as well as Tiffany Hinkle, AVP of Financial Reporting. We'll do a fireside chat for the next 30 minutes, and we'll kick it off with just maybe if you guys could help us out, just for those investors in particular who may not have a strong knowledge of Haverty's, maybe give us a brief introduction. Obviously, you guys have been around for a long time, but maybe a quick history of the company as well as where your store base is located, generally speaking, and anything as far as an introduction is concerned, that'd be great.
Sure. I can kick us off here, Anthony. Thanks, everyone, for joining the chat today. We are a 141-year-old company. We've been around a long time. We've seen a lot of different economic cycles. We are headquartered in Atlanta, Georgia. We are the oldest public company in Atlanta, so that's older than Delta, older than Coca-Cola. We've been around a while. We are a retailer of residential furniture and accessories, and we currently have 130 stores in 17 states. In the fourth quarter, we're going to be entering our 18th state, which is going to be in Pittsburgh, Pennsylvania. We're excited about that heading into the end of the year. Our store base is in the South to Midwestern regions, and we have three large distribution centers. We have one in Florida, Georgia, and also Texas.
Our goal is to open five new stores a year in that distribution footprint. A quick background on our customer profile. We're selling to the women. The women are usually outfitting the homes and coming up with all the décor. Those are our target. They are living in the suburbs. They're married with children. They have large single-family homes, and they also have household incomes of $150,000 or more. If we're talking about the K-shaped economy that's been top of mind this past year or so, we're talking about the upper end of that K. We have a better end customer. They're paying attention to the stock market, they're in the stock market, and they're doing pretty well right now. We offer a free design service, and that is something that we think differentiates us from our lower-end competitors.
We also feel like we offer a better value than our higher-end competitors who may also offer design. That's one thing that we're very proud about. We also offer a regret-free experience. When a customer comes and shops at Haverty's, they don't have to worry about dealing with any fine prints or anything like that. If they are not happy with the product, we are going to make sure that we take care of that customer so they can shop with us with confidence because they know that we're going to make sure we take care of them on that.
Thank you, Tiffany. Just switching over to the demand and consumer health. You guys have posted four consecutive quarters of positive same-store sales. If you look at your Q2 results, same-store sales were up 8%. The year written comps were even stronger at 12.3%. Can you just talk about what's changed the most meaningfully in regards to the demand environment during the quarter, and how do we think about your positioning in the industry, given the various pressures that are still impacting consumers and the housing market as well?
Yeah, Anthony. When we look at it from a demand perspective, traffic stayed fairly positive, still in the low single digits, but it was positive. We talked about Q1, we were down, but Q1 was impacted by a couple events. One, the Ukraine war breakout that happened at the end of February, and then we had a big weather event in Q1 that really basically was bookended on two weekends, and in between was a major weather event. Without that, we would've been positive in Q1, and so we felt good. Traffic is looking good moving forward with it. Conversion rates have maintained and been stable. But the real winner for us is average ticket. It's a home run. It grew double digits, 15%, roughly. I think one was 14.7 overall, one was over 15 on the design side.
Our average ticket's $8,800 on design, and so that is the real win. Design is driving our business. It was almost 36.5%, so that was our real big win for us in helping to differentiate us for the quarter, and where we see ourselves going forward. Where are we positioned right now? As we look at it, if you look at the pyramid, we consider ourselves in the upper side, upper middle of the pyramid. Above us, you got an Arhaus and a Restoration Hardware, a Room & Board. Below us, you got a Rooms To Go, an IKEA, a Bob's Discount Furniture, an Ashley that operate down. Then in that middle tier, you've got other competitors such as a Pottery Barn, a Crate & Barrel. You've got a La-Z-Boy, an Ethan Allen, a Bassett Furniture Industries.
All of those that I mentioned in the middle tier and up offer a design of some type. We feel like we do it differently. We have one per store. We compare ourselves to a La-Z-Boy. We feel like our product assortment is broader. We have case goods. We have a full assortment of that, mattresses, as well as the upholstery, motion, and all the things that go with it, where their stores tend to be more focused on the motion, the stationary. They do have some dining, et cetera, and occasional. A Bassett Furniture Industries is a smaller footprint, offering all assortment, but a smaller footprint. Mainly, their sales are more designer-oriented inside their stores. Ethan Allen, of course, is all design, smaller stores. They're moving to smaller footprints.
Crate & Barrel and Pottery Barn are more of a department store kind of feel as you walk through. We feel like we sit uniquely in between there, and that we offer a real value for our customers and a real choice for them to choose. So we see that as a competitive advantage for us. As I said, the design is a real big plus for us, and we see big opportunity with that.
