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Edited Transcript of HVT earnings conference call or presentation 2-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Haverty Furniture Companies Inc Earnings Call

ATLANTA May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Haverty Furniture Companies Inc earnings conference call or presentation Tuesday, May 2, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clarence H. Smith

Haverty Furniture Companies, Inc. - Chairman, CEO and President

* Dennis L. Fink

Haverty Furniture Companies, Inc. - CFO and EVP

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Conference Call Participants

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* Anthony C. Lebiedzinski

Sidoti & Company, LLC - Research Analyst

* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* David Vargas

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Presentation

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Operator [1]

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Good day, and welcome to the Havertys First Quarter 2017 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.

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Dennis L. Fink, Haverty Furniture Companies, Inc. - CFO and EVP [2]

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Thank you, operator. 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 some insights about our direction. Clarence?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [3]

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Thanks, Dennis. Thank you for joining our 2017 first quarter conference call. We're pleased to report a solid first quarter performance. Net sales increased 3% to $200.4 million with comparable store sales up 1.6%. Total written sales were up 2.5% with written comp store sales up 1%. Net income was $5.98 million versus $4.76 million last year. Earnings per share for Q1 were $0.28 compared to $0.21 per share last year. We had an increase in gross profit margin to 54.7% in Q1, up 100 basis points compared to 53.7% in 2016. Along with reduced ocean freight, we had strong execution with pricing and promotion and reduced markdowns due do better handling and lower closeouts in the line. Our Havertys branded merchandise continues to demonstrate a strong value as well as a desirable fashion statement to our customer. Total delivered sales for the second quarter to date 2017 are up 2.2% with comp store sales up 1.3%. In order to equalize the impact of Easter on our sales, we believe that the appropriate comparison for written sales includes the last week of March plus the month of April, which shows sales up 2% for the same period with comparable sales up 0.9%. We're in the midst of opening some exciting new stores, relocations, major remodeling projects, system upgrades and a major warehouse expansion. In the first quarter, we moved back into a completely rebuilt and spectacular new store in Lubbock, Texas. The Lubbock revival was like a phoenix rising from the ashes, and resulted in what we now believe is the best-looking store in Texas. We have for years wanted to find a store in Winston-Salem's bigger sister city; last weekend, we fulfilled that need and opened a new store in Greensboro, North Carolina. In one of the more creative projects we've taken on, we will relocate to a new store in the Columbiana Mall area of Columbia, South Carolina. This 2-story store is another long-desired repositioning strategy that will come to fruition and help us better serve and reach our customer in that key city. We also have 4 major remodeling projects underway that we plan to complete by early in the third quarter. We expect that our retail square footage will remain relatively flat for 2017. This month, we break ground on a major expansion of our western distribution center in Coppell, Texas, just outside of Dallas, which will finish in the first half of 2018. This addition will provide over 50% more storage capacity and allow us to provide quicker and better service to our western stores. We expect a CapEx spend of $27 million in 2017. A key sales driver continued to be the increases in our average ticket, up 2.9% to $2,040, the 10th consecutive quarter that number has increased on a comparable quarter basis. Our in-home designers were instrumental in approximately 20% of our sales and were a significant factor in these increases. We continue to gain expertise and develop more products and services to better serve the design-oriented customer. Our merchandise team just returned from the April High Point Furniture Market and we're excited about many new additions and major projects that we've developed with our key suppliers, which are coming in the next several months. As we've developed and grown our H Design business and increased our special order mix, we've seen an improvement in the sales of our upper-end merchandise and these new collections are real enhancements to that lineup we've upgraded our quality control team, both in the U.S. and in Asia and enhanced procedures to assure that our suppliers are producing and packaging our goods properly by having our staff on the production lines. We've also significantly improved our handling procedures in our distribution centers and on our delivery trucks, reducing damages and delivering high-quality products the first time. I'm very proud of our teams for improving our product returns and helping reduce damages and markdowns, which is now showing in our increased gross margins. But more importantly, we're providing a better service to our customers and enhancing our top-drawer delivery service. This year, we're concentrating on making improvements throughout the entire company with a focus on improving the interaction with each customer. We're dedicated to making the entire process of shopping and buying easier, smoother and genuinely enjoyable for our customer. We just finished shooting a new series of television commercials directed by Academy Award nominee, [Tad] Melfi, writer and director of Oscar-nominated movie, Hidden Figures. This terrific series of new LIFE LOOKS GOOD commercials is very entertaining, and we believe it will help separate us from our competition when it begins airing in the next weeks. Later this spring, we began installing a new human resources information system called SuccessFactors. We'll be automating and standardizing many manual functions. This is a significant collaborative effort between human resources, IT and our operations team. This is an important company-wide implementation that will impact every associate and provide efficiencies to our HR processes.

