Ladies and gentlemen, thank you for standing by. Welcome to the Havertys Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone this conference is being recorded today, November 1, 2012, at 10:00 a.m. Eastern Time. And I would now like to turn the conference over to Mr. Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to our conference. We really appreciate those of you who have gone through the difficult weather over the last few days that have been able to join us, and we hope business is back to normal for you as quickly as possible. During this conference, we'll be making 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, Chairman and CEO, Clarence Smith, will now give you an update. Clarence?

Thank you, Dennis. Thank you for joining our third quarter conference call. We are pleased to report our third quarter earnings of $0.15 versus $0.01 for the Q3 last year. We're experiencing an improving top line trend with 4 consecutive quarters of positive same-store sales and increased momentum with double-digit written growth for the most recent 4 months. Fourth quarter comparables written stores sales are up 14.5%, which exceeds our expectations. We believe that the improvement in housing has had a positive impact on our sales, while the upgrading of our stores and merchandising has helped us better appeal to our target customer. Together, they are driving the top line for the first time since the first half of 2010 and moving us to consistent profitability. Our upgraded merchandise product and store presentation have helped grow our average sale, which is a key driver of our sales increases. The main emphasis of our marketing program and in-store signage has been special order upholstery. All of our special order and custom choice products account for over 20% of our sales in the category, which is 31% higher than last year. We believe that our training sales associates, our greatly enhanced point-of-sale platform, our logistics and operating systems give us a distinct competitive advantage in assisting our customer select special order goods with a more timely delivery than our competitors. Last weekend, we had the soft opening of our new store in McDonough, Georgia, south of Atlanta, replacing a leased store at Southlake Mall. Initial soft opening traffic and results have been excellent, with the official opening tomorrow morning. Next weekend, we open our 122nd store in Allen, Texas, a 46,000 square foot location northeast of Dallas. This will feature all of our Western style product mix, and we expect this location…

[Operator Instructions] Your first question today comes from the line of Budd Bugatch of Raymond James.

Talk a little bit -- Clarence, you were talking a little bit about your, I think, competitive positioning. I realize it's hard to get market share data, but can you talk about how you think you're gaining share or losing share or -- relative to your performance in your specific markets, Atlanta and obviously Texas and some of the other markets as well?

Well, Budd, you knew that the independents in our industry were primarily at the upper end of the business, and a lot of them have gone out of business, gone away. It's one of the reasons that we've tried to target the special order customer and be able to execute on that better. I think that -- well, for instance, a Beverly Hall here in Atlanta was a major player, they're gone. I think we're doing a better job there. We are pleased with our sales increases recently, particularly, and it is primarily in the better end of our lineup. So we try to separate ourselves from the promotional players in the markets, Ashley's and the Rooms to Go's a little bit. And I think that we're starting to see some traction there. The fact that our average ticket is up is another indicator that I think we're appealing to that better customer.

Can you quantify that for us on the average ticket?

We haven't given a number of the dollar amount, but it is up about 6% to 7%. And we're seeing -- our closing rates are improving, too. Now traffic has been flat, so most of the increases has been in our closing rate on our average ticket.

Is there much variation geography by geography, or is it pretty much consistent throughout the chain?

We've seen good increases in what we call our 5 regions of the 17 states we're in. And just like in October, every region was double-digit. And no region was more than twice the average. I mean, it was all in the teens, one slightly over that. So there's been a general bounce back. It's not every city, but it is every region.

I see. Just to finish the thoughts, you've talked merchandise-wise about Bedding being the best performer, I think, over the -- most of the period. Now with getting at better end, can you kind of go through the merchandise performance?

Well, Upholstery and Bedding have been the strongest performers, and I think as everybody's acquiring with all guns in the Bedding business, and it is in the better end of the program, and that's helped drive our average ticket also. The alternative Bedding and the foam Bedding is really important and growing, and we continue to see increases there.

And finally from me, in terms of SG&A, are there any issues with bonuses that might crop up in the fourth quarter? Are you accrued properly for the year given the better performance?

We're accrued ratably for the year, and I believe it's proper. You pick a target and accrue to that and we're capable of beating the target.

I don't think you'll see any surprises, Budd.

No, I don't think there'll be any big adjustments to it.

Your next question comes from the line of Todd Schwartzman of Sidoti & Company.

Did any of your stores suffer any structural damage from Sandy?

No, we were very lucky. We go as far as Baltimore north, but every store was open the next day. We did have some leaks, but no structural damage. So we were very, very lucky compared to those north of us.

Okay. Good. Wonder if you could talk a little bit about the merchandise mix by market. I know that you've got targeted products, a limited number of SKUs that are unique to that market. I wonder if you could maybe just put some numbers to that. Maybe talk about how you typically see churn in the -- within the market as far as what's targeted to that market specifically. In a given calendar year, let's say, how much in the Dallas or the Texas markets, is "Texas products" and how frequently you turn over that portion of the product portfolio. And which markets are doing best in terms of the unique sales?

