Welcome to the Havertys Q2 2012 Financial Results on the second of August 2012. [Operator Instructions] After the presentation, there'll be an opportunity to ask questions. [Operator Instructions] I will now hand the conference over to Mr. Dennis Fink, Exec VP, CFO. Please go ahead, sir.

Good morning, everybody. During this conference, 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.

Thank you, Dennis. Good morning. Thank you for joining our second quarter conference call. We're pleased to report earnings for the second quarter of $0.11 versus a $0.04 per share loss of the same period last year. We're encouraged by the momentum that we're seeing from the many investments and advances to our merchandising, store presentation, marketing and operating systems to better serve our customer. Our 6% increase for the second quarter was consistent with our 6-month sales increase, and we're pleased to see written sales for the third quarter so far improving to a 9.5% rate. We continue to rollout our Bright Inspirations store remodeling program throughout our regions, which is a major part of our $20 million plus CapEx for 2012 and will be for 2013 as well. We believe that our new enhanced interiors and displays are gaining real traction with our customers and are a significant factor in our larger average sale and improving closing rate for 2012. We're improving our sales per square foot, and we'll continue to stress existing store improvements to drive our sales and profitability. We're gaining on our multiyear goal to bring our sales per square foot back to the $200 level. We've had a major increase in our special order upholstery business with the addition of our in-store special order configurator. This tool has helped us to improve our average sale as well as our gross margins. It allows for a simple accurate way to create your own unique look with a much larger percentage of our upholstery line. Special order upholstery is a focus of our marketing theme, Discover Something You! We can help our customer realize her dream for her home. We believe that we are better able to fulfill our customer's vision than most any of our…

Thank you, Clarence. Last night's press release included several points about the results for the quarter and the first half. We'll answer questions about those in a couple of minutes, and I'll just make 2 quick comments on a couple of other topics. First, an update on the simple operating model for gauging Havertys 2012 SG&A expenses. We expanded our store base by 1 in late June, and we'll add 2 additional stores in the second half of 2012. Also, we'll relocate 1 other store to a newly constructed site. As planned, these additions will require some increases in various expense categories. We are still comfortable with the guidance given earlier in the year that our annual fixed and discretionary SG&A cost for 2012 will be approximately $213 million to $214 million. Some cost savings experienced in the second quarter should help us stay within or come out at the low end of that fairly tight range for the full year. We have also pointed out previously that the fixed and discretionary SG&A costs will be greater in the back half of the year as the advertising spend is higher then and the additional stores will begin operations. The second half of 2012 total of these SG&A costs are expected to be approximately $6 million higher than the first half. The other part of this simple model on SG&A is variable SG&A expenses. They have been expected to run in the 17% to 17.5% range as a percent of sales for the year, and we are track -- on track to stay in that corridor. The other topic is just cash flow. We do anticipate having positive cash flow for the full year of 2012. Capital expenditures, $23.5 million are expected, and they're about $4.5 million more than the depreciation expected for the year. We anticipate earnings to generate enough cash to more than offset the increases in working capital required together with the minor balance sheet lease obligation payments we make and the scheduled quarterly dividends. In closing, I'll just point out again that the book value as of mid-year 2012 is $269 million. It's a little over $12 a share, and we do have the LIFO inventory valuation, which causes our balance sheet and our book value to be conservative. That LIFO reserve is about $18.3 million right now. And also, we have no intangible assets, such as a goodwill recorded, and we do own 45 of our 120 retail locations free and clear. Danny, at this time, we'll take questions from the audience.

[Operator Instructions] And the first question comes from Budd Bugatch from Raymond James.

It's TJ McConville filling in for Budd. Clarence, can we parse apart some of the delivered results in the quarter between maybe traffic and ticket or even the written sales increase to date? Pretty solid result and ahead of some of the others out there that are reporting. So just trying to get a sense for exactly what's driving here.

Well, our average ticket is up nicely, and it's probably one of the bigger drivers. Our closing rate was up. We did see a decrease in traffic. And we're hoping that that'll come back, but traffic has been down. I think we're getting a better targeted customer who is -- who likes what we're presenting. And I think our product mix and our advertising is resonating with them, and we are selling a better product price point than we did a year or so ago. So we've upgraded our quality somewhat. I mentioned special order upholstery, which is a new focus of ours, and it's mainly average ticket and an improved closing rate.