We're now heading into the strongest mid-year sales events. With the Memorial Day sales and the major summer holidays that follow leading into Labor Day. As we remember the adage, "Bedding sales rise with the temperature," we'll not only be promoting our strength in bedding lines, but also our entirely -- entire enhanced merchandise line. Our stores as well as our team members are well prepared to serve our customers in these coming months. For 2017, we believe that our business will benefit as the housing strengthens in the region and as the general economy improves. We're confident we have a strong connection to our customer with upgraded stores, appealing and value-oriented merchandise and excellent personal service. These will be the important drivers of our 2017 sales results. I'll now turn the call back over to Dennis.

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Dennis L. Fink, Haverty Furniture Companies, Inc. - CFO and EVP [4]

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Thank you, Clarence. I'm going to recap and expand on some of the financial highlights mentioned in last night's earnings press release and then we'll take your questions. Total SG&A dollars increased $4 million or 4.2% for the 3 months ended March 31, '17, compared to Q1 last year. Our selling cost increased $0.8 million in 2017 in step with higher sales except for additional staffing in our new stores and increased [bank card] usage cost. Occupancy expenses rose $0.8 million, primarily due to increases in depreciation for new, relocated and renovated stores. Our warehouse and delivery expense rose $0.5 million in the first 3 months of '17 compared to the prior year due to partly -- partly due to higher personnel costs and warehouse material costs. Advertising and marketing costs, as planned, were up $0.8 million in the first quarter of '17. Administrative costs rose $1.1 million or 5.1% over 2016 due to higher compensation costs and increased insurance costs for workers' comp, partly offset by lower group medical costs. Other income includes a $1.2 million gain from insurance recovery upon rebuilding our Lubbock, Texas location. We aren't expecting any further such gains for the rest of the year. Looking forward, our expectation for annual gross profit margins for the full year of 2017, is approximately 53.9%. The cost for inbound ocean freight decreased in the second half of 2016, but those costs are anticipated to increase in the second half of 2017, tempering the recently higher gross margins. Last year, there was a change in the LIFO reserve that generated a 35 basis point positive impact in the second half. But this year, we expect a negative impact of around 25 basis points in the third and fourth quarters of 2017. Considering those swings, second-half gross margins this year is expected to be approximately 40 basis points to 50 basis points lower than the 53.9% full year average. Our estimate for fixed and discretionary type SG&A expenditures for 2017 are now $259.0 million, that's a $1 million reduction of our previous estimate and it compares to a $250 million spend for those same costs last year. The increase is largely due to depreciation and occupancy costs for new and relocated stores, overall compensation including staffing increases and inflation. The fixed and discretionary expenses were $63.9 million for the first 3 months of 2017 versus $61.1 million last year. The increases in these costs for the rest of the year will fluctuate with store expansion and with marketing activity, which is expected to be at its highest level in the third quarter. Variable type costs within SG&A for the first 3 months of 2017 were 18.2% of sales compared to 18.1% for the same period last year. For the full year of 2017, we anticipate those costs to be 18.1% compared to 18.2% for the full year of 2016.

Operator, at this time, we'll take questions from the audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question today from Brad Thomas with KeyBanc Capital Markets.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [2]

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Couple of questions, if I could. Wanted to start just with margins. And I think it's pretty straightforward that the freight is more a function of exogenous factors, but seems like you did a good job with markdowns in the quarter. I was hoping you could talk a little bit more about that and how much of a function that is of the customer liking what they're seeing in your stores versus perhaps the environment improving or maybe some structural opportunities that you're seeing?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [3]

