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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2003

OR

For the transition period from __________________ to _______________

Commission file number: 1-14445

HAVERTY FURNITURE COMPANIES, INC.

Registrant’s telephone number, including area code: (404) 443-2900

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X]    No [  ]

     The number of shares outstanding of the registrant’s two classes of $1 par value common stock as of October 24, 2003 were: Common Stock – 17,758,868; Class A Common Stock – 4,422,636.

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H A V E R T Y   F U R N I T U R E   C O M P A N I E S,   I N C.

I N D E X

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)

See notes to condensed consolidated financial statements.

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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data - Unaudited)

See notes to condensed consolidated financial statements.

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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands - Unaudited)

See notes to condensed consolidated financial statements.

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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Haverty Furniture Companies, Inc. and Subsidiaries (the “Company”) for the year ended December 31, 2002. Accordingly, the quarterly condensed consolidated financial statements and related disclosures should be read in conjunction with the 2002 Annual Report on Form 10-K. The financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and all such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2003, are not necessarily indicative of results for the entire year.

NOTE B – Stock-Based Compensation

At September 30, 2003, the Company had two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share data):

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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE C – Interim LIFO Calculations

An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management’s estimates of expected year-end inventory levels and costs. Since these are affected by factors beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation.

NOTE D – Comprehensive Income

Total comprehensive income for the following periods was comprised of (in thousands):

NOTE E - Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” The Interpretation requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise that has a controlling financial interest through ownership of a majority voting interest in the entity.

We lease our Dallas distribution center and three retail locations from an unconsolidated variable interest entity (VIE) under an operating lease, which is renewed automatically and expires April 2009. Third parties have invested capital at risk exceeding 3% of the assets of the VIE with the remainder being financed through a debt obligation. This and certain other criteria allow us not to consolidate the VIE in our financial statements prior to the adoption of the Interpretation. Rather, we currently account for the arrangement as an operating lease. Accordingly, neither the properties nor the related debt is reported in the accompanying balance sheets.

The lease contains residual guarantee provisions and guarantees under events of default. Although we believe the likelihood of required funding to be remote, our maximum guarantee obligation under this lease is approximately $18.3 million at September 30, 2003. We expect that we will exercise our purchase options at the end of the term of the lease, which will be $13.0 million in 2009.

(Continued)    

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HAVERTY FURNITURE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In October 2003, the FASB issued FASB Staff Position FIN 46-6, which is a deferral of the effective date of FIN 46 in recognition of the complexities associated with implementation of FIN 46. Accordingly, we will determine if the VIE meets the criteria required for consolidation and if so, consolidate it effective December 31, 2003, as provided by FIN 46-6. If we had consolidated the VIE beginning January 1, 2002, property and equipment reported at December 31, 2002, would have increased by $26.0 million, accumulated depreciation by $3.3 million, long-term borrowings by $20.7 million and a minority interest of $1.0 million would have been reported. Rent expense for the year ended December 31, 2002, would have decreased by approximately $2.8 million, while depreciation expense and interest expense would have increased by approximately $0.5 million and $1.8 million, respectively.

In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. We do not believe that the adoption of SFAS No. 149 will have a material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. We do not believe that the adoption of SFAS No. 150 will have a material effect on our financial position or results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING INFORMATION

Certain statements we make in this report, and other written or oral statements made by or on behalf of the Company, may constitute “forward-looking statements” within the meaning of the federal securities laws. Examples of such statements in this report include descriptions of our plans with respect to new store openings and relocations, our plans to enter new markets and expectations relating to our continuing growth and the roll-out of our distribution system. The forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statement. We believe that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. Such statements speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. The following are some of the factors that could cause Averts’ actual results to differ materially from the expected results described in our forward-looking statements: the ability to maintain favorable arrangements and relationships with key suppliers (including domestic and international sourcing); any disruptions in the flow of imported merchandise, whether caused by war, strikes, tariff, politics or otherwise; conditions affecting the availability and affordability of retail and distribution real estate sites; the ability to attract, train and retain highly qualified associates to staff existing and new stores and distribution facilities and corporate positions; general economic and financial market conditions, which affect consumer confidence and the spending environment for big ticket items; competition in the retail furniture industry; and changes in laws and regulations, including changes in accounting standards, tax statutes or regulations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating Results

Net Sales

Our sales are generated by customer purchases of home furnishings in our retail stores and revenue is recognized upon delivery to the customer. In addition to total sales increases, another important measure of a retailer’s sales performance is comparable-store or “comp-store” sales. These are comparisons of sales results of stores that have been open at least one year. The following outlines our sales and comp-store sales increases for the periods indicated:

Retail sales of big-ticket home goods were weak for the previous four quarters as consumers were anxious over employment uncertainty, threats of war, war and geopolitical unrest. There was also a lingering negative effect from lower stock market values. Beginning in June 2003 we had positive comp-store sales results that continued throughout the third quarter. We believe that continued strong housing sales and low interest rates are a positive factor for the industry but consumer confidence and further indications of a strengthening economy are key to increased spending for big ticket furniture items. Many retailers have been advertising aggressive sales promotions to stimulate business and increase their sales volume. We believe that this approach would negatively impact our “everyday low pricing” integrity with our customers over the longer term. We have instead used some promotional pricing during traditional sales events such as those offered as part of our successful Labor Day promotions. Supplementing the sales promotions, we also began to offer longer free interest and deferred payment period financing promotions. During the remainder of the year we expect to continue with this approach of providing a selection of specially priced merchandise and financing promotions to increase traffic in our stores.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our sales during the third quarter of 2003 increased across all major categories of furnishings, with bedding, formal dining rooms and upholstery performing better than the average. Our average sales transaction and price per item both remained modestly higher in the third quarter over the prior years period. Net sales for each period by category were as follows (in millions):