Okay. That makes sense. And then I realize it's a very short timeframe that we're measuring that impressive written comp for the quarter-to-date. But was that concentrated mainly around the July 4 promotion? Or was it maybe a bit steadier than we might think or than you might have expected?

It was more concentrated around the Fourth of July holiday, which fell on the middle of a week. So we carried the promotion over 2 weekends, and that was the strength of the month for sure.

Okay. That seems to be how the consumer's buying these days.

Right.

Okay. So if we can move down a little bit down the income statement to that gross margin improvement, you mentioned a couple of items in the press release. Can you maybe quantify what the mix versus promotion versus maybe some input costs or at least maybe rank those things for us?

Well, we are all selling more upholstery. We're selling more higher-end upholstery, getting better margins on that. It is a larger percentage of our business, and it continues to grow. We're doing well with Bedding, which, as you know, in this industry fight going on right now, they're higher price points, and that's also helped drive our business too. So those 2 areas are probably the ones that have had the most impact.

And the back half expectation for maybe a little bit more moderate gain, is that a function mainly of the strength you had in the back half last year? Or are any of those things expected to change in your mind?

I think there is a little bit of concern about what is happening in the macro level. We're clearly encouraged by what started off in the third quarter, but I think that we're being conservative in our view for the second half.

That's fair enough. Last one for me, guys. We haven't talked about credit availability much in the last couple of quarters. Any discussions with your partner recently? Or anything you've seen that indicates any change going on there?

It seems to be pretty good. In fact, if anything, it's a little better than it was a year ago, 2 years ago. Part of it might be that we are upgrading our price points somewhat. And the customers we're bringing in are really more prepared to purchase, and probably, they have decided to buy a little better product than they might have available if they wanted to spend less. So I think that credit for us with our consumers is not a problem. It's very good.

And the next question comes from Todd Schwartzman from Sidoti & Company.

I realize the July comps -- and you explained the solid performance there, Clarence. I realize that was certainly a good result. Notwithstanding that though, are you seeing any evidence that your consumer in some ways may be taking longer to reach a purchase decision?

I do think that our consumer is doing more research. They go into the website. I think our website helped us there, because we have a fully integrated one and one that I think is probably better than most of our competition. They can find more information. But they are checking out more about the product before they come into the stores, but I would say that there may be more cross shopping now than there was a year or 2. I think they are looking around. They're doing more research. They know more about it before they come in the stores. And I think that might be helping us in that when they come in, they're happy with what they see. We deliver on what they expect, and it's helped our closing rates.

Okay. And on advertising, how should we think about the back half versus the first half? Would the incremental spend be commensurate with the bump in in-store count? Is it going to be something more, something less?

Todd, it's more -- it's viewed better as part of that increase of $6 million in fixed and discretionary SG&A we talked about. That's -- one of the parts of that increase from the first half to the second half is advertising. The number of holidays and the consumer shopping patterns are such that there is more business to be had in the second half, and we do advertise more. But -- so that does step up. Third and fourth quarter both are at a higher level.

Okay, Dennis. Finally, without quantifying the average ticket, just really trying to get a handle on your success with moving offstream as to price points. Can you possibly quantify the increase, if any, in ASPs just in terms of all the units that you've sold?

The increase is in the low single-digit level. I think we are selling -- let's just look at a category, for instance. If you look at upholstery, more people today are buying sectionals or larger upholstery groups, which cover the entire family room. So it is a little better product quality, but also, it's just more product that goes into the purchase itself. So I think that's helped drive the ticket. And clearly, with the Bedding, with all the new foam bedding, that's at much higher price points than we sold in the past. So I think those are the main indicators there.

Has the Bedding category see you -- or did the Bedding category see you grow in Q2 about at the same rate as Q1 year-over-year?

It's been pretty flat for the year. It's -- and I think that we're probably seeing a little fraction now because of all the continued advertising from all of the different vendors that most of whom we carry. But it's been pretty flat with -- throughout the year this year.

Flat on a sequential basis?

Yes.

