Net Sales

Our sales are generated by customer purchases of home furnishings. Revenue is recognized upon delivery to the customer.

The following outlines our sales and comp-store sales increases and decreases for the periods indicated (dollars in millions, amounts and percentages may not always add to totals due to rounding):

                                                     2012                                                                                   2011
                                Net Sales                                  Comp-Store Sales                             Net Sales                             Comp-Store Sales
                                     %                 $                                    $                                               $               %                  $
                                  Increase         Increase         % Increase          Increase                      % Increase         Increase        Increase           Increase
                                 (decrease)       (decrease)        (decrease)         (decrease)                     (decrease)       (decrease)       (decrease)        (decrease)
                                 over prior       over prior        over prior         over prior         Total       over prior       over prior       over prior        over prior
Period       Total Dollars         period           period            period             period          Dollars        period           period           period            period
 Q1         $         163.6              6.1 %   $         9.4              5.7 %     $         8.7     $   154.2            (1.2 )%   $      (1.9 )           (0.6 )%    $      (0.9 )
 Q2                   151.5              5.9               8.4              5.6                 8.0         143.1            (1.4 )           (2.0 )           (1.4 )            (2.0 )
6
months
ended
June 30               315.1              6.0              17.8              5.7                16.7         297.3            (1.3 )           (3.8 )           (1.0 )            (2.9 )
 Q3                       -                -                 -                -                   -         155.4            (1.1 )           (1.8 )           (0.6 )            (1.0 )
 Q4                       -                -                 -                -                   -         168.3             3.8              6.2              3.5               5.6
Year                      -                -                 -                -                   -         620.9             0.1              0.6              0.3               1.7

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.

Our average ticket is up approximately 10.1% for the second quarter and 5.3% for the first half of the year as our customers respond to the value offered in our better quality merchandise. Sales in the upholstery product category continued to show strength in the second quarter and first six months of 2012 increasing 16.0% and 14.6% over the prior year periods, respectively.

Gross Profit

Gross profit for the second quarter of 2012 was 52.6%, compared to 51.3% in the prior year period. Gross profit for the six months ended June 30, 2012 was 52.4% compared to 51.3% for the same period in 2011. Our expansion of upper-middle price point products in our assortment and focus on pricing discipline were the primary factors in generating the gross profit improvement.

We plan to remain competitive, but not overly aggressive with our pricing structure. Gross profit margins for the second half of 2012 are expected to be approximately 52.0%.

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.

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 marketing; and administrative.

Total SG&A expenses as a percent of sales for the three months ended June 30, 2012 decreased 1.6% to 50.4% from 52.0% in the prior year period. Total SG&A dollars for the second quarter of 2012 increased $2.0 million compared to the prior year period. Our selling expenses increased $1.4 million as commissions and related costs rose with sales and our administrative expenses included increased accruals of $0.8 million for incentive compensation. We benefited from reduced expense of $1.3 million related to employee group health benefit costs.

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

We became primarily self-insured for these expenses beginning January 1, 2012 and, as with our other self-insured costs, maintain an accrual based on historical claims data and an actuarially developed incurred but not reported component.

SG&A costs for the six months ended June 30, 2012 decreased 1.8% to 50.0% as a percent of sales from 51.8%. Total SG&A dollars for the first half of 2012 rose $3.8 million compared to the prior year period. This change included increased selling expenses due to higher sales, increased incentive compensation and lower employee group health benefit costs.

Our expectations for SG&A costs for the full year 2012 are unchanged from those discussed in our Form 10-K for the year ended December 31, 2011. Fixed and discretionary type expenses for the full year are expected to be approximately $213 million to $214 million. Variable costs are expected to be 17.0% to 17.5% as a percent of sales. We note that our fixed and discretionary type expenses are not equally distributed among the quarters given store changes and timing of advertising spending. We expect in the second half of 2012 fixed and discretionary expenses will be approximately $6.0 million higher than in the first half of 2012.

