The following discussion of Havertys' financial condition and results of operations should be read together with the accompanying condensed consolidated financial statements and related notes thereto and our 2007 Annual Report to Stockholders.

Net Sales

Our sales are generated by customer purchases of home furnishings in our retail stores and beginning in March 2008 via our website. Revenue is recognized upon delivery to the customer.

Total sales decreased $25.1 million or 12.5% and comparable stores sales decreased 14.9% or $29.2 million in the third quarter of 2008 compared to the prior year period. The remaining $4.1 million of the change in sales in the third quarter of 2008 was from new and otherwise non-comparable stores. Sales for the first nine months of 2008 decreased $49.6 million or 8.6% and comparable stores sales decreased 11.3% or $64.4 million. The remaining $14.8 million of the change in sales in the first nine months of 2008 was from new and otherwise non-comparable stores. Stores are non-comparable if open for less than one year or if the selling square footage has been changed significantly during the past 12 full months. Large clearance sales events from warehouse or temporary locations are excluded from comparable store sales, as are periods when stores are closed or being extensively remodeled.

During 2008, we have promoted longer term no interest financing and special pricing on select merchandise to help stimulate sales. We plan to remain competitive, but not overly aggressive, with our general merchandise pricing as we strive to maintain our gross profit margins. We will continue having promotional offers to drive store traffic and discounts during periodic sales events.

Housing sales, which is one driver of home furnishing purchases, is at historically low levels. Home values have declined and mortgage lending has tightened such that consumers have less access to funding for large discretionary purchases for the home. Higher gasoline and food prices have also contributed to consumers' reluctance to increase spending for big-ticket furniture items. More recent turmoil in the financial markets has further reduced consumers' inclinations towards spending. We do not anticipate a significant rebound in demand for the remainder of 2008 and well into 2009.

Gross Profit

Gross profit for the third quarter of 2008 was 51.5%, an increase of 193 basis points as a percent of net sales compared to the prior year period. Better inventory management reduced the levels of damaged and close out merchandise during the third quarter of 2008 compared to 2007. The level of sales financed internally using long-term no interest credit promotions also affects our gross profit. During the third quarter of 2008, a third-party finance company funded more of these promotions, positively impacting gross margins.

These changes, along with improvements generated by new products, product mix and better pricing discipline affected our gross profit year to date. Gross profit for the nine months ended September 30 improved from 49.4% in 2007 to 51.6% in 2008.

Substantially all of our occupancy and home delivery costs are included in selling, general and administrative expenses as are a portion of our warehousing expenses. Accordingly, our gross profit may not be comparable to those entities that include these costs in cost of goods sold.

We have carefully managed our inventory and warehouse operations to reduce costs and maintain service levels. Many of our suppliers have experienced price increases and we are working diligently with them on our product costing. Our LIFO provision estimates for the remainder of 2008 are such that we currently expect our gross profit margin to be similar to the first nine months of this year and above last year's comparable period.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses are comprised of five categories: selling; occupancy; delivery and certain warehousing costs; advertising; and administrative.

Our total SG&A costs were approximately $6.9 million and $10.5 million lower in the third quarter and first nine months of 2008, respectively, compared to the prior year periods.

The cost of the promotional credit programs offered through a third-party finance company is included in selling expenses. These charges fluctuate in part due to the types and frequency of promotions offered through the third-party and the levels of usage of those programs. The cost for these programs decreased $1.6 million in the third quarter of 2008 as compared to the prior year period as the amounts financed and cost of the programs through the third-party decreased. For the first nine months in 2008, the third-party creditor expenses increased $2.0 million over the comparable prior year period as usage of the programs during the first half of 2008 was much greater than in the first half of 2007.

Occupancy costs are a significant portion of our SG&A costs and are generally fixed. Store rents represent slightly less than one-third of our occupancy costs. We are evaluating several locations with leases reaching renewal for potential renegotiations of option terms or possible closures. Currently, we lease ten properties we have exited prior to the end of their terms and have sub-leases on eight of these locations. During the third quarter we increased our reserve for store closing costs, which includes amounts related to sub-leased properties and potential defaults by sub-tenants, by $1.1 million.

