Welcome to the Haverty's Third Quarter 2015 Financial Results Conference Call. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Dennis Fink, Chief Financial Officer and Executive Vice President. Please go ahead, sir..

Good morning, everybody. During this conference, we will make forward-looking statements which are subject to risks and uncertainties. Actual results may differ materially from those made or implied in such statements which speak only as of the date they are made and in which we undertake no obligation to publicly update or revise.

Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed in the Company's reports filed with the SEC. Our President, CEO and Chairman, Clarence Smith, will now give us an update on key trends and initiatives.

Clarence?.

Good morning. Thanks for joining us on our third quarter conference call. As we previously released, third quarter net sales increased 5.7% to $209.9 million with comparable store sales up 3%. Earnings-per-share for the third quarter were $0.34 equal to last year's Q3.

Earnings-per-share for the nine months ending September were $0.81 compared to $0.82 for the same period of 2014. The main driver of our sales increases continues to be the average ticket, which is currently running over $2100, with our designer average ticket approximately twice that average.

Through the third quarter, 18% of total sales had a designer closely involved. We have 114 designers on staff in our stores who have had a significant impact on our professionalism and the service levels that we provide to our customers.

We began offering this free service several years ago and first started hiring these talented designers at our largest stores. We now cover all but a few of our markets. We will complete H Design centers in 98 of our stores by year end with a handful more for certain stores later.

These small but highly visible centers facilitate custom presentations to customers in our stores and along with the newly configured special order fabric racks with expanded selections quickly demonstrates our design focus.

This H Design program is being embraced by our customers and by our sales staff who work with the designers in a team selling format. The program is driving our special order sales and has helped generate additional accessory sales which combines to drive our increased average ticket.

We believe that we can move our H Design percentage -- sales percentage to a run rate of 25% within the next several quarters as our team matures and word of our customer's positive experience spreads in our markets because we've been steadily hiring additional trained designers, our selling expenses has risen year to date.

We expect this higher sales expense will begin leveling out in future quarters. Our designers and sales associates are continuing to use our leading edge 3-D room planner in their presentations, an experience which helps the customer to fully visualize her home and how it will be transformed.

Our research shows that nearly 90% of our customers use our website at some point in the sales process. In September we completed the rollout of our greatly improved website. The site is much easier to search and navigate and shows our product in a much more fashion oriented presentation.

We believe that with these major enhancements and with the planned future stages, havertys.com will be one of the most engaging and easy-to-use furniture websites anywhere. The new site is highly interactive and adapts to any size format with a strong focus on viewing on mobile devices.

We've seen a nice improvement in bedroom and dining room sales while upholstery continues to be our largest category. Sectional upholstery and more casual designs dominate our bestsellers. Special order upholstery is now about 22% of that overall category and continues to show double-digit increases over the previous year.

This year we feel we in a better position to fulfill orders due to a steadier flow of merchandise compared to the port disruptions and Chinese supplier issues we experienced in the second half of last year. Our delivery backlog is somewhat higher because of a greater level of special order upholstery.

We feel that we'll be better able to fulfill orders with incoming merchandise arriving and in stock inventory on top sellers in time for the holiday deliveries. We have a leaner merchandise lineup than last year, especially in case goods, as we focused on having our bestsellers available for delivery.

Most of our upholstery special orders are produced by North Carolina and Mississippi manufacturers and we're getting the majority of those shipments within 30 days. We're upgrading our supply chain systems with new software and standardizing our processes on a single supply chain management platform.

We recently announced the hiring of Abir Thakurta, Vice President of Supply Chain, from outside the industry, replacing our long serving executive, Gary Niedermeyer, who retires early next year. We will add about 3% retail square footage in 2015 ending with 122 stores.

We plan to open four new stores in 2016, three of them in new markets within our distribution footprint. With the planned expansions, relocations and closings, we expect to net about 1% to 2% square footage growth and end 2016 with 123 stores.