And the next question comes from John Baugh from Stifel, Nicolaus.

I guess I wanted to start with a high-level question first and pertaining to import and deflation, historically at least. Has that played out in your mind? And is the increase you're seeing in average selling price got anything to do with furniture prices in general stabilizing or reinflating? Or is it just a mix issue, and you're getting a better customer in? Because I know in this downturn, there's been a bit of a mixed trade-down from the consumer as well, a lot of cross currents. I wonder if you could put some color on that.

Well, we definitely -- let's say in 2008, we went down in price points on purpose, because the customer did, and we targeted a little more promotional customer. And in doing so, we might have lost a little ground with the better customers. We focused, particularly over the last several years, in upgrading our presentation and our product mix to appeal to a little better customer, one that historically we might have appealed to in the past but I think one that we're now better able to serve and we execute better than we were in the past. So I think it's a product mix mostly. And I think as far as deflation, we're not really seeing deflation. As you know, the labor issues in China are a major problem. We are moving to other countries, Vietnam, Indonesia, to try to get the best values. And so overall, I'd say right now, it's pretty stable. I don't see the average ticket going up primarily because of inflation. I think it's because of a better product.

And staying on this topic, is traffic maybe not a good measure? I know one of your competitors has talked about what you referenced. The consumer is doing a lot more work on the Internet before they come in. So maybe they're not, on a Saturday, hopping around the 5 stores like they used to. They've narrowed it to 1 or to 2, because they've done their homework on the net. And obviously, you're close ratios with those that are coming through the door better. Do you think that's what's maybe driving, and the traffic is not a good metric to look at?

Well, it's certainly a good metric still, John, but you do have a good point. The way the customer shops today is really different than it was 3 or 4 years ago, and I do think she's doing more research. So it might not be as important an indicator as it was. However, we certainly don't like to see fewer people coming on our stores, and that's not what our focus is. But it may be a bit of a change in the way people do shop and look for furniture.

And you mentioned on Bedding that there's been a lot of -- a lot going on. I'm curious. When you look at your Bedding floor today versus where it was a year ago, what is the mix of specialty today versus then? And have you seen your average unit selling price go up in Bedding? Is it stable year-over-year? Just kind of curious.

Well, we have a much larger percentage of our Bedding shown in alternative foam bedding. I mean much larger. And so those are much higher price points, and that mix is going up. We still carry innerspring and will, but you know the industry. It's changed dramatically and continues to change. And I think our average price is up. However, some of the higher price points have been coming down too, as you know, with Tempur-Pedic's promotions and that type of thing. So our average ticket is up nicely in upholstery -- I mean, excuse me, in Bedding and price per SKU too.

Okay. On advertising, the cost of it in battleground states like Florida, I guess, where you operate, what have seen there? And are you worried at all between now and the election in terms of you're not going to get the same prints or eyeballs or whatever it is?

Well, I think it's promotions for going into this second half of the year or around Labor Day, as you know, and that begins in a few weeks and goes though Labor Day. We tend to, because of that and because of what we know is going to happen here, back off a little bit after Labor Day and a little bit into October. We don't really start back up a lot of our heavy TV advertising till right at election time or certainly, November, which is our -- November, December, our 2 best months. So we think that yes, it does have an impact on us, and it will increase some of our cost for those spots. But the majority of our dollars will be spent both before, meaning this month into Labor Day and after or November and December.

Great. And my last question is as you look at your business regionally, are there many differences? And I'm curious, those areas where you're doing better -- and it seems to be you're doing better everywhere, but there may be gradations of that. Is that due to the macro environment within that region getting better or competitors going away and/or you're improving your competitive position?

Well, it's a combination. We have invested real heavily in the last several years in making our stores look better, and I think it's starting to pay off. But there are certain regions that do better, and one of them is clearly Texas. Texas is better. And oil and the gas, all of that's impacted most of that state. We're well represented. It's our biggest state, and it's doing well. The other states -- the other regions are doing well also but not to that level.

[Operator Instructions] We do not appear to have any further questions. Please continue with any points you wish to raise.

We'd like to thank you for joining us on our call, and we appreciate your interest in Havertys.

This concludes today's presentation. Thank you for your participation, and you may now disconnect.