all categories, all regions to make sure we don't have merchandise we don't really need or any duplicate lineup that we don't need.

Okay, so it isn't really focused on any one specific area?

No, it is across all categories, all the lines.

Okay, and what percent of your sales right now are custom orders? Do you have any --?

Well, custom orders -- we include in that what we call custom choice, which is different colors, different fabrics. It is usually two or three weeks that we've already worked the lineup with the upholstery people to support, and that is in the teens, I would say mid to high teens. And that is most of what we call special order. We do have some merchandise we order that we don't necessarily carry, but most of our special order is off of our current frames, different colors, different fabrics that are combinations already preset.

Do you have any sense of what that was -- I don't know five years ago or two years ago how has it changed?

I would say it would be in the mid the single digits about five years ago. So it is up probably 10%.

So it has actually gone up a bit (inaudible)?

Yes, and I think it will grow more particularly in upholstery. We've got some new special order programs we are rolling out this month that we are very enthusiastic about that I think will get us into the 20% range. That is our goal.

Okay. Thank you.

Budd Bugatch, Raymond James.

Good morning. This is Rex. Budd is here with me, and I had a couple questions about margins. First of all, on the Q2 call you said that you expected the higher gross margin in the back half of the year. This was a little lower on the restated basis. Was that exclusively the transportation costs, or were there any other factors at work there? And how should we think about that for the fourth quarter?

For the fourth quarter?

Yes.

We're not giving guidance on that but we do believe that we can come out with better margins. We are in the process, and Susan referred to it somewhat, we are in the process in this paring down of our line; we are taking some markdowns which are affecting us. I would say that we expect that to be flattish for the fourth quarter. Where we would expect to see improvement would for the first quarter, second quarter of next year.

As a follow-up on that, you talked about the Haverty brand and your projection for the end of 2006 getting to 80% of the mix excluding bedding, which is the first time you talked about that in a while.

Yes, it is.

At one time you gave us idea of what the incremental margin was on the Haverty brand versus the fleet average. Can you give us a little idea on where that takes you on gross margin?

Seeing that it is already two-thirds of our business to say that it is better than the average is really not a factor anymore. We do believe that we can get higher margins going forward. I mentioned our problems the rest of this year, but the reason we have come back out and stated that this is our goal is because in the past we were using brands in our lineup. We are moving away from that except for bedding and one or two other brands. So we do think there is some upside because we are doing some direct sourcing. We are able to get some of the costs out of the product. But we are not giving exact guesses of that. Dennis, you want to comment on it at all?

No, in the past we had talked about 200, 300 basis points difference a few years ago, and as Clarence said, it is harder to look at that with the non Haverty brands diminishing. It does vary pretty widely, too.

Okay, and when you sell a Haverty brand, can you -- is there a difference in ticket when you are selling a Haverty branded merchandise versus another brand?

Our average ticket has held pretty steady, so there is really not much ticket, and I want to correct the way you are saying it, Rex. It is Haverty's brand. But we have not seen any change in the ticket significantly or to any effect over the last couple of years. So we think we are holding onto that better customer as witnessed by some of our recent stats I mentioned.

And one other question -- you mentioned $360,000 in demurrage given that the change in accounting, is that in SG&A or cost of goods?

That is in SG&A.

Yes, it is in SG&A, correct.

Thank you.

Todd Schwartzman, Sidoti & Co.

I wanted to ask about the catalog mailing. Was this done in test markets, or was it up systemwide?

I would say it was test marketed, Todd, because we sent it to our best customers. It was a smaller mailing, and I think the number was -- what was the number? No, I don't think it was that high. I think it was close to 300,000, but I could be wrong on that. It was a smaller mailing to our best customers, and we -- I tried to check this morning. It just went out, completed mailing end of last week. And I don't have exact numbers on that but we're very optimistic about it and we had very good reception. It is a new direction for us in putting together a full catalog. So if this is effective, we will be expanding that.

I'm sure you are waiting to see some feedback, but do you have any ballpark expectation as to what that circulation might reach at its height in '06?

I do not, Todd. I really don't have that -- I will try to find more information about that.

And did that replace any ad spending or was it all incremental essentially?

Yes, it did. We had a direct-mail last year piece at the same time that was replaced by this catalog. So we replaced a more promotional direct-mail piece to more people with a catalog to specifically our best customers.