Delivery and certain warehousing expenses were down in the third quarter as compared to the prior year period. In response to the lower sales levels we adjusted our routes in many of our markets, reducing total headcount and related delivery expenses. The effect of these decreases were partially offset by higher fuel costs. Delivery expenses for the first nine months of 2008 were down approximately $0.7 million compared to the prior year period.

Our advertising and marketing expenses decreased by $2.1 million and $5.6 million for the quarter and nine months ended September 30, 2008, respectively, compared to the prior year periods. We have adjusted our advertising spending in 2008 using more targeted methodologies designed to reach our customer.

Our administrative costs were down $0.6 million and $1.5 million in the third quarter and first nine months of 2008, respectively, as compared to 2007. This decrease is due in large part to a reduction in insurance costs and management non-equity incentive compensation.

Credit Service Charge Revenue and Allowance for Doubtful Accounts

The in-house financing offer most frequently chosen by our customers carries no interest for 12 months and requires equal monthly payments. This program generates very minor credit revenue, but incurs lower bad debts relative to our deferred payment in-house credit programs. In addition, we offer our customers different credit promotions through a third-party credit provider. Sales financed by this provider are not Havertys' receivables, accordingly, we do not have any credit risk or service responsibility for these accounts, and there is no credit or collection recourse to Havertys. The most popular program offered through the third-party provider for the third quarter of 2008 was a no interest offer requiring 36 equal monthly payments.

We elected to shift the offering of the longer term no interest promotions to the third-party provider during 2008. The following highlights these changes and related accounts receivable and allowance for doubtful accounts (in thousands):

                                     Three Months Ended       Nine Months Ended
                                       September 30,            September 30,
                                      2008         2007        2008        2007
Credit service charge revenue      $       468   $    591   $    1,530   $  1,853
Amount financed as a % of sales:
Havertys                                  7.8%      13.4%         8.5%      16.7%
Third-party                              34.9%      37.4%        36.7%      28.7%
                                         42.7%      50.8%        45.2%      45.4%

% Financed by Havertys:
No Interest for 12 months                65.8%      14.0%        61.5%      17.9%
No Interest for > 12 months               1.8%      64.2%         6.1%      62.0%
No Interest for < 12 months               9.5%       7.6%        11.3%       7.6%
Interest bearing                         22.9%      14.2%        21.1%      12.5%
                                        100.0%     100.0%       100.0%     100.0%

                                             September 30,
                                            2008       2007
Accounts receivable                       $ 36,009   $ 76,983
Allowance for doubtful accounts              1,700      2,000
Allowance as a % of accounts receivable       4.7%       2.6%

Our allowance for doubtful accounts as a percentage of receivables is higher in 2008 due to an increase in the delinquency and problem category percentages compared to 2007. The dollar amount of the allowance is down slightly compared with the year ago balance due to the large reduction in total accounts receivable.

Interest, net

Interest expense (income), net is primarily comprised of interest expense on the Company's debt and the amortization of the discount on the Company's receivables which have no interest terms for greater than twelve months. The following table summarizes the components of interest expense (income), net (in thousands):

                                       Three Months Ended       Nine Months Ended
                                         September 30,            September 30,
                                       2008         2007         2008        2007

Interest expense on debt             $     517    $     755   $    1,747   $  2,861
Amortization of discount on
accounts receivable                       (167 )     (1,179 )     (1,260 )   (3,321 )
Other, including capitalized
interest and
interest income                            (77 )       (147 )       (139 )     (263 )
                                     $     273    $    (571 ) $      348   $   (723 )

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Interest expense on debt decreased in the third quarter and first nine months of 2008 as compared to the 2007 periods due to lower levels of average debt.

We effectively stopped offering in-house interest free credit programs in excess of twelve months in January 2008. Previously, we made available to customers in-house interest free credit programs, which mostly ranged from 12 to 18 months. In connection with those programs which are greater than 12 months, we are required to discount the payments to be received over the expected life (considering prepayments) of the interest free credit program. The discount is recorded as a charge to cost of goods sold and as a contra receivable and is amortized as a credit to interest expense over the life of the receivable. The amount of amortization will decrease as the receivables generated under longer term, free interest financing promotions are collected.

Provision for Income Taxes

The tax rate, which includes the effect of discrete items, was 35.9% for the nine months ended September 30, 2008. In addition to the impact of discrete items, our rate is also affected by the Texas taxing scheme which is based on gross margin and not pre-tax income.