Gross Profit

Cost of sales consists primarily of the purchase price of the merchandise together with freight costs and the sourcing costs of our products. Our gross profit is largely dependent upon merchandising capabilities, vendor pricing and the mix of products sold. We have developed strong relationships with our suppliers and believe that we receive excellent pricing and superior service from our key vendors in exchange for distribution of their products. The continued improvements related to the products imported from Asia and pricing pressure on domestic suppliers have also generated good values for us. Many retailers have used the decreased costs to support their heavy promotional pricing. Our approach has been to offer products with greater value at our established middle to upper-middle price points. Gross profit as a percentage of sales was 49.1% for the quarter ended September 30, 2003, a 90 basis points increase over the 48.2% in the previous year’s comparable period.

Gross profit has been improved by the increase in the mix of our Havertys branded merchandise line. This private-label product generally carries a modestly higher gross margin. Of the items selected for our core furniture merchandise groups, Havertys brand comprised approximately 30% at the end of 2002, increasing to approximately 35% as of September 30, 2003. Our core furniture merchandise comprises approximately 85% of the furniture items, which excludes bedding and accessories, which we carry in all of our stores. Additional products that are more regionally focused and items needed to merchandise our larger retail stores supplement the core furniture merchandise assortment.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our focus for the remainder of 2003 and in 2004 is to continue to seek values with imported product offerings and to explore how we might better source and flow those goods. Of our core merchandise groups at December 31, 2002, imported products comprised approximately 37% and based on the selections made to implement our current merchandising plan, this is increasing to approximately 60% as the new products are received and displayed in our showrooms. Wood products, or “case goods,” are generally imported with only 20% of our selected core items at September 30, 2003, produced domestically. Upholstered items are not as heavily imported, with the exception of leather products, of which almost 100% of our stationary leather items were imported at September 30, 2003. The Havertys brand mix is approximately 80% imported with virtually all case goods and leather items being imported. We will continue to strengthen the Havertys private label and have developed our own “collections” for more effective advertising and brand building. Name brand merchandise of well-known U.S. manufacturers such as Broyhill and Lane of Furniture Brands International, Bernhardt and La-Z-Boy, will remain a significant part of our product offerings.

Selling, General and Administrative Expenses

Selling, general and administrative expenses are comprised of five categories: selling; occupancy; warehouse and delivery; administrative; and advertising. Selling expenses primarily are comprised of compensation of sales associates and sales support staff. Occupancy costs include rents, depreciation charges, insurance and property taxes, repairs and maintenance expenses and utility costs. Warehouse and delivery costs include personnel, fuel costs, and depreciation and rental charges for equipment and rolling stock. Administrative expenses are comprised of compensation costs for store management, information systems, executive, finance, merchandising, real estate and human resource departments as well as retirement costs for all Havertys employees. Advertising expenses are primarily media production and space, direct mail costs, market research expenses and employee compensation.

Our SG&A costs were negatively impacted as we began transitioning to our new distribution system in June 2002. We completed the Eastern distribution center rollout program on June 30, 2003. We now have 52 stores fully integrated, representing approximately 45% of our business. SG&A costs as a percent of net sales were 43.7% for the third quarter, a 1.5% decrease from the 2002 third quarter level of 45.2%. These costs for the nine months ended September 30, 2003, were 44.7% as compared to 43.1% for the 2002 period. We are continuing our focus on refinements of our new system and related reductions in costs. Additional savings should be derived as sales increase and the operational costs of our new facilities are further leveraged. The growing amount of product manufactured overseas amplifies the need for excellent supply-chain management, given the longer lead times from order placement to arrival, and the ability to receive and warehouse the larger order volumes of product associated with importing.

The cost of our outsourced credit program is included in SG&A. The type of credit promotion and the level of its usage impact this expense. The amounts paid for the third quarter of 2003 were more than double the 2002 level as we outsourced a more expensive and popular new credit program. We expect that costs associated with our outsourced program in the near term will remain at their current level as a percent of net sales. Accordingly, improvements in total SG&A costs as a percent of sales on a comparable period basis will be strongest in the second half of 2004 as the shift to these credit programs anniversaries.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Credit Service Charge Revenue and Allowance for Doubtful Accounts

Our credit service charge revenue has continued to decline as customers choose credit promotions with no interest features. The in-house financing program most frequently chosen by our customers is a 12-month, no interest and 12 equal payments promotion which generates very minor credit revenue, but helps us reduce our interest expense and bad debts due to the faster payout relative to our other in-house credit programs. The standard outsourced program offers deferred payment for 360 days with an interest accrual that is waived if the entire balance is paid in full at the end of the deferral period. Beginning in the third quarter of 2003, another similar outsourced promotion was offered for larger purchases that allows for deferred payments up to 18 months. This promotion has become the most popular of all the credit programs offered. The following highlights the impact these changes have had on our credit service charge revenue and related accounts receivable and allowance for doubtful accounts (in thousands):