And what was the differential in terms of expense?

It was about the same.

You gave some guidance for the fourth quarter regarding expectations for gains on property sales of $1 million. How would you suggest we look at the other income line in 2006?

It's less predictable, Todd. We have a couple more properties that we're marketing. And the gain on those perhaps you could count on a million dollars somewhere during the year. Less than we have had over the last few years, we sold off several warehouses as we were transitioning to our new distribution. And some of the gains offset some of the extra expenses we've had. But next year I think we will have less, a $1 million for a planning basis is reasonable, and we will try to keep you up-to-date as we have a contract on that and can predict when it is going to happen.

Okay, and also lastly, the Haverty's brand if that was two-thirds or 65% in October, what was the total for the third quarter? Haverty's mix?

A little less than that. I think we had that a number, it was like 55, 57% or something like that. So it is growing. As we convert the rest of our line.

And total imports as a percentage of sale including the Haverty's brand?

Is about two-thirds. Is that right? Yes, it is almost the same; it is about 65%.

So there is really very little you're doing in terms of imports other than the Haverty's brand?

That is correct.

Great. Thanks.

Joel Havard, BB&T Capital Markets.

Thank you. Good morning, everybody. Dennis, could you talk about the dollars in SG&A beyond the demurrage, unless I caught that wrong, the 360 was specific to demurrage but you talked about medical, some utility variances and professional fees?

Yes, actually I'm not ready to announce the exact numbers on those. Those are kind of the trend lines. But let's say that they were collectively more significant than the demurrage.

That is in keeping with what you were looking for on the Q2 call. I believe your comments at that time were that this would be stepping down in Q3, stepping down further in Q4, and sort of getting to a more even comp for '06 versus the '05. Is that still true in your opinion?

You mean that in terms of total spending?

As far as these other sort of atypical charges and fees and costs.

With the exception of the fuel -- I mean right now of course fuel costs have come back down some. I would love to think that we saw the peak in the third quarter. And that is a wild card for me. I don't know. I would hope that that comes back down some. But the others are basically the third quarter level except for what I call now is pretty much steady-state, and it is a matter of leveraging the high level of fixed costs that we had as Clarence said.

Right. That is a great segue. On the DC transition you are expanding Braselton. Clarence, when do you think that is done, Q1 or did I catch Spring?

I think it is going to be Q2, probably middle of Q2. The first phase will be done by the end of this year, so we will have a significant part that is usable by the first of the year or late this year. And then the second phase is going to be late Spring.

What more is that going to cost?

About the rent and everything on that is about 150,000 a month more.

That is the incremental cost in the meantime between now and mid Q2 call it? If I understand that right.

No, I would say after it is all up and going it would be about 150,000.

That is correct, yes.

I'm trying to get a sense of the cost disruption or cost pressure in the interim.

This is a leased facility. The initial phase we get at the first of the year will have some cost.

It's probably half that for the first couple months and three months and then the full amount.

Either one of you, the repurchase effort, what is left on the authorization? What is your appetite with the stock where it is today?

We are authorized for what --.

Over 1.5 million shares.

So we don't expect to be doing that, but we are still in the market from time to time.

Any sense that you would be willing to debt finance some of that? Or is this strictly a free cash flow opportunity for you?

We would prefer it's from free cash flow, but I would leave it as a preference, not as an absolute.

That's all I've got right now. Oh, one other question on the coming back to the catalog, that best customer definition, did that have something to do with your comment about the $100,000 household income target?

No, actually we had somebody help us analyze that to determine which of our customers were buying consistently. We got some new information here on the question earlier from Todd. We put out 500,000 of those catalogs.

You will note that on average, Clarence, we were right, (inaudible).

All right, guys. Thanks. Good luck.

(indiscernible) Morgan Keegan.

I just wanted to find out in terms of the paring down of your SKUs what percent is completed currently? I mean how far into that process do you believe you are?

I would have we are pretty well through the process. We did it about 30 days ago. We moved out a lot of that program. We're still selling off some of the goods, but we are really paring down to a core lineup that fits our average store, which is 35,000 square feet. So we are pretty well through that. Certainly we will be through it by the end of the year.

As far as markdown activity, do you expect that to continue to impact the sales in the fourth quarter in relation to the SKU reduction?