Well, the 2 areas with unique product are what we call coastal merchandise, which applies to the East Coast, the normal coastal markets, as well as mostly Florida. And then we have a Texas mix, which is primarily for Dallas, and for the western stores out there. We have always had a significant Florida coastal mix, so we've increased that as we move into Southeast Florida. I would say it's about 20% of the product down there that's unique to those markets in that area. We are -- we're adding to that. I think we're strengthening that program. I think it's helped us grow in Florida. And I'd say it's a little less that unique mix in Texas, probably around 15%, and it is very southwestern, the heavier fabrics, darker colors, more rustic furniture. And we've increased that this year and I think that's helped us reach that customer, particularly throughout those regions. The turnover is certainly higher in upholstery. We turn upholstery pretty fast, turn it over because fashion changes quickly there. Case goods is much slower. And I'd say in upholstery, we change probably 30% to 40% of our line over every year. And case goods would be less than half of that, I would guess.

And as far as the inventory reduction over the quarter, Q2 to Q3 sequentially, about $9 million, how much of that was seasonal? And just kind of give some color, if you could, what's going on there.

I think we're too low on our inventories right now. We're actually building them up for this quarter and have plans to bring in product for -- before Chinese New Year to make sure we're in inventory there. So it's a little over than we like it to be. I don't think that it was something -- we didn't want to be this low going into the fourth quarter. So we're receiving very heavily now. Hopefully, we'll be turning the right product and shipping it right back out, but it's frankly lower than we would like it to be.

And lastly, what should we expect as far as ad spending for the balance of the year for Q4 and into 2013?

Q4 is similar to Q3. And 2013 will have some increase. I don't think we'll have an increase as a percentage of sales in advertising because the increase we do have will generate more business. As you're looking at 2013, just remember that, historically and likely next year, the lowest quarter for spending in advertising is the second quarter. It's the weakest quarter of the year and there's fewer holiday events in that quarter. And in our latitudes, people buy less furniture in the springtime. They're thinking more outdoors than they are indoors. So but -- we're real pleased with our advertising and feel like it's helping build our brand and identifying us to shoppers as a place they need to be, need to come to.

[Operator Instructions] And your next question comes from the line of David Berman of Berman Capital.

I'd just like to ask a question related -- follow-up question related to the inventory that you just mentioned. Your operating margins have been kind of in the -- pretty low for the last number of years and they're starting to come up 3% and so forth going forward. Obviously, they're way too low for what you'd like. To get the operating margins higher, one way, obviously, and most obviously, I suppose, would be to increase your gross margins, correct?

Well, I would say it would be to grow sales, number one.

Well, yes, you grow sales and get the leverage, but that's going to be an awfully long time before you get to higher margins. So one way would be to increase the gross margins. And I realize in a tough environment that's difficult to do. But given that your inventories are so low, and you have to make decisions, right? I mean, you can get 15%, 16%, 20% sales growth or you can aim for 10% sales growth with high gross margin, right? The question is -- the question, I guess, you have to ask yourselves and I'm curious how you would look at this is, to what extent do you sort of cut back on promotions a little bit to get the 10% sales and get stronger gross margins, and how do you make that decision? Because, obviously, you want to get your operating margins up as high as you can as well.

Good questions. The last few years, we've moved up margin over 100 basis points. And we actually in the worst year, 2008, we actually moved up margins 100 basis points. So all of our costs in cost of goods sold, or almost all of them, are variable. We don't manufacture anything. We buy and -- to our design a lot of times, and to our spec, and then we warehouse and deliver. So working with vendors, you need to get a volume per item in order for it to be economical for them to run. And we've kind of -- as you recall, we dropped considerably, as the rest of the industry did, from the peak in 2006 to the trough in 2009, and we cut fixed costs during that time period. And actually, our margin, our gross margin, again, which is almost all variable, went up quite a bit. So we're real pleased with where our margins are, but we're not pleased with where our sales are. We understand it and don't -- we think there's valid reasons for that drop as housing was shut down and the recession moved forward. But we think that the -- that the play now is to get more volume. And the leverage is pretty substantial. There's a -- as we pointed out in the release, in the SG&A side, we've got about 17.5%, 17.8% variable costs in SG&A and at a margin of 52%, just using for an example, that's all variable. So you end up with 52%, say 18%, it's the 34% contribution margin. And that's -- if you keep that fixed cost the same, a $10 million sales increase would increase operating income $3.4 million, for example. So there is -- we're trying to stay competitive, have better looks and…

So you need to continue to offer those good value and you feel that you can have the inventories in time, I mean...

Well, the play is that there's a lead time 3, 4 months for the imported product. The domestic product is not as much. Bedding is very quick, so it's not the lead time with that, but it requires that you have a good planning, good supply chain grip on things. And it's -- you have to be good at it. You have to -- somebody asked a question earlier about product line turnover. It's just got to be managed well and timed well, and all the many things involved with a new product introduction have to come together efficiently. And you have to do projecting that's pretty sensible. You also have to get out of products that aren't selling well. So it's a tougher model than it was 10 years ago before there was as much importing, just because of the longer lead time. You cannot get around lead time. So we've moved our margins up. We'd love to see more, but I think the play is just going to be more volume, and the strain is going to be on our supply chain and merchandising planning, but I think we're up to it.

All right. Well, I mean, I guess, good luck and keep on squeezing the supplies as well to get better cost.

We'll keep that in mind.

And Mr. Smith, there are no further questions at this time. Please continue.

Well, thank you for your interest in Havertys. We appreciate you joining our call.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation, and you may now disconnect your lines.