Mm-hmm. That's good to hear. As it relates to the merchandise categories that you have, can you talk about which ones have been the biggest sale gainers, and where do you see opportunities to perhaps improve assortment, maybe your value perception, or attachment rates? I imagine that, as you grow your design business, the attachment rates will grow as well. But maybe if you could just speak to the top sellers that you see in your business.
Yeah. When you have double-digit growth, every category's up. But certainly our main upholstery occasional were certainly strong. What we're really glad to see is continued strength in the bedroom and dining room area as well. All four of those were up well in double digits. Mattresses were kind of a single-digit increase in decor, which is a little less, even though accessories, the designers do sell and tag that well. But they did not perform quite as well. They're still single digit, don't get me wrong. They're still positive increases, but not where we were looking to go. If you look at opportunities in categories, obviously outdoor is an opportunity. That's one we certainly know. It's the biggest category that we participate with it with an online assortment, but it's a very limited assortment. We know that's a huge opportunity for us, especially with our design business.
That's just another room and extension of the house that is outdoor, or sunrooms, in some cases, that we could be getting. That's certainly going to be a focus of ours as we move forward with it. Then, of course, we measure attachment rates on everything we do, whether it's mattresses to bedrooms, whether it's top of bed spreads to bedroom sets, what are we doing, how are we performing accessories to the actual sale, chairs, accent chairs to the upholstery. We look at those, and our merchants are constantly looking at that and ways that we can offer and increase that for the consumer.
Mm-hmm. Steve, you touched on the traffic a little bit. The average ticket also, when we look at that, it's been up nicely. Overall consolidated average ticket up 14% to roughly $3,800. Can you speak to the components of that, pricing, mix, units per ticket, and how do you think about the consumer being willing to continue to pay up more?
Yeah. Definitely pricing has been the biggest driver of that. There's no question about it. That's helping us, and that has moved the needle more than anything else. But what we have seen, and we've talked about this over the last two quarters, is that with that increase, we have an increase in units. Not at the same rate, don't get me wrong, it's not a one-for-one, but our increase in units was in low single digits, and that was nice to see that turn and transition. We'll have to continue to watch it as we move forward. We know, as we've talked, we're going up against tougher comps, as now we're starting to go up against our increases from having four quarters in a row. We'll have to kind of measure that and see where it takes us going forward.
We're not seeing anything with the consumer backing down, Anthony. We're still seeing $15,000, $20,000, $30,000, $40,000, $50,000 sales. The consumers that are investing and moving, they can afford to do it, and they're getting the furniture they want and allowing our designers to get in the home and actually make those come to fruition for them. We're not seeing a slowing down there. I know The Home Depot just reported today, or yesterday had a report out that they're seeing some of the bigger tickets are being taken down. Consumers are putting off doing certain things. The consumers that are buying furniture from us, we're seeing average ticket go up. We're seeing units per ticket rise, albeit not a huge amount, but they are up. That is a positive, and so we're encouraged by that.
Mm-hmm. I wanted to go back to the design piece of the business, which you seem to be pretty excited about. It was 36.5% of your revenue last quarter, average ticket of about $8,800. As you go forward here, what are some of the biggest levers to expand that penetration further, and do you think there's a natural ceiling for that or a goal in mind that you have, perhaps, as far as the design penetration?
That one. Right now when we're looking at the design service, we've been doing a few things. One thing we've been doing is increasing our marketing and awareness around design. On the website, making sure that we've got pages and sections that talk about our design service and make sure that our customers know that it's free. The one way we're doing that in the stores is we are investing in new signage, new design centers, and we're also outfitting those areas so that they have new 60-inch flat-screen TVs. They've got the proper tables so that the salesperson, the designer, and the customer can have a collaborative experience when they're looking at the furniture. And we're also bringing in the swatches and all the outfits and all the laptops and just making sure that they have a true experience in the store.
That's definitely one way that we are increasing awareness with the customers, because sometimes they may hear "free design service" and be a little apprehensive. We want to make sure that they understand that there is no catch. It is a service if you are intending to purchase, and we want to make sure that they're aware of that.
Got you. Thanks, Tiffany. As far as your custom special orders, that's another key highlight, key positive here that we've seen, increasing 24%, roughly. What's driving that growth, and how do we think about the impact of custom orders on your gross margin?
Yeah. There's really no margin difference when we're talking about the custom orders, but the growth is very correlated with the increase in our design business. And one thing, you asked about what is the goal. Right now, if we think about the percent of tickets right now, the percent of customers who are coming in the door who are using design, somewhere around 17%, when we think that that can be in the 25%-30% range. We do think that there's a tremendous opportunity to increase that design, and we know that design tickets are practically double of what our regular average tickets are. And with that, the custom orders are also contributing to that.