Sales?

Yes, sales because you had commented markdown to impacted Q3 sales in relation to the paring down of your SKUs.

Okay, it would probably affect sales. It will affect margin some. But what we are really trying to do is to make sure that we have a lineup we can support so that we can bring in the best selling goods, which has been a challenge to us. So in fact, we hope that it will allow us to improve sales in the fourth quarter because we'll have more of the goods that we should have.

(indiscernible) Ferris Baker Watts.

Just a couple things here. First of all you guys talked the last quarter about some cost-cutting, duplicate costs for the warehousing system. Is that pretty much out of the way, or is there more left on that, do you think?

I would say the duplicate costs are out of the way. Pretty much. And we sold off some of the facilities this past quarter. But previously what we were referring to was particularly in Florida, where we had a new IDC we are opening up, and we had some duplicate facilities. Those are closed or relocated or sold off. So the duplicate costs are behind us.

And as far as top performing categories you guys talked I guess first six months upholstery, the occasional casual dining has done well. Was that still the case in the third quarter?

Yes, that is -- (multiple speakers)no dramatic changes there.

And as far as Octobers sales, how did that track during the month? Did that get better or worse toward the end of the month or --.

At the end of the month we had the hurricane activity in Florida. So it skewed it. So it was a little softer at the end of the month.

How many stores did you have to close in anticipation of that?

There were eight stores that were closed for one day or more. One was closed for six days. But the days ahead of the storm, you know, I have to really hand it to the weather services for predicting the big right hand turn of that hurricane and so Florida knew it was coming for almost a week. And it did have an impact I think on the shopping, people were thinking more about their potential evacuation and about the hurricane than they were shopping. So it had an impact for about eight or ten days the last part of the month.

So some of the deliveries might get pushed out to November?

We did have some deliveries pushed out, not as many as I thought we would have. We did have in particularly two markets. The Fort Myers, there is three stores in that area and three stores on the other coast.

And the one store that was closed because of the previous hurricane, in Mississippi, is that reopened? I assume that's reopened.

Yes, its reopened and its doing great. It is a tiny store in Hattiesburg, Mississippi. They toughed it out and got back open faster than a lot of the establishments in that little town.

And then a final question, where do you think maybe by the end of 2006 or a couple years out direct imports will be as a percent of your mix? That you guys are bringing in yourself?

We said it was 65% now. We are still getting most of our upholstery domestically other than leather. And with our expanded special order program I think that will continue to be good. But we are getting more upholstery now from China, and I'm sure that will start to erode. I mean I can -- it's going to go up. It could go to 80%. I would say that's probably a number that makes sense to me. I think we will always have and certainly hope to have domestic upholstery.

But you are using agents for some of that, though, right?

Some from China, that is correct.

Justin Maurer with Lord, Abbett.

Clarence, just relative to the distribution issues you guys have fought through the last couple of years, is it fair to say most of the gains you saw in the merchandise margin relative to the import program you kind of given back in a sense with the distribution costs as those have started to ramp up on you?

Well I think obviously SG&A has gone up faster than our margins have in that that same. We are really looking at a different model than when we started this. So I do believe that we are now at a point where we can start to gain some ground on that spread that we used to have. But we certainly have given up some gains to the cost of getting the product here and to the customer over the last couple of years. So now that we've got this in place, we are hoping to be able to get the leverage that we anticipated going forward.

I know you guys had talked, six nine months ago about in certain collections, categories, what have you about getting sharper on some price points because you felt like you were maybe leaving some business on the table. Is that pretty much run its course? Are you doing any more of that these days?

I think the lineup we have in place now is what we want. We've got some promotional goods that we might have missed during that period, and I think we are happy with what we have now. And certainly because of the imports there has been a lot of pressure on price points, and we are recognizing that. We don't want to give up and try chase down the lowest price point. But I think right now we have a good mix of promotional merchandise and better goods, which can help us to increase our margins.

I remember when you guys started on this program a few years ago there was a lot of bluster from one of your main suppliers at the time that the -- there's a difference between purchase cost and landed costs, if you will, because of a lot of the costs that are hidden, be it transportation and otherwise. In hindsight, is that something that maybe had an element of truth to it that has proven itself out over the last couple of years, do you think?