During the nine months ended September 30, 2008, the Company settled certain state audits related to state taxation issues resulting in a $0.3 million recognition of benefits. The remaining cumulative tax benefits at September 30, 2008 that would favorably affect the effective tax rate of future periods if recognized was approximately $0.8 million and is classified as long-term.

During the nine months ended September 30, 2007, the Company recognized approximately $0.3 million in benefit from the settlement of certain state tax audits and revisions in assessments related to state taxation issues.

Balance Sheet Changes for the Nine Months Ended September 30, 2008

Our balance sheet as of September 30, 2008, as compared to our balance sheet as of December 31, 2007, changed as follows:

• increase in cash of $18.6 million;

• decrease in gross accounts receivable of $32.9 million as we shifted more of our longer term credit offers to a third-party provider;

• decrease in inventories of $2.6 million as sales demand has been less than expected;

• decrease in accounts payable of $8.0 million due to a lower level of purchases in the third quarter of 2008 as compared to the fourth quarter of 2007; and

• decrease in accrued liabilities of $4.3 million, primarily as liabilities for accrued payroll and commissions, related taxes, benefits and non-equity incentive pay declined due to lower net sales, reduced head count and normal seasonality.

Liquidity and Capital Resources

During the first nine months of 2008, our principal source of cash was $38.6 million derived from operations. Our primary uses of cash were (1) capital expenditures totaling $8.3 million; (2) repayments on debt of $6.2 million; (3) dividend payments totaling $4.2 million; and (4) acquisition of treasury stock totaling $1.8 million.

Our cash flows provided by operating activities totaled $38.6 million in the first nine months of 2008 compared to $45.2 million for the same period of 2007. This decrease was primarily the result of working capital changes and the net loss of $2.8 million in 2008 compared to net income of $0.1 million in 2007. For additional information about the changes in our assets and liabilities, refer to our Balance Sheet Changes discussion.

Our cash flows used in investing activities totaled $7.9 million in the first nine months of 2008 versus $9.2 million in the first nine months of 2007. The $1.9 million difference in capital expenditures was offset by a $0.6 million difference in proceeds from sale of property and equipment.

Our cash flows used in financing activities totaled $12.1 million in the first nine months of 2008 compared to $30.3 million for the same period of 2007. This decrease is primarily due to a $12.6 million decrease in net repayments of our bank revolver, $2.1 million less in payments on long-term debt and lease obligations and $3.4 million less in treasury stock purchases.

Financings

Our revolving line of credit is available for general corporate purposes and as interim financing for capital expenditures. This credit facility is syndicated with five commercial banks and terminates in August 2010. At the end of the first quarter of 2008, we eliminated our subsidiary's $20.0 million unsecured revolving line and amended certain of the covenants on the remaining $60.0 million credit facility. Borrowings under the facility are unsecured and accrue interest at LIBOR plus a spread that is based on a fixed-charge coverage ratio. We had letters of credit in the amount of $5.7 million outstanding at September 30, 2008 and these amounts are considered part of the facility's usage. Our unused capacity was $54.3 million at September 30, 2008. We are currently exploring other financing alternatives which provide greater flexibility given the uncertainty of the economic environment.

Store Growth and Capital Expenditures

Our current store growth plans for 2008 include two new stores, one which opened in Orlando, Florida in the first quarter and one which will open in an existing market in the fourth quarter. We are relocating stores in Murfreesboro, Tennessee and Mobile, Alabama in the fourth quarter and are closing three additional stores during 2008. These changes should result in net selling space being down 1% in 2008 compared to the end of 2007.

Many of our new stores under development are leased locations which reduces our capital investment. Our planned expenditures for 2008 are $7.2 million for stores and store improvements and $3.1 million for distribution and information technology. Capital expenditures for stores do not necessarily coincide with the years in which the store opens. Cash balances, funds from operations, proceeds from sales of properties and our bank line of credit are expected to be adequate to finance our planned capital expenditures.

Forward-Looking Information

Certain of the statements in this Form 10-Q, particularly those anticipating future performance, business prospects, growth and operating strategies and similar matters, and those that include the words "believes," "anticipates," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. For those statements, Havertys claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in industry conditions; competition; merchandise costs; energy costs; timing and level of capital expenditures; introduction of new products; rationalization of operations; and other risks identified in Havertys' SEC reports and public announcements.