Good day, and welcome to the Haverty's Third Quarter 2016 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everybody. During this conference call, we'll 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 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 you an update on our results and our progress. Clarence?

Good morning. Thanks for joining our call. Third quarter earnings were flat with last year with a slightly positive sales increase. Our net sales were up 0.8% with comparable stores up 1.2% and written comparable store sales up 3%. Earnings per share for the quarter were $0.34 equal to last year. As other retailers have reported, sales increases have been challenging this summer and fall. We did see good balance in our sales performance with positive sales across most of our product categories. The increases were led by accessories, occasional furniture and casual dining. As we’ve been seeing for several years, our average ticket was the most important driver of sales with 3.2% increase for the quarter. We saw lower traffic in our stores which was offset by an equally improved closing rate. For the fourth quarter, we were impacted by Hurricane Matthew which threatened all of our stores up to East Coast of Florida as well as Georgia, South Carolina and some North Carolina stores. We had 23 of our stores closed for one or more days over the important Columbus Day holiday weekend, but we were fortunate that none of our stores suffered significant physical damage. We’ve struggled to gain backlog sales in several of those areas, but we’re gaining ground in new written business and delivering out a larger backlog of sales. We expect to make up a lot of that business in the first few weeks of November. We are pleased with the stores in new markets that we opened recently. Charlottesville, Virginia and College Station, Texas are both beautiful stores featuring all of the newest store presentation and designs that we've refined over the past few years. These features are visually open store arrangement or a more contemporary approach to flooring and a combination of…

Thank you. I will recap and expand on some of the financial highlights we mentioned in last night's earnings press release and after that we'll take your questions. First on the third quarter results versus last year gross profit margins increased 50 basis points to 53.7%. There was a $0.7 million decrease in LIFO reserve in 2016 versus a $0.2 million increase in 2015’s third quarter, that’s a positive change of $0.9 million or 41 basis points of margin. This resulted from modestly lower costs versus a year ago of the items making up our ending inventory partly from inbound shipping cost fluctuations. Other income for the quarter includes $0.5 million in gains from the insurance recovery related to the destruction of our Lubbock, Texas location that happened at the end of 2015. Looking at the nine-month results, our gross margins were 53.6% versus 53.4% last year. The LIFO year-over-year positive change again was $0.9 million which is 15 basis points and accounted for most of the improvement. Looking at nine-month SG&A cost, the SG&A dollars were up $11 million. It was partly driven by $2.9 million higher health benefit costs and also due to a full nine months of cost for the four new stores added during 2015 and also the third quarter costs of two stores opening this year. Also we expanded our Florida Distribution Center in mid-year. The total depreciation expense is up for the nine months $2.5 million over last year and it spread across the various SG&A subcategories outlined in the earnings release. Other income includes a $2.5 million gain from the insurance recovery for inventory, building reconstruction, and business interruption claims from the loss of our Lubbock, Texas store location. We expect approximately $0.8 million of additional gains we do recognize from this recovery…

[Operator Instructions] We’ll take our first question from Brad Thomas with KeyBanc Capital. Please go ahead your line is open.

Yes, hi, good morning, Clarence and Dennis.

Good morning, Brad.

I wanted to first ask about the consumer environment and if you could just offer a little bit more color in terms of what you think you're seeing from your customers. It's been a pretty tough time across the furniture furnishing landscape more broadly and feels like your results are holding up pretty well particularly if you make the adjustment for Hurricane Matthew?

Well, I would agree with that it is buzzing time. People aren't sure about what's going to happen with the election what we do think that some of it. It also is difficult to advertise in a number of our markets because of the political advertisement particularly on TV. So in many cases we've had the back half till after that's over. So I think the unknown is a real issue obviously we went into detail about how the storm effectiveness in the beginning of this month or beginning of October, but I just think that it's a time when people are unsure about where they are and housing is still pretty good in our markets. We like the mix there and we're pretty positive about how it's going to come out late this year. So I think the unknown is the main issue.

And to your point on advertising, how much do you think could you quantify or do you know how much maybe your impressions are down in September and October and will you end up spending more than in November and December once surpassed the election?

I think actually for the quarter you've seen the advertising percentage there it's about the same, it really – we're backing off or have backed off in October to come back heavier in November. So I'd say for the overall quarter, it's going to be about the same, but the mix has moved heavier into November. And so it just makes sense with what's happening with the political situation. I don't have the stats on the impressions, but wherever you put the dollars is where you are going to get the impressions.

Great. And then maybe be a little bit early, but as we look out to 2017, maybe could one of you give us some thoughts on where you think maybe CapEx and store growth and some of those higher level data points might come in?

Well, I mentioned the detail on which stores we're going to be open and the CapEx for this year is about $34 million - $32 million and it will be down I would say in the mid-20's $24 million, $25 million and a big portion of that will be the start on the expansion of the Dallas facility, the distribution center out there. So it's going to be down and then after that would probably continue to be down in that kind of numbers or even less. We have spent well over $100 million in the last five or six years on redoing our stores and repositioning our stores and we're focusing now on getting the production out of them.