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I think it's more structural. I believe we really addressed this. We beefed up our quality control teams here in our distribution centers, really focused on handling the product properly, making sure that it was manufactured right, to begin with. We, last year, began putting our folks into every plant in Asia, not only the ones that we're directly working with, but the third-party vendors also, working with them on first cuttings, making sure the products package right, handled right; and then when we handle it, that we're not having damages that we're creating. So our return percentages are lower. We're having fewer markdowns and I also think we're probably doing a little better job of flowing product and not overreacting before we know rate of sales, so that we don't have to have a larger markdown. So it's operationally across everything we're doing, I think, has helped us reduce those markdowns.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [4]

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Great. And then I'd love your thoughts, Clarence, on the outlook for written same-store sales. The company has done a great job of posting positive comps for the last 4 quarters. The comparison will get a bit tougher here in your June quarter, up 6 last year, but sounds like you're off to a good start here. How are you feeling about the environment and the outlook for comps?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [5]

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Well, we don't give guidance on sales. But we feel pretty good about our position. Certainly, a key to this quarter is what happens in the next 3 or 4 weeks around Memorial Day, that is the big event. And then the summer holidays, I mentioned 4th of July is important, Labor Day. We're prepared for all of that. I like our marketing. I think we've got a better in-stock position on our bestsellers. But it all depends on what happens in the next several weeks. We feel, based on where we are right now, pretty good about it.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [6]

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Great, great. And lastly, I just wanted to follow up on some comments you made about the mattress category. I know it was a good category for you in your first quarter, but obviously, the U.S. retail industry for mattresses is about to undergo a big transition. What if you changed in terms of your offering and how is your marketing and go-to-market strategy changing here?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [7]

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Well, we're reworking our line right now, some of which was necessary by the vendors, Sealy and Tempur. We're adding some new product to our mix. We're adding some private label branding for the first time that we're excited about. We put a great deal of effort in making sure we have the right mix on our force. So we're going to rely on the key brands. We're a big player with Tempur, Sealy, you know that, but also with the Simmons folks. And then that's going to be enhanced with some of our own private label marketing. So it's some of the biggest efforts that we've ever put into the bedding category that's being rolled out right now. So we feel pretty good about it.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [8]

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And I guess, the big question everyone is asking in the industry is, what happens in a world where Mattress Firm no longer sales Tempur products? Have you seen any uplift in that brand in particular since that relationship ended?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [9]

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I think in several markets -- Matt Firm has hundreds of stores in our markets. And literally, in our big markets, they might have a hundred stores or do. So when they don't sell that product right across the street from us, it does help us. We do sell it and we do show it and we have salespeople that understand the product. So I think it opens a great avenue for us.

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Operator [10]

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And we'll take our next question from Budd Bugatch with Raymond James.

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David Vargas, [11]

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This is David on for Budd. Wanted to follow up on some questions on mattress. If you could -- could you give us the growth rate in mattresses for the quarter, the revenue dollars, in terms of?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [12]

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I don't think we like to give those kind of percentages out. It was up. We felt good about it. That's not something we usually give out, David.

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David Vargas, [13]

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And you talked about private label -- going into private label mattresses for the first time. What price points are you going to be at for that private label offering?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [14]

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The main lineup is going to be the hybrid. And so it's going to be below what the hybrid product that's off -- the name brand vendors, but not a lot lower. It's going to be great quality product. We learned a long time ago in branding for our own brands in furniture that we don't want to go low. We want to go to the heart of where our customer is. So it's a better product and a higher quality product that we feel carries the price quite well. It'll be under the branded players and lower price than the branded players.

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David Vargas, [15]

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And is that on the floor now or and will...

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [16]

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No, it's not. It's coming later this month.

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David Vargas, [17]

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Got it, but in time for the major holidays?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [18]

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Some of it. We want to make sure that for the major holiday, we don't disrupt our floors too much. We do have a change going on right now. But for the major -- some of it won't be on the floors for Memorial Day, but some of it will.

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David Vargas, [19]

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I understand. Okay. And you talked about the in-home designers now about touching about 20% of sales. Where do you see that number ultimately getting to, and is there an opportunity for that to have -- for growth in that category to have a significant impact on gross margin given that there's probably a higher attachment of accessories and other higher gross margin type products when you get an in-home designer involved?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [20]

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We came up with a target of 25%, it's now 20%. We came up with a target of about 25% when we started it. I think that's a pretty good number. We don't want it to get too high. We pay a little bit more for it, as you know. But it's going to be driven by not only how well we execute, but what our customers need. And not everybody needs a designer. We sell a lot of people who just want to buy a sectional sofa. So it's going to be driven by how we do a good job and what the customers want. I think 25% is a pretty good target, it may go higher than that. It has helped us drive our average ticket. I think it will continue to do that.