As our design business increases, the custom orders can also benefit from that because the designer and the customer are able to really customize those pieces that they want inside their home.
Mm-hmm. As we switch gears to store growth and productivity, you opened two new stores fairly recently, one in St. Louis, Missouri, another one in Nashville, Tennessee. You are also planning six more in the second half. What are some of the early learnings from these new store openings, and how do investors think about the productivity ramp and payback period for these new stores?
Yeah. Good afternoon, Anthony. This is Richard. We are excited that we opened our 130th store last week in Fredericksburg, Virginia. You mentioned earlier, but we have eight new stores or openings this year, four closures, and one of those is a reload. So we will end up with a net four more stores by the end of the year, 133 locations. Big picture, we want to leverage our distribution footprint. We want to put stores in locations where they can be served by existing distribution capabilities or adjacent states that can be served by the same distribution system. We typically spend $2 million-$3 million to retrofit a location to make it a Haverty's branded experience. We expect it to pay back in three to four years. We like to get a minimal 25% cash on cash return.
If all goes well, we should be breaking even by month 12 in terms of a store P&L by month 12.
Mm-hmm. Thanks, Richard. As we look at gross margins, they have been pretty strong. The last reported quarter, you did have a little bit of a tariff or refund that helped the gross margin. But even absent that, the gross margins have remained pretty strong. How do investors think about the sustainability of the gross margin now, given the current sourcing dynamics, promotions, the freight costs that are being impacted by higher diesel prices? Maybe if you could speak to that.
Sure. We have been committed to a range of 60.5%-61%. We have been very disciplined in that regard. Over the past several years, we saw an increase in gross margin. We are comfortable keeping it flat and working a little bit more on volume. But we want to keep it at that 60-plus level. You mentioned it, the headwinds are fuel costs, bunker charges, incoming freight, those types of things. LIFO could be a factor, a positive or negative. We have seen some margin enhancements from tariffs refunds. But as you know, that is not sustainable. We did say in our last earnings call, we would expect to continue to get some tariff relief in the back half of this year.
Mm-hmm. Got you, yeah. As it relates to tariffs, just to close the loop on that topic. As far as the various tariffs that are out there, whether it is the Section 232s or 301s, can you speak to that as far as how you are managing that and as far as talking with your vendors and making pricing decisions, does that impact your sourcing strategy as you look forward to 2027?
This is Steve. I do not see any change in our sourcing strategy with the tariffs. To be quite honest with you, the tariffs going down to 10% and 12.5% are a relief, and we finally think maybe we have settled somewhere. I do not want to say that. I need to knock on wood somewhere. But I am hopeful that that is someplace that we can settle at, and that is lower than where we were, because we were at 20%. The one we are waiting on now is the Section 301, the upholstery. That was supposed to go to 30%, if you remember, at the beginning of 2026. He put it off for a year. So that will be a wild card. We will have to wait and see if that happens at the end of the year. Hopefully it will not as we go forward. I really do not see the tariff situation.
It's kind of settled down. We've worked with our vendors. We've got the refunds figured out. As Richard mentioned, we participated in giving back money to our vendors who worked with us. I think that was a big deal. I'm not sure that every company out there has done that. But we felt like it was the right thing to do, because they participated with us. They're partners of ours. We felt like it. Our biggest headwind right now is fuel, and how do we mitigate that, because it's impacting our real SG&A expenses when you look at our delivery truck expense, fuel expense. You look at our dedicated runs between our warehouses with fuel surcharges. You look at the container rates being up 25%-30%.
Those are substantial increases that we don't think are going to go away right now based on what we're seeing out there. On top of that, it's affecting input cost. We're starting to get price increases that we're seeing from our suppliers who are at real cost. Vietnam's facing some labor issues. We'll continue to monitor that. But we like where we are with our current vendor assortment, our suppliers. They're in a good position to continue to supply us. We haven't been impacted, you've heard a little bit about container shortages, but we haven't been impacted by that yet. But if this conflict over there expands and gets over into other areas, that could extend out some lead times. But we're in the right position that we can take care of from an inventory position.
We can just increase and carry a little bit more inventory for that extended period of time. We just got to know kind of what it is.
Mm-hmm. Right. Just shifting gears to SG&A expenses. You did move up, as far as your variable component of your SG&A, the guidance moved a bit higher at the end of the second quarter. Given commission-based compensation and credit costs. As sales recover, where do you expect the most meaningful operating leverage and kind of what cost items could remain sticky here?
