Good day and welcome to the Haverty's second quarter financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Hare. Please go ahead.

Thank you operator. During this conference call, 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 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 provide commentary about our business.

Good morning. Thank you for joining our second quarter conference call. We were pleased to see that we had positive sales for the second quarter and for the first half. Every region was up and delivered sales for June, which was the strongest delivered sales increase in over a year. Our store traffic was down for the quarter, but was offset by stronger store efficiencies, with higher closing rate and a higher average ticket of over $22.50. H Design sales for the second quarter were up to 25% of our total sales and continue to grow and help drive our average sales increases. In-store tablets have helped store transaction and allows our sales consultants to stay fully engaged with the customers throughout the sales process. Our 3D and 2D room planners help our designers engage better with our customers providing services that are helping our customers' vision of their homes come true. Sales in havertys.com were up 18% for the second quarter. We continue to invest in making our website inspirational and easier to use by our customers and by our sales team. Our marketing team has invested a great deal in the first half to improve our SEO and organic search, which has helped increase visits to our site. Mobile traffic has increased to 80% of the total traffic. Over a year ago, we began a concerted effort to reduce our damaged and discontinued inventory and we now have the most current and cleanest in-stock inventory we have had in several years. We have a significant number of higher quality bedroom and dining room collections planned to hit our stores this quarter, which we believe will be exciting for our teams and our customers. Our merchandising and supply chain teams have begun aggressive processes to make sure that we…

Thank you Clarence and good morning. In the second quarter of 2018, sales were $198.8 million, a 1% increase over the prior year quarter. Our comparable store sales were up 1.3% for the quarter. Our gross profit margin decreased 20 basis points to 54.2%. The decline was primarily due to a slight increase in freight cost, product mix and markdowns related to store closures. Selling, general and administrative expenses increased $1.9 million to $98.8 million or 49.7% of sales. This increase was largely driven by higher group medical cost and third-party credit cost. Our usage of longer term credit promotions increased during the quarter. Other expense of $183,000 includes the loss on sale of one of our closed properties. Net interest expense was slightly down $111,000 to $454,000 and pretax income decreased $1.3 million to $8.4 million during the quarter. Our tax expense was $2.2 million during the second quarter of 2018, which resulted in an effective tax rate of 26.1%. In the prior year period, the effective tax rate was 36.2%. The Tax Cuts and Jobs Act of 2017 became effective in the fourth quarter of last year and significantly reduced the company's federal tax rate from 35% to 21%. The primary difference in the effective tax rate and the statutory rate is due to the state income taxes and additional tax expense associated with vested stock awards. Net income for the second quarter of 2018 was $6.2 million or $0.29 per diluted share, which approximates last year's second quarter results. Now turning to our balance sheet. At the end of the quarter, our inventories were $107.5 million, which was up $3.7 million over the same period last year. We ended the quarter with $74.7 million of cash and cash equivalents and our $60 million revolving credit facility remains…

[Operator Instructions]. Our first question comes from Budd Bugatch with Raymond James.

Good morning Clarence. Good morning Richard.

Good morning Budd.

A couple of questions, if I could. You talk about some success in the website and you talked about it, I think, in your script as well some success in the e-commerce area. Obviously, it's an area of significant focus and interest. Can you remind us if you have disclosed this, how much of your business now is actually e-commerce transacted? And what are you seeing in the trends there?

Yes. But it's not a major part of our businesses. We have said, it's actually the transaction. We were less than 2% last year and now it's a little over 2%. And one of the reasons there is that we have made this very easy for the sales person who deals with the customer in the store to also get credit for transactions where they are involved online. So that's really the facilitator there. I still feel that our customer, particularly as we have upgraded our product and dealing more with the designer, wants to see the product, wants to engage with us. I mean, our average ticket is over $2,200. And the average transaction, when it's involving a designer, is almost $5,000. So that will continue to grow some, but they are online, they are checking us out and as I mentioned, 80% are on mobile, checking us out. Website is super important. We want to be as easy as possible, but I still believe most people want to deal with and physically deal with seeing the product and our designers and we want to make it as easy as possible however she wants to do.

I understand. Thank you for that. The tariff issue is the one that you have addressed in some detail. Many of your imports come through other vendors and you are not the importer of record, if I remember right on that, I think there was a press release as well. What are you hearing from your suppliers on that issue? And can you provide any color on what they are doing? We are seeing that --

What's interesting today is the new threat that's come out that it might go up to 25%. We have seen the Chinese currency being devalued and coming down almost 5% and I think that will help offset it and we have heard that from one of our vendors. I know that several of the major players we deal with have moved to Vietnam and are trying to set that up as quickly as possible. We are going to move with them. We think moving out of China looks to be an advantage and looks to be what the industry is trying to do. So if we get to 25% tariff, that's going to be a big hit and will impact the whole industry. Who knows whether that's going to happen? 10%, I think, the China felt like they can probably work around that, may be with the currency and we would try to work some around it. I have said in my comments that we have moved aggressively to bring product in earlier than when we think the tariff will hit, which would be probably October but it's hard to know. We don't know that.

Okay. Thank you. And finally from me, you had talked about thinking you are having a good second half. Any idea you wish to hazard a guess as to what maybe the comps would be? You have got some easier comparison, I think, in the third quarter. How do you think about the --?