There is definitely a big difference between first cost and landed costs, and we are gaining more experience in that, and we do have a team oversees that helps us in sourcing the product. And there are costs, and we are trying to make sure we recognize them and recover them and get margins on top of that. So we have gone through a learning curve. And certainly it is a different cost arrangement than picking up merchandise from North Carolina. So we do know that, and we are learning.

Relative to you mentioned earlier the comp and the orders maybe are a little bit impacted by some of the problems. Is that in the form of canceled orders, or you just hearing some grumbling from some customers?

Its really recognized by the increased backlog we have; our backlog kept growing. And we were having trouble getting in some of our best sellers. And yes, I'm sure we did have some cancellations which disturbs us. But we are now getting back to a position where we think we can service our customer the way we would like to service our customer. And the way we recognized that it was a problem was yes, we had customers who couldn't get what we had on our floor, and sometimes even what we were advertising. But in our backlog that had grown, but that is now beginning to come back down.

Lastly Ethan has talked about this everyday, price strategy, somewhat in an attempt to level load the business a little bit. You mentioned the issues that you had getting some product in from time to time. Does that potentially make any sense to you guys that it would allow for less spikes in shipments coming in and distribution issues?

We went to a one-price system two years ago. So we have done -- we do not allow discounting of our goods on the floor of our Haverty's branded goods. And it is a price that is set by this office here. And we have been on that system for a couple of years. So we believe in it and we think it is much more credible and yes, you're correct, it does allow it day and day out sales to be better. You don't have as many peaks and valleys as you did when you were promoting for special events.

Thanks a lot.

John Baugh, Legg Mason.

I had a couple questions. Could you flesh out your comment about whatever research you are getting that shows you are doing better with the $100,000 plus income customer?

That was a report that I just saw yesterday, John, that was done by the AJC. It's recent research. It showed that we have significant gains in that category, which we were pleased to see from two years ago. We mentioned in the past that we've just brought in someone to help us with market search. By the way, AJC is Atlanta Journal-Constitution -- with market research. James Daniel who has that kind of background, and he is helping us to find out more about our customer in every market and we're doing more of that and committing to that. So this is just a recent report that I frankly just saw yesterday, and I was very pleased, it does refer to the Atlanta market.

As you look at your product on the floor today, say versus three years ago, would it be higher end, lower end, about the same? Obviously you had a huge increase in Haverty private-label, and that has been sourced largely and there is a much greater value with that. Just maybe even forgetting the price point although you can certainly address that, because there is obviously a greater value in imports. But would you describe your product line as being more attractive to the wealthier consumer, about the same or more going after a middle income consumer?

John, I think what has happened in the marketplace is dramatic in the last several years in the value of what people would pay for high-end furniture has come down significantly. And I think we gained some share there. I clearly think we are appealing to the better customer now. I think we are also a couple of years ago we probably had some lower end merchandise, but we did have on our floor a Thomasville, and they were perceived as higher end than what we normally would be perceived. So I think we are planned better to the middle, upper middle. We don't have as much high-end possibly, but we also don't have much in the lower end. So we are more focused on the lineup which we think is going to reach this better customer. I don't know if that answered your question, but I think that we are happy with the balance we have now.

Will there be a change in the inventory balances as we build out Braselton? Obviously its coming down now, I guess year-over-year because of all the warehouse consolidation you've done. Is it starting to go back up, or what does that number do?

I think it will go back up, and I think we need it to go back up. Maybe -- Dennis, what are you thinking?

I am thinking 10 million.

And frankly we need to be able to support our stores and our customers better than we have and the fact that we are importing containers is going to probably cause us to carry more. But we are getting better at it and we understand it better. We are flowing it better. I mentioned the investments and the changes we've done in supply chain. I think that we have hurt ourselves in the last couple of quarters by not being able to service our customers with in-stock merchandise.

Are you confident that the management changes and whatever process or systems are I guess physical capability, it seems to me it is always a problem that what you really need you don't have enough of. And what you have a lot of you don't really need and the lead times from --.

That is just life, John isn't it?

Its just always that way, and I'm wondering how confident you are that you can -- you never resolve that problem but that you will make a significant improvement on that and wondering exactly what it is that has to happen for that to occur.