We will be adding 110,000 square feet, an increase of 50% to our Florida DC in Lakeland, which increases its storage capacity over 70%.

The extra space and capacity will allow us to more quickly serve our growing market share in that important state and to flow a larger portion of imported containers directly into the facility, lowering our inbound freight costs. We currently have 30 stores in Florida, the most of any state we serve.

CapEx for 2016 should be approximately $33 million, similar to what we expect to spend for 2015.

Over the past six years, we significantly improved our store presentation, investing $41 million in our store remodel program, upgraded our products, added designers, enhanced our sales associate training and focused on better targeted marketing of our style-oriented customer.

We're well-positioned in key markets in the 16 states we serve to grow our sales and to gain market share. We're counting on a strong finish to 2015, leading into an excellent 2016. I'll now turn the call back over to Dennis..

Thank you. The third quarter earnings release was last night and it covered the financial highlights. I'm just going to cover a few of those points now before we open up the call for your questions.

Our practice is to give updated guidance in the press releases for expected gross margins and SG&A expenses for the current year within each quarterly release. We don't publicize any sales forecasts.

We do announce our actual sales within a few days after each quarter end and disclose sales for the new quarter to date and how they are trending when we announce these calls -- or announced these earnings, as we did last night. The third quarter 2015 total SG&A expenses were 10 basis points lower than last year's third quarter.

The overhead costs increases were partly driven by four additional stores open this year versus last year's third quarter. The fixed and discretionary type expenses within SG&A came in as expected at $61.8 million this quarter, which was $3 million higher than the prior year.

The increase is mainly due to depreciation and occupancy from expansion and the additional management, administrative and operations staff in the new stores we have this year. We also relocated three old stores last year to better, more expensive locations that also played into the fixed cost increases.

The fourth quarter estimated fixed and discretionary costs are $62.8 million at the high end of our range, which would give us the $241 million at the high end of our total 2015 fixed and discretionary SG&A costs. That is versus the $231 million of that category for the full year of 2014.

For the fourth quarter, within the discretionary portion of this large SG&A category, our planned advertising marketing spend will be up about $800,000 compared to last year as we get our message out in two new markets and increase our awareness with consumers in Southeast Florida while having grown our store base there.

Third quarter variable SG&A costs were 17.6% of sales. In the first half of the year, those variable expenses were running at 18.1%. We're expecting 17.8% variable SG&A for the full year of 2015. That's an increase over the 17.5% for the full year last year.

It's mostly from additional sales and designer associates coming on board, commissions earned less than initial minimums in the first few months for new store locations and also a slight shift in the mix of credit promotions to a little more expensive promotions. Operator, that's the end of my planned comments.

We'll be glad to open it up for questions..

[Operator Instructions]. We will take our first question from Jason Campbell..

I just wanted to touch base on anything you are seeing geographically outside of Texas.

Just wondering how some of your other core markets like Atlanta and Florida have been doing recently?.

Well, we've said in the past Florida is doing quite well and we're growing down there. It's one of the reasons we're expanding our distribution center and we're adding some product mix down there. So for the Florida has been doing well and probably is the top performer for us.

So we've had good balance, other than some of the Texas markets, which are obviously fit into the mix on the sales that we've given. We actually have pretty good performance across the other regions right now..

And then this year you've talked about -- you've had some elevated spending. You've opened some new stores, done some IT, but it sounds like you have a couple other initiatives that you are going to be spending on next year.

Just wondering on how you are thinking about your kind of SG&A spending going forward and then what type of comp growth you would have to see next year to where you might be able to leverage that?.

We're not quite ready to give guidance on next year, but there won't be any cuts of significance in the fixed discretionary side. And we're hoping to get a little more efficient on the variable side.

But normally you have got to see comps 2% to 3% to make the same earnings just in general as you look at any consecutive year and there will be less additional cost from new stores because we won't have as many next year..