Great. Thanks so much and good luck to you.

Thank you, Brad.

Thank you. [Operator Instructions] Our next question comes from Budd Bugatch with Raymond James. Please go ahead. Your line is open.

Good morning, Clarence. Good morning, Dennis.

Good morning, Budd.

Dennis, you went through some nice detail on gross margin and talked about the fact that I guess LIFO was responsible for almost all of the change year-over-year in a gross margin, did I get that right?

Yes, you're right.

So talk about the competitive environment or was it just coincidence that it's about flat year-over-year and there's not a whole lot of increase promotional cadence is. Is that's the way to read that or am I just trying to be – make to final point?

No, I mean there's several positive factors and several challenges. I’m looking at it as a little more promotional and competitive just because of the increased online advertising that everyone is doing and the promotional offers around the holiday periods. The people in the industry really don't necessarily agree with that, they say it's always extremely competitive, but we've had - we've been able to hold our prices fairly well and we do promotion during – certainly during the holidays and that tends to be when we get more of the business. So I think we have held our margins pretty steady and then you're right the LIFO increase was a better factor for this quarter.

Budd, one of the ways I think we've been able to hold our margins is we're doing a bigger percentage of special order and that's not quite as price sensitive as the promotional goods. So it's a larger midst of our product as we get into the homes and we're doing more in our H design program and that's helped us maintain those margins also.

So realizing that you may not want to be too forthcoming for competitive reasons, can you give us some flavor on where the penetration of H designers and special order?

Well, we really began this program about three years ago and we started it in Florida which makes sense. And we had success there and then it spread it out to the whole Company now. I will say that we are doing a lot of special order and custom in Florida. It fits that customer base a little bit more, but we're stronger in the bigger cities now. We’ve developed our design teams in every market. We have basically at least one designer per store. It’s strongest in the major markets in Atlanta and D.C. and now in Dallas. So the bigger markets we do the best and any time we get into a customer's home, our average ticket is over twice the store average. And it's just something where we're providing a service that I think these customers wanted and we didn't provide it in the past. And we’ve worked very closely with our special order upholstery providers to speed up delivery to be more focused on custom to give us better services and I think we're gaining some share in that area.

Okay. Two of your geographies have been – obviously in the news a bunch over the last year or two Texas and Southern Florida for different reasons. Can you give us some flavor of what's happening in Texas? You've had some competitive intrusion there and the oil patch is not been a pleasant experience over the last 18 months, so what are you seeing?

We're pretty well positioned in Texas. It's a very important state for us. West Texas and the oil patch is still an issue and is a drag on all of the stores out of that state. We are recovering; I'll just put it that way from the competitive issue that hit us in Dallas. We're now comping positive which is great. And I think we're gaining back some of our share there, but Dallas is a great market. And the other stores south of Dallas, Austin, San Antonio good markets where you hurt the worst is any place it's in the Permian Shale or in the oil basin there. It is still a drag on us out there.

And southern Florida you add a lot of immigration or a move…

Yes. I don't think that impacted us as much as the very high-end people. There were a lot of South Americans that were coming in and buying up real estate, buying up condos and just investing in real estate in Florida. We got some of that business and yes, that has weakened significantly. But I don't think it impacted us quite as much as the very high-end design houses.

Okay. And my last area is one more of philosophy or philosophical. You’ve opened up some new stores, can you talk a little bit what you're learning from them, is it changing any of your thoughts about size and store and layout of store. You talked a little bit about the openness of some of the stores. And my history tells me that those things come and go in terms of almost kind of a Hawthorne effect. But maybe I’d love to hear what your thoughts are on that?

Budd you saw what we did here in Buckhead that was a real step out for us. It's a smaller format than we usually do and it's in the 20 range, 20,000 square foot. Our average stores are around 30,000 to 35,000 right now and we're very comfortable with that. We have used a lot of the elements that we've developed over these years and I mentioned them more interesting floor – hard surface floor coverings, a more open LED lighting it's brighter, it's much more open, it's more – you can see the whole store when you come in, it's not as boxed-in all of that we're using and we've used that in these new stores and as we've upgraded. So we've learned that that's helped us appeal to a more contemporary customer and I think it's also helped us grow this design business.

I would think the LED is a real positive factor for occupancy in terms of having to keep air conditioner less and probably change your energy usage.

It’s been a big deal over the last several years. Interesting that I didn't know is when you spec for a new LED lighting, you can also spec for less air conditioning, but the heat's not there. So it has allowed us to reduce our energy consumption and lower our energy costs even when the rates are going up. So it's been very important we began this about five years ago. It's where we rolled it out most everywhere the payback is within a year and half to two years. So it's well worth it.

Okay. Thank you, Clarence. Best of luck on the fourth quarter. I hope we all recover from the election.

Thank you, Budd.

Thanks, Budd. End of Q&A

Thank you. [Operator Instructions]

Operator, it sounds like we don't have any other calls. Okay, Well I'd like to thank you all for joining us on the call and for your interest in Haverty’s.

And that does conclude today's program. We'd like to thank you for your participation. Have a wonderful day. And you may disconnect at any time.