Other Income

In March 2012 a faulty fire sprinkler system flooded a portion of one of our stores. During the second quarter we recognized a gain of $0.5 million from the settlement of insured damages.

Provision for Income Taxes

Our effective tax rate for the second quarter and first six months ended June 30, 2012 was 37.3% and 38.1% respectively, compared to 7.5% and (4.4)% for the same periods of 2011.

We settled certain state audits during the second quarter of 2012 which reduced our gross uncertain tax positions to $0.6 million at June 30, 2012 from $1.1 million at December 31, 2011. The settlements and related changes to our unrecognized tax benefits reduced the second quarter's tax expense by approximately $70,000.

The income tax expense for the second quarter of 2011 is primarily a discrete item related to a reduction in our recorded income tax receivables.

Liquidity and Capital Resources

Our primary cash requirements include working capital needs, contractual obligations, benefit plan contributions, income tax obligations and capital expenditures. We have funded these requirements primarily through cash generated from operations. We have no funded debt and our lease obligations are primarily due to arrangements that are not considered capital leases but must be recorded on our balance sheets. We believe funds generated from our expected results of operations and available cash and cash equivalents will be sufficient to fund our primary obligations, dividends, stock repurchases and complete capital projects that we have underway or currently contemplate.

Summary of Cash Activities

Our cash flows provided by operating activities totaled $20.5 million in the first six months of 2012 compared to $15.2 million for the same period of 2011. This increase was primarily due to earnings in 2012 compared to a loss in 2011 and a reduction in accounts payable and accrued expenses in 2011. This was partially offset by maintaining a flat inventory in 2012 compared to a reduction in 2011. 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 $12.6 million in the first six months of 2012 versus $10.8 million for the same period of 2011. This increase was primarily due to increased capital expenditures in 2012 and partially offset by a large initial investment made in 2011 in restricted cash as collateral for insurance programs.

Financing activities used cash of $1.8 million in the first six months of 2012 compared to $0.4 million for the same period of 2011. This increase was primarily due to the 2012 payment of $0.9 million in dividends while none were paid in the first half of 2011 and the impact of $0.3 million in proceeds from exercise of stock options received in 2011 versus no amounts in the same period of 2012.

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

Balance Sheet Changes for the Six Months Ended June 30, 2012

Our balance sheet as of June 30, 2012, as compared to our balance sheet as of December 31, 2011, changed as follows:

· increase in cash of $6.1 million;

· increase in property and equipment of $4.5 million as we invested in and expanded our store base;

· decrease in accounts payable of $2.0 million due to timing of payments;

· increase in customer deposits of $2.2 million due to the normal seasonal differences in the timing of written business relative to the end of the period and to delivery of product to customers;

· increase in accrued liabilities of $3.2 million due to additional amounts related to incentive compensation and self-insurance reserves; and

· decrease in other liabilities of $2.3 million as we made a $1.0 million contribution to our defined benefit plan and due to settlements of state tax audits which reduced our reserve for uncertain tax positions $0.5 million.

Store Plans and Capital Expenditures

We opened a new store in Baltimore, Maryland during the second quarter. Our plans for the second half of 2012 include entering the Midland, Texas market early in the third quarter and later in the year adding a store in the Dallas, Texas market, and a replacement store in Atlanta, Georgia. These changes would increase net selling square footage by approximately 2.5% in 2012 assuming the new stores open and the existing store closes as scheduled. We also have stores reaching the end of their lease term and are subject to closure if terms of renewal are not reached.

Our planned annual expenditures for 2012 are $23.5 million including $18.3 million for new stores and store improvements and $4.0 million for information technology.

Off-Balance Sheet Arrangements

As of June 30, 2012 we had no off-balance sheet arrangements or obligations.

Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. We had no significant changes in our critical accounting estimates since our last annual report. Our critical accounting estimates are identified and described in our annual report on Form 10-K for the year ended December 31, 2011.

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 the economic environment; changes in the housing market; 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.