And as we've pointed out, we're almost fully staffed on our designers, so we won't be adding a lot more of that expense. So that should level off there. So we hope to be able to out run and leverage that expense as they get more experience..

And then with your designers, because presumably you are paying a salesperson, also paying a designer, but hopefully bundling in some more higher-margin accessories and building that ticket.

Is there much of a difference -- the margin profile of a couple who comes in and just buys a couple of pieces of furniture versus somebody working with a designer?.

Yes, we're getting a little higher margins there and I think that will increase. We're certainly doing more special order with the designers. Accessories are a larger part of that transaction and we're doing much better margins this year than last year in accessories and I think that will improve.

They are less sensitive to individual price points, clearly and so it does give us some opportunity, particularly as we do more special order for the larger designer sales. So I think there is some opportunity there..

And is that kind of eaten away with a higher kind of selling and marketing expense? Because I'm not sure how the commissions work with a salesperson and a designer.

Is that kind of shifting between buckets or is the overall transaction more profitable?.

I would say the overall transaction is more profitable because it's larger. Certainly the average ticket has been the driver of our business. There is an additional cost because you have a designer involved who is primarily on salary, but there is a little bit different commission and that's something that we'll continue to refine and look at.

But we're comfortable with the team selling process. I think it's been what's happened and made the program successful. We have modified it over the years. We're comfortable with it, but I do think we're going to have to evaluate the total cost of it as this continues to grow..

And then lastly, you really stepped up the buybacks this quarter. Just wondering if there's any change in your uses of cash going forward? I know you have somewhat leaned toward a special dividend in the past.

Is this something where you are looking to continue this rate of buyback going forward or what's the or what is the thinking on uses of cash?.

Well, the Board certainly sets the dividend rate and we have the authorization to buy back an additional 10 million. We've got about 2 million outstanding on that buyback and the Board will be meeting in the next several weeks and we will be discussing that. But I see a combination like we've been doing recently, frankly.

We increased our dividend this year 25%, our quarterly dividend. The special dividend is special. I mean it's something that we could do, but that's certainly up to the Board and we will be looking at all of that..

And we will take our next question from Budd Bugatch..

This is David on for Budd.

I'm wondering if you could just give a little color on the cadence of business throughout the quarter, maybe how the demand you saw hasn't started and then kind of how it finished?.

Yes, we had really a stronger July, had a little softer August. With Labor Day a week later -- that promotion and the advertising that everybody does for that holiday was a week later. So we picked up some of that obviously last year, some of the business in August with Labor Day being the 1st last year and the 7th this year.

So Labor Day was strong and then after Labor Day, it dropped off kind of like normal. So I would say probably in terms of the feeling about how the quarter is going, we felt real good in late July. We felt pretty good right after Labor Day and you see in the end the numbers came out like they did.

But there was a couple of really knocked out weekends and like I said, Labor Day was real strong. But that's kind of how it fell out..

Okay.

And on the new supply chain that you were talking about, so is it going to be an implementation of new software to help manage and be more efficient there and what's the timing of that implementation?.

Yes, it's over the next three to six months and it's cloud-based. So it's not nearly as much to getting implementation and getting full benefit out of it. There's a lot of details because it involves the freight points, it involves all the contact and visibility points with the Asian suppliers or the non-U.S.

suppliers and it is not like an ERP or anything close to it, but it's a big impact on visibility and we don't think it's a real disruptive kind of implementation and we can really put it at our pace. A lot of it is replacing things we already have, but it's going to be on a single platform that's very, very widely used already by our suppliers..

Okay.

So there's compatibility with your suppliers and what they are using?.

That's right because there is vendor involvement certainly..

Okay.

And on H Design and the number of transactions that involve a designer, can you give me what that percentage was at the end of last year? I know you were still ramping up but just for comparison?.

This was 10% to 12%, so it's up to about 18% now. And then -- so it continues to grow as we've expanded it. We started in our best stores and now it's almost completely out. So I would say from last year to what we think we can do mid-year next year, it would double is what I'm going to say, somewhere from 10% to 12% to 25%..

