Welcome to the Havertys' Q1 2012 Financial Results Conference Call on the 3rd of May, 2012. [Operator Instructions] I would now like to hand the conference over to Dennis Fink.

Thank you, operator. Good morning, everybody. During this call, we'll make forward-looking statements, which are subject to risk 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 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 and CEO, Clarence Smith, will now give you an update.

Good morning. Thank you for joining our First Quarter Conference Call. We're pleased to report first quarter pretax profits of $4 million versus a loss of $500,000 in 2011. We previously announced net sales increased 6.1% to $163.6 million with comparable store sales up 5.7%. We made significant investments in the past several years to improve our presentation in our stores, upgrade our technology to better serve our customer and add higher quality exclusive merchandise to our selection. Our focus has been on improving our customer's experience from website used to the showroom interaction and ultimately, to the final delivery. We believe that we've made real strides in raising the bar on the full experience and that our customers are responding positively with better closing percentages, higher average ticket and higher sales. We think that we will be steadily gaining market share due to the combination of all of these improvements. Next week, we will complete the rollout of all of our stores, a new feature-rich point-of-sale system which is much easier to learn and use and allows for faster transactions, as well as much more product detail for the sales associate to use when assisting the customer. We will also introduce a special order configurator, which will create unique SKUs based on some various attributes selected to make special ordering much more intuitive. This process utilizes images and is faster and more accurate. We think that these features, along with working closer with our suppliers, will help us be a stronger player in the special order Upholstery business. Next week, we will also offer a new mobile version of our website and the reskinning of havertys.com, which will be more attractive, engaging and useful to our online visitors. The enhancements will refresh the color palette and allow photography and…

Thank you. Several points were made about the quarter's results and the outlook for 2012 in last night's press release. I'll just add a few brief comments. On gross margins, we had expected first quarter gross margins to be a little higher than the rest of 2012. The rate we have right now on pricing trends and merchandise mix suggests that we move our expectations for the full year, up 30 basis points from our previous outlook to a 52.0% figure. That would be a record annual level for Havertys. That's really the only change in the simple operating model we had given back in our late February earnings press release call for gauging Havertys' performance in 2012. Variable and nonvariable SG&A costs are running in line with the prior guidance. As we explained in our previous conference call, the fixed and discretionary costs will be skewed somewhat to the back half of the year as advertising spend is usually higher for the second half and all of the 3 additional stores we are opening this year will begin operation in the second half. First quarter cash flow was strong with cash increasing $7.1 million during the quarter. The pace of capital expenditures will pick up for the rest of 2012 with a total of $23 million CapEx expected for the year. That's about $4 million more than depreciation is expected to be for the year. Our book value at the end of 2011 and now at the first quarter of 2012, is $266 million, approximately $12 per share. We will look at this figure as conservative, since our LIFO inventory reserve is a little over $18 million, and we have no intangible assets such as goodwill recorded and we own 45 of 119 retail locations free and clear. Operator, at this time, we'll take questions from the audience.

[Operator Instructions] The first question comes from Budd Bugatch.

[Audio Gap] Filling in for Budd. First, on the gross margin, if you could dig in a little, either Clarence or Dennis, on maybe where -- I know, Dennis, you said you expected the first quarter to be a little higher than the rest of the year, but it was still a little bit above your expectations. Can we dig into where you think that the drivers were to the upside, to your expectations? Was it less promotion? Was it just mix? Or any color there would be appreciated.

You're referring to the margins, correct?

Yes, sir.

I think that the new product coming in is selling well. This is a higher price point of goods and it's just -- it's been successful and we're getting some traction there. So I think it was probably a little stronger than we anticipated, at the better end of the month.

Okay. That's heartening after several years of not being at that better end of the market, right? On the new advertising -- the new commercial's entertaining. The 2 things that we take away: decidedly younger and decidedly focused on the special order. So on those 2 points, is there, one, a change at all in the demographic of the customer that's in the store now? And two, can you quantify for us maybe just how much of the business is now special order and where that figure might go over time?