We do have an easier comparison in the third quarter and in the fourth quarter, but we are not giving out advice on comps. It's an easier comparison and we started this quarter positive. So that's where we are.

Okay. I thought I would give you the opportunity. Thank you. Good luck on the third quarter and balance of the year. Thank you.

Appreciate it. Thanks Budd.

Thank you. Our next question comes from Brad Thomas with KeyBanc.

Hi. Good morning Clarence. Good morning Richard.

Good morning Brad.

Just to follow-up on Budd's question about the tariffs. So if it does go through as it's currently proposed, what's the timing that we would start to see that hitting the P&L if there were any impact? I presume we would be looking at the first half of next year.

I think that's right. There will be some impact late this year. But as I mentioned, we have moved as much as possible of our bestsellers to be in-stock through the rest of the year. But it will impact us late year probably and certainly the first quarter of next year, if it goes in place for goods received in say, October.

And just to reiterate, what Clarence mentioned earlier, Brad. That certainly would have an impact on our balance sheet as well, as we bring in more inventory in advance of potential tariff.

Right. Got you. Okay. Now the outlook for gross margin does look more positive here for the second half, in line with the way you had been talking for the year for the last couple of quarters. Richard, could you just remind us some of the other puts and takes on gross margin, where do you think you have some opportunity?

Yes. We left our gross margin expectations the same as we forecasted last quarter. So as we look at the back half of the year, just looking at some of the new product offerings that Clarence mentioned, kind of the closures are behind us. So we don't see as many markdowns on our closed locations. That and the product mix and some of the promotions, we feel very optimistic. And that's where we left our margin forecast the same for the year.

Brad, I also mentioned that we have done a very good job in the last year-and-a-half or so of getting out of our discontinued markdown goods. So that markdown was an effect on our margins and that should be lessened going forward.

And for 2Q or for the first half, do you have a specific number in dollars or basis points that the markdowns were a drag?

No. I don't think so. It started, let's say, the beginning of 2017, late 2016. So it's been there and it's now much less significant.

Okay. Great. And then just in terms of the outlook for SG&A. How should we think about level of spending in 3Q versus 4Q? And anything of note?

Well, a couple of things. The variable G&A guidance we gave remains the same at 18.5%. We pulled back our fixed G&A just a little bit and reduced that slightly because of the closures, since we closed some of those locations we have got less cost there. So those are the two components to that. On a going forward basis, we feel really good about the $257 million range for the G&A on the fixed side.

Great. Well certainly it feels like you are set up for a strong second half. Good luck to you.

Thank you.

Thank you Brad.

[Operator Instructions]. Our next question comes from Anthony Lebiedzinski with Sidoti.

Good morning gentlemen. How are you? So I first just wanted to follow up on the tariffs again. So at this point, how much of your currently sourced products in China could potentially be shifted to Vietnam?

Well, I don't think we have an exact number on that. I mentioned there has been about $100 million a year. There are a couple of key suppliers who are providing a lot of that. One of them is trying to move to Vietnam a portion of it. The other would be a more difficult play and would take more time. In a year, could we move that $100 million to $50 million? That would be pretty significant. We might move it to $70 million or something. But you couldn't move all of it rapidly. It would take us a while to do that. And I don't think we could do that. Some of that, some of product is of the quality that we want, that I don't think we could get in Vietnam right now.

Okay. So thanks for the color. And assuming if this does go through and obviously there was some discussion even today actually there was some new proposal using about 25% as tariff. Now let's assuming it's the 10% tariff, what would you say is your ability to pass along that price increase on at least some of the furniture?

Well, we would do as much as we could. It's probably easier on our wood collections because they are more specific and more exclusive to us. When you get into upholstery, it's a little more competitive or looks are similar. So we would certainly try to move the pricing up as quickly as we can. I did mention that one of our vendors in China has already reacted to what they anticipate happening and with the devaluation of their currency, if the tariff comes, we would go back to our vendors to try to get some help. But they are going to have pressures and there will be pressures on both sides.

Got it. Okay. And just looking at the second quarter, were there any notable differences in the same-store sales by region in Q2 and so far in Q3?

We haven't put anything out by regions. I don't see anything that really stands out significantly. Our closings were in several different places. I have said earlier in the year that Florida has been pretty good and it continues to be pretty good.

Got it. Thanks for the color for that. And also you did mention that you use the longer term credit promotions more or so in 2Q. Just curious, how much of the same-store sales increase was driven by these longer term credit promotions?

We don't disclose that. But we did do more 60-month financing this past quarter than we have traditionally on items other than mattresses. So we were very pleased with that. But that drove up our G&A costs slightly.

Got it. Okay. And lastly could you touch base maybe [indiscernible] any sort of color as far as the timing of closings and openings for this year and possibly for next year, if you have that?

We closed these three stores, some of them earlier in the first half and several were late in the second half. We do have one store planned in Raleigh closing that overlaps with our main store there. That is all we have listed now. We have Chattanooga on the board for next year that we were hoping to get in this year, but it's going to be next year. We haven't announced any other closings or store openings until we finalize the leases on some of those. So that's what we have right now.

Okay. Great. Well, thanks and best of luck.

Okay. Thank you.

Thank you Anthony.

Thank you. There are no additional audio questions at this time.

Well, thank you for your participation in today's call. We look forward to talking with you in the future when we release our third quarter results.