Okay.

And then one more question on the buyback, was that open market or was that an accelerated share repurchase?.

That is open market. There were some blocks, but it was open market..

[Operator Instructions]. We will take our next question from Kristine Koerber.

First, can you give us an update on Texas? You talked about the markets outside of Texas, but just wondering are trends getting worse or are you seeing some stabilization? And I don't know if you can quantify the impact on your business?.

I'd say we're seeing stabilization. Last call we said that we actually performed better than we had budgeted and I think that's continuing. I see a stabilization -- certainly the oil areas, West Texas is going to continue to be tough. The South, I mean we're in some great markets in San Antonio and Austin. They are very good. They were great markets.

They are performing okay, not like they used to. In other words, Texas was our hottest state we had and now it is a bit of a drag. But I'd say that it is stabilizing and we think that that will improve certainly I would say in the Dallas area in the next several quarters..

I'll add one thing, we anniversary the competitive opening in March of 2016--.

In Dallas..

Yes. In the Dallas-Fort Worth market..

And then as we look at fourth quarter, how do sales typically build? I guess I'm just trying to figure out which months tend to be your strongest and I'm assuming I believe you said in your opening remarks that you expect most of the backlogs to be delivered for the holiday season.

Can you give us some idea what the backlogs are?.

The first part of that -- November -- is by far the strongest month of the year for written business. It's huge. The one sale -- Columbus Day -- in October helps October and the first week of December is pretty good and the last week of December. But in the middle, it is very soft.

So we tend to deliver very heavily in November and December as we catch up. And the backlog is usually lowest of the year at the end of December as people tried to get their furnishings ahead of Thanksgiving and ahead of Christmas and other holidays. So we think that the backlog is always there. It runs two and a half to three weeks.

So it's the highest right after a big sale event and those fall the same time roughly every year relative to quarter end so that our year-over-year increase is -- it's single-digit millions, but it's still higher systemically, as Clarence mentioned, from more design business, which is bigger ticket and they pick out more items and those all get delivered at the same time and also a lot of those have -- in fact, most of those probably have custom upholstery there and that's a 30 day lead-time just to get the items.

So our backlog is a little higher than we would like at the end of September 30 and we'll reduce it -- we usually reduce it in the fourth quarter..

Kristine, let me add a little color on the fourth quarter as far as our supply. Last year because of the port delays and some issues that we had in China, we were actually bringing in a number of new collections in the fourth quarter -- last year that we weren't able to get out and actually sell.

This year we focused on making sure we're in stock on our best sellers. We feel very good about that. We feel good about the flow of our best sellers and to get here in time for delivery before the holidays. So I think that we're in a better position this year than last year, particularly for all of the better selling products..

And then as far as inventory, I believe it's up about 11.5%, but it was down from the prior quarter.

Is that mostly case goods related?.

I think it's pretty much a balance. We're seeing better sales I mentioned in bedroom in and dining room, so we're in a better position there. But I don't think there's any percentage issue as far as being out of balance there for different categories..

No, as we said, the closeouts were -- I guess there are probably more closeouts in case goods than there were in upholstery, but we did lose some inventory related to that. We're in good shape where the dollar amount of inventory is a reasonable number. It's all about the mix as orders come into the fourth quarter..

Okay.

And then just lastly, can you just remind me how much of the case goods business has been refreshed at this point?.

From? Well, let's say from last year, probably 30%, something like that..

Okay.

And you are still working on it?.

We feel very good about that. I think we're in very good position on getting out of things we don't want. We've got some new collections coming in that are going to be very important this month and next month that I think will help us. So I feel very good about our lineup.

I think we're in very good shape as far as having the right product and having the right mix..

And there are no additional questions in the queue at this time..

Okay. Well, thank you so much for joining us on our call and thank you for your interest in Haverty's..

That does conclude today's conference. Thank you for your participation..