Well, let me talk about the customer. We've done a great deal of research on our customer and where she is and what type of media she likes to see and pay attention to. And that's been a process now, 9 months into that. So we're utilizing that to, I think, better reach the customer. And some of this, the creative is to be a little more entertaining to get their attention, to get across the point with our theme of "discover something you," that we can help the customer realize her vision in our store. Now, the Upholstery business has been good for us. It is growing faster than other categories, and the special order part of that is growing. And we're getting better at it, not only because we understand how to do it, but because we've got the technology to execute it better. So I would say that Upholstery and that special order is more important, and I think we're also understanding that the younger customer is more contemporary and more interested in changing the product versus something that's on everybody's floor. So I think we're appealing to a younger customer, we're understanding who she is and where she is, and we're giving her the kind of product that she's looking for. Your second question -- yes, I don't think we have exact numbers on that. I would say special order is in the teens to the high-teen percentage, which I would include in that what we call custom choice, which is a different color fabric of the same design on a product which we can execute in about 30 days. So the special order in custom choice, I would say, is in the high to mid-teens percentage of our total Upholstery business.

That's very helpful, Clarence. And then lastly from me, if we take a step back, end at this quarter at about $150 a square foot in sales on a trailing 4 quarter basis -- and I know that you folks have talked about $200 maybe into the 2015 period. With the improved margin profile, is there -- can you talk about where you think operating margins might be at a $200 a square foot level, Dennis? What about the historical peak?

I would prefer you do the math. It depends really on how fast we would get there. Because the faster you get there, the higher the operating margin would be. And I say that because you've got to factor in inflation to the so-called fixed or the, at least, the nonvariable cost, which are fixed and discretionary items. And there's just -- if the more years it takes you to get there, you've kind of got to adjust that fixed cost, nonvariable cost number. It creeps along just with lease renewals and increases in rents and a variety of things that normally just go up over time. So if you hit it in 1 year, some kind of a giant leap back to total sales levels we had enjoyed before, you would -- you can run that model that we've kind of outlined, and it will generate a percent, pretax for you, that would be a reasonable percent. It's pretty high.

That's fair enough, guys. If you want to give me some more color about how fast I should get the math there, I'll leave that to you.

The answer to that, it's not nearly soon enough, but we'll hope it gets here.

The next question comes from Todd Schwartzman.

Do you -- when you enter a new market or just open a store in an existing market, do you necessarily and customarily step up local market ad spend in that particular market?

I'd say we spend more than we would normally spend as a percent of sales planned on the front end for a period of time. But we do expect to get profitable in a fairly short period of time. So we recognize that you have to invest significantly on the front end. We haven't opened up in a lot of new markets recently, so most of them have been in existing markets. And in that case, we don't usually have to step it up, we just move some of the advertising to where that store is or to the customers or to the grand opening itself. So it's not a huge deal, and we don't way overspend like some of our competition do. We invest a little heavier on broadcast media, so people know us on the front end.

Okay. Regarding Presidents' Day, I wonder if you could just walk us through the level or relative level of promotional activity for the quarter. Obviously, centered around the holiday and also the demand trends that you saw post-holiday, did you build on that momentum? Did you sustain it for the bulk of the quarter, both in terms of written business and delivered?

Now, you're interested in Presidents' Day back in February, right?

Correct.

It was almost exactly the same plan we had the previous year. We didn't step it up any stronger. We had basically the same message, the same media mix. We're changing over our media mix, as I've said, to heavier television, but it wasn't anything stronger than the previous year, really.

And then in terms of geography, you're in warm climates so I'm not -- I'm guessing that a benefit from weather is really a nonissue for Q1. Would you say that's a fair assessment?

I don't know if it is a fair assessment. I think weather was good. I think weather probably did help us in Q1. Atlanta, for instance, last year was blasted and so was the East Coast. Atlanta was down for a whole week in, I think, February of last year. So I think we were blessed with good weather as well as the rest of the country. And I think that helped the overall industry in the first quarter. And now we're back to the normal.

In that case, Clarence, is there any way to quantify the benefit and deliveries for Havertys?

Well, I'd say -- Dennis, you want to...