We are learning a great deal about sourcing from Asia, and we have brought in some real professionals who are making significant changes now, which are improving our operations and our ability to serve the customer. This expansion is significant. It does support our mother ship here. It does allow us to bring in more containers to one place and then flow them. I think this will give us what we need to serve the growth that we expect in the next several years. It is correct. We are changing to a whole industry that -- the models changed when we started this. We didn't know we were going to be importing 65% from China when we designed this. Or from Asia, but that is the case and we will be moving to more. So we are reacting to what is happening in the industry, and I think that we will be in good position in the first quarter.

Last question, can you comment on written business in October excluding Florida, which had both the help, I guess a year ago from the recovery of all the hurricanes, and obviously a hurt this year from Wilma. Can you just talk to the written comp in October ex Florida?

I'm just looking at that, and I would say the figures look like there was about flat for the other regions.

Okay.

So the decrease was in Florida.

Thank you very much.

(indiscernible) Value Line.

I just have one question. Can you talk about the timing of the expansion of your distribution center and planned increases in sales in the fourth quarter? Since in the third quarter and only modest increase in sales caused space problems?

The planned -- I'm sorry, could you restate that?

The furniture distribution center, I believe you guys are planning to expand the capacity there. I was just wondering if you can talk about the timing of that and how that parlays into planned increases in fourth-quarter sales since in the third quarter you had only a modest increase in sales and that caused space problems with regards to flow.

The expansion -- the first phase will not be complete until very late this year, late December. So I don't know if that is going to be able to affect our sales this year. We have to do a better job with what we have until that point. The other, the second phase doesn't come online until late spring. But I would anticipate once the first phase is online we will be in a good position because that gives us certainly enough space to support growth. But I don't see the planned expansion of that facility having much impact on this quarter sales.

So we should expect a sort of (indiscernible) for the fourth quarter?

There is a bigger challenge in the fourth quarter, yes, but we've already, as we mentioned, been paring down the product line and have been moving out and plan to move out any excess inventory that we have. So we are trying to make the room for it, and get by as best we can this quarter.

(indiscernible) Morgan Keegan.

Forgive me if you have been asked this, I got on the call late, but can you talk about what drove the increase in other current assets in the quarter?

We haven't talked about it yet. Let me refer to something here. We have a couple of receivables from 10/31 exchange, some of it is property sales that we reported are actually in a -- the funds are with an intermediary, and we are matching the gains up with some additional purchases in a 10/31 transaction. So that is what is sitting there, and it is just about all of the increase.

Okay, and then secondly, the credit service revenue was a little below what I had estimated. Was there a change in third party financing? Is that picking up as a percentage of total financing offers?

It is going back and forth between the quarters. The most recent quarter the in-house was down relative to the outsourcing. But for the first half of the year the inside financing was higher. So for the year it was about equal, the year-to-date. But most of the financing we do is free interest, and we only get into the interest if somebody doesn't pay it off according to the plan, which is incremental monthly payments for the most part. So we just had a steady march down of that credit service to our income. And I think that's probably going to continue because the prevalence of the free interest.

(OPERATOR INSTRUCTIONS) Budd Bugatch.

I do have a question on the paring down of a number of patterns that you're using because I think that is, I like the idea and the more focus. But doesn't it have an impact on how you display in the stores and are you planning to change your -- some of the display focus?

We are looking at the layouts and the way we display our merchandise, but I think the main area that its going to affect is we're going to show fewer dining rooms. We always had a pretty strong selection in dining room. That is the main area that is being cut. We also we are trying to support a broader upholstery program than we really could. So I don't think it is going to affect the way the stores look other than dining room because we had more merchandise than we could put on our 35,000 square foot showroom. So it is really becoming more disciplined and more focused on serving our customer versus -- we have buyers who like to buy, but we are becoming much more disciplined about it.

In advertising parlance will the stores show more white space?

You know, I don't think -- well, I will say that I think our stores will flow better. And sometimes we have gotten more crowded than we needed to be because the managers have the ability to bring on 40,000 square foot store into 35. And they have the ability to do that. So we're going to have the merchandise better organized, displayed more consistently, for instance, the same table groups and the same rugs would be shown with the same upholstery group on one floor versus another floor. And more standardization of our displays.

It will require more of what I call metrics merchandising, making sure that each pattern fills a particular need or a particular niche.