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Operator [21]

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We'll go next to Anthony Lebiedzinski from Sidoti.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [22]

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So Clarence, I just wanted to follow up, as far as the improved delivery procedures, the lower returns, it sounds certainly like it's paid off well for you. Is there any way that you can perhaps quantify what impact that had on your margins? And if you could just give little bit more color on that, that would be great?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [23]

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I'm going to let Dennis get into this a little bit.

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Dennis L. Fink, Haverty Furniture Companies, Inc. - CFO and EVP [24]

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I think it's going to have more impact going forward than it has already. And we have -- we've sold off more of the product that we would -- that's in our warehouses. We've -- we added an outlet here in Atlanta, and in doing that, have had more exposure just to our executives and our management team. The kinds of things that were ending up in a category to be closed out, and I think that the impact so far is that we are moving out more of what's in the warehouse and then we're finding out more and taking action and improving procedures that have helped our overall cost of merchandise that's basically wasted or that is -- has to be disposed of. We're not looking for huge numbers there, but somewhere under 20 basis points probably. But we've already realized some of it and it's an important thing, not just with cost, but with service to the customer and having the brand reputation where it needs to be without hassles. Because that's one of the reasons you go to a full-line retailer is they take care of everything and it interrupts that good vibe and choice -- reinforcement of the choice and make if you have any delivery issues or merchandise issues. So it's very important more so probably than just the P&L impact.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [25]

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That's definitely very helpful color. And also you highlighted upholstery, mattress and accessory groups doing well for you, left out the case goods, can you give us sort of a comment as to what happened in the quarter and also your outlook going forward for case goods?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [26]

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Well, case goods have been a challenge for the industry for a while now. But we believe we're good players in that. We understand the category, we've grown up in the category and we're improving it. So we, coming back from this market, our team has been working for months on a number of new collections that we're excited about in bedroom and dining room that are coming in, in the next several months and that will be coming in into next year, that we think will enhance our growth there. There are not a lot of players who understand case goods, particularly in the better end of the goods. And we think that we've got an opening there. So I would see bedroom and casual dining with growth opportunities, not only in dollars, but as percent of sales. And it's a real focus of ours right now. But the homes have changed. And not many people have formal dining rooms anymore. Not many people have entertainment centers anymore. So we have to go to where the opportunities are there and we think that we've got several new collections and focuses that they are going to help us there.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [27]

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Got it. Thanks for color. And also, just broadly speaking, do you anticipate that you'll be able to still drive the average ticket higher, and I guess partially offsetting that would be lower traffic, is that fair to say as far as how you think about?

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [28]

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It is. Traffic has fallen off and we don't see much improvement there, we certainly would like to see it. What has been driving our business is an improved close rate, but more importantly, is the average ticket. And I do think that will continue to go up.

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Operator [29]

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And I'm showing we have no further questions at this time. I'll turn the call back to you for closing remarks today.

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [30]

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Okay. Well, thank you. Before we end the call, I want to recognize what the analysts have all mentioned, that after conducting these calls for the last 24 years, this may be Dennis' last call as CFO. We announced earlier that Richard Hare will be taking over as CFO later this week. And he comes to us after 11 years as CFO for Carmike, which sold to AMC last year. Dennis will be retiring later this summer and will be here to help with Richard's transition. Dennis has been my wingman and partner these past decades and taught me more than I can say. But he definitely taught me all I know about Wall Street and running a public company. He's been a real strength for Havertys and has been -- made tremendous contributions in every part of our company. But possibly, his largest contribution has been his insistence that we treat everyone associated with the company fairly. This means full transparency with investors, team members, customers and suppliers. He's taught us the real meaning of always play it straight. So thanks, Dennis, and good luck.

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Dennis L. Fink, Haverty Furniture Companies, Inc. - CFO and EVP [31]

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Thanks. I appreciate it. It's been a privilege. Thank you.

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Clarence H. Smith, Haverty Furniture Companies, Inc. - Chairman, CEO and President [32]

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So thank you for joining us on our conference call and for your interest in Havertys.

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Operator [33]

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This does conclude today's program. Thank you for your participation. You may disconnect at any time.