Yes, it's just hard to do. It certainly disrupted, particularly in January and early February last year. We were further behind in deliveries and we ended up getting caught up by the end of the quarter. So I think it probably hurt expense a little bit, and it just hurt the pace and the kind of consistency, but it's not a huge factor, but it's probably a positive factor. It's what Clarence was saying.

Well, then you had 1 extra day in February.

Yes. And this year, we had an extra day in February with the leap year. That's true.

Right, right. Also, could you maybe discuss some of the puts and takes and just talk about the relative strength among the product categories: Upholstery versus Case Goods versus Bedding, I think, maybe even if you would throw in Accessories into the mix?

Well, Upholstery is the strongest category and I think it will continue to be. It's growing. And as I've mentioned, we're emphasizing it pretty heavily particularly on the customer choice, special order. The Bedroom business is holding. It's improving slightly. Dining room is moving more to occasional -- I mean, to casual versus formal. And the casual side's growing faster. Bedding is very competitive now. We're doing a lot of business in Bedding, but it's extremely competitive and we're fighting to gain share there. The category the previous year, it is not the growth category it was, because we're all fighting for more share there. Now Accessories is a growth category for us. We're putting a lot of emphasis. We got a new product line. We're excited about it, and we're adding to our inventory there and the way we stock it at our distribution centers and can now back it up. And so that is growing, and we expect that to grow. But it's not been a big part of our business. It was down to about 2% of our business. It's now about 3% of our business. We want to get it to maybe 4% to 5% to 6% of our business. So it's a growth part, but not a major factor overall.

And on the Bedding side, Clarence, there was a pretty high profile merger announced, particularly pertaining to a couple of your key markets. Any concern there from a competitive landscape perspective?

You're talking about Matt Firm?

Yes.

They're a big player. They've merged with a couple of bedding stores in our markets. And they have -- in Atlanta, I think they're advertising 60-something stores here and they're spending a lot of money advertising. We're trying to separate from them. Let people know that we're in the Bedding business and that we're the best place to buy. But they are very competitive, as well as all the other players here in this marketplace. So we're in the game, we're in the fight and we want to gain shares. So we're not going to outspend them, but I think we're going to try to be smarter in our marketing and get our message across that we're the place to come for your bedding needs.

And what about price promotions there?

We'll be competitive. We're certainly not trying to go under them and try to be the cheapest guy in town. We're trying to sell the better product and the experience. But we'll be competitive in our pricing for sure.

The next question comes from David Berman.

I was just wanting to ask you a quick question. Most of them have been answered. On the balance sheet, I noticed that your accounts payable have come down quite a lot. Now they're down, I think, 25% year-over-year, down to 17 days of payables. What I'm just trying to understand why they're down so much, given that your inventories are near 4%. And then relatedly, why not try and extend your payables? I mean, if you got them to lock 30 days, for example, it'd be great for cash and you'd get an extra almost $0.50 a share in your stock, in a sense?

Yes. The payables have come down as we've imported more. It's been a trend for several years. We found it that the manufacturers, in some cases, the middle -- [Technical Difficulty] Excuse me, the middlemen have been in financial strain. Havertys, one of our advantages that we offer to our suppliers is that we do not ask for extended terms, because we really have adequate financing. It's not to say that we wouldn't at some time, but just with the shift towards more imported goods. And also the fact that we like to get the priority of other items with our manufacturer's price in service, in help with styling, in uniqueness and our product is probably the main thing. So it's just something we haven't pushed for. We feel as though we have good relationship with the suppliers and that what we need the most, they will supply. So I mean, it could evolve over time, David.

Yes. I mean, do you think that -- you don't think you can push more on this side? I mean, if you're paying cash-grade terms, you're a big company. I mean, is there any way that you can try and do better on the buying side? Is the opportunity there?

Yes, there's an opportunity. But I think we're choosing the right things to emphasize it. We're -- our payables would grow as our volume grew, and I think these other factors were just more important recently in the near future.

[Operator Instructions] Thank you, sir. There seems to be no further questions. Please proceed with any other points you'd like to raise.

Okay. I want to thank you for joining us on our Q1 conference call. We appreciate your interest in Havertys.

This concludes Havertys' Q1 2012 financial results. Thank you for participating. You may now disconnect.