That's true, but, and you are getting back to your retail days aren't you there?

I try to avoid that, Clarence. You know that. My other question has to do, and I think another analyst was trying to get there, you talk about Haverty's brand and the direct sourcing almost in the same light. But I think the way I think about it is the use of middlemen or agents or even what we used to call manufacturers and now I call them marketing wholesalers versus what you do direct sourcing from your sourcing overseas where you don't necessarily pay an agency royalty or a markup to a middleman. Can you dissect for us or help us understand what percentage of that 65% is going direct sourcing through your organization now.

I would say very little right now, Budd. Most of it is still through agents. Some of it through some manufacturers, but I would call them sourcing agents is most of what we're doing. We are now beginning to get in product that we have developed and are working directly with manufacturers over there. It is just now hitting. We are developing more of it and expect to see more of it, but I also expect us to be using agents and sourcing companies for a good while as long as they are offering us the values that we expect and that our customers expect. So it's going to be a mix, and even though we've had a team in place for a year now, we are just now beginning to get the product in. And it is probably a six-month development line.

So if we look at this this time next year, are you comfortable with telling us what percentage you think might come --

I don't think I know that yet, I don't know that number.

So you don't know the cadence of change yet, you don't know that?

It's going to go from zero to something pretty quickly. But I don't know what that is.

I think it would be safe to say that we are more concerned about having the product available for the customer than just hitting any benchmark about how much we buy direct. If we can get the values without running the direct sourcing up to a much higher number, that would be fine with us. And the other thing you say is that the level of imports, the origination of the product is one thing and how it comes to us is the other. And buying direct in containers, we've had some products that are imported, and we've been buying previously been buying that from some warehouse somewhere in the United States. And now we're bringing those in in direct containers and that has been part of the issue.

I understand all that, and one last question is can you -- have you quantified or will you quantify for us the cost of your direct sourcing infrastructure in the Far East or even combine it with what you have here?

Right now it's just one person, and we have some companies that are on a retainer based on the volume we do.

Agencies?

Yes, QC (ph) agencies and designers.

You pay them on a percentage of the royalty rate or do you pay them a straight fee?

Similar to the royalty, we had some minimums on the startup phase, but yes.

Gary Rhodes (ph) Investment Counselors of Maryland.

I guess first to follow up on Budd's question is just wondering if you could quantify the margin opportunity if you kind of cut out the agents.

I don't know if we can ever cut out all the agents, but I think agents charge anywhere from 5 to 15%, and I think there is probably that midrange is probably the number. And there are other costs involved, too, but I think Dennis ; point and something that we have learned is getting the product in a timely manner is as important as getting a good deal on it. So we believe that we're going to be using agents for a while, and we want to just make sure that we are getting the right value for the additional cost.

The other thing I was wondering about is I don't know how much your sales or your floor space is dedicated to product whether it is for Broyhill or Lane and I guess where I'm going with that is furniture brands has been talking about being more aggressive in kind of cutting prices I think specifically on Broyhill, and just wondering how that affects the way you may price your product relative to that.

We know we have to be competitive with whatever merchandise is out there. We are still buying from Broyhill; we are buying less from Broyhill. Going forward they are going to the branding their own brand and not developing product for us that we would be branding. And I think I pretty clearly stated our direction is to be our own brand. So they are still a good supplier for us. We need to be competitive with anything they have out there that we don't. Lane is still a good supplier for us and the difference between Lane and Broyhill is that they do make product that we do sell under our brand. And while that is doing well, we will continue to grow that.

I guess just finally, have you already seen the price cuts that they suggested they were going to implement?

Well, they came in with new groups that -- are talking about Broyhill -- they came in with new groups they are sourcing from China that they're willing to sell direct container pricing. So these are groups that didn't exist before. And so I don't know what it would have been priced before. So they have a container price, and they have a warehouse price. And many companies have been doing that for a while.

So same product; you're not really seeing any change? Is that correct?

I don't know enough about the Broyhill line. I think you probably ought to talk to them more about it.

There are no further questions at this time. Please continue with any closing remarks you might have.

Greatly appreciate your interest in Haverty's. Thank you.

Ladies and gentlemen, this does conclude Haverty Furniture Co. Inc. third-quarter earnings conference call. You may now disconnect, and thank you for using AT&T teleconferencing.