Yeah, good question. I'd say, breaking it down into variable and non-variable G&A. On the variable G&A, the things we've pointed out, I think the range is 18.7%-18.9% of sales. Part of that was credit costs, that is in sales commissions and credit costs. I like paying sales commission. I don't particularly care much for paying credit costs. That's going to continue to be a pressure point. We have to be competitive in the marketplace and offer 60-month financings from time to time. How we manage that is we have to be disciplined in having a defined duration of that promotion and being disciplined about sticking to it. Also monitoring the ticket sizes that qualify for 60-month financings. Also within the variable piece, there is some delivery and transportation costs. There's some pressure points there with gasoline prices continuing to be challenging.
That's something that we have to manage the best we can throughout the rest of the year. The big leverage point is on the non-variable piece, and those are things that if you go back and look at the company when we hit $900 million to $1 billion in revenue, you really leverage the cost structure of the business. If you've got your gross margins at 60.5%-61% and your variable G&A between 18.7% and 18.9%, you're going to pick up 40 points or potentially up to 40 points, as you increase the volume through the system. That's what's encouraging for me is this is a challenging environment, and we're doing quite well, profit-wise with our margins. But when you get revenue above $800 million, approaching $1 billion, you really see the margin expansion at the pre-tax income line.
And we want to get back to those double-digit pre-tax operating profits.
Mm-hmm. Right. That makes a lot of sense. As you look to grow revenue, how important is your credit card program, as it relates to the Haverty's card that you offer through Synchrony, I believe. Maybe, can you speak to what you're seeing in terms of approval rates, promotional financing usage, delinquencies, and just overall appetite for that as it relates to the Haverty's card?
Sure. We have a great relationship with our partner, Synchrony. They do a terrific job servicing. About a third of our customers take credit. Synchrony gives us data and information on our customer base. Very strong approval ratings in store in the upper 80s to 90%. Online approval is less than that, but in-store is very strong. They are telling us that delinquency rates are what they have been historically. They have not seen an uptick in any type of metrics that would indicate more delinquencies. Credit scores are really solid with our. You would imagine, our customer is, as Tiffany described earlier, above middle income, suburban, female, family-oriented. The credit scores we hear are in the mid-700s, which is very strong. Our consumer is holding up quite well in the economy, which is one of the reasons we have done so well in the last four quarters.
That is good to hear. Then, as we look at your inventory, at the end of the last quarter was just above $100 million. How comfortable are you with the current inventory levels? Any sort of ballpark estimate as to where we could see inventories by the end of the year?
Yeah, Anthony, I have said it multiple times. We are extremely comfortable. Our inventory is in as good a shape as I can remember in my time with the company, and that has been a long time. Our markdowns are at an all-time low. Our back end of the business distribution delivery is executing extremely well. Our merchants are doing a great job with the suppliers and the quality team on ensuring the quality is right. So I think we will end the year and if we are in that comfortable range between a $90 million to $100 million range, that is a comfortable range that I can live within. What I am going to have to watch out for, and the supply chain and merchandising teams are going to be looking at, is if these lead times start to elongate and become longer.
With Chinese New Year coming, we may have to push a little bit of inventory, more inventory into the system as we move into Q1. But at this point, I think we will end the year in that $90 million to $100 million range.
Mm-hmm. Got you. Got it. As we look at capital allocation, during the first half of the year, you guys repurchased a little bit more than 700,000 shares of your stock. You continue to pay a good dividend as well. Can you just speak to as far as how you expect to allocate your cash from operations going forward, whether it's buybacks, dividends, store and other investments?
Sure. We have a little bit higher CapEx this year because of the new store opening. That's, I think it's around $33, $34 million. What do you do with the rest of the money, the capital you have left over? The board has been very favorable to the company using three mechanisms to give back to the shareholders. One is through the regular dividend, which we've been paying since the mid-1930s. Secondly is share repurchases, and we're typically very opportunistic on share repurchases. We'll jump in from time to time when we feel like the market is soft and we have excess cash. This past quarter we did something a little different. We had a shareholder who's a very long-term shareholder who's been with us over 20 years.
He wanted to diversify a little bit, and so we bought back 600,000 shares from him at a 2% discount. That's a little bit unusual to see. You typically don't see that level of volume, but we're glad to do it for a long-term shareholder. The third is a special dividend. If after those mechanisms are exhausted, if we have excess cash on hand and don't see the need to use it for any capital projects, the board has done that from time to time in the past. I will say the target has been to return half of our earnings per share to our shareholders vis-a-vis one of those three mechanisms all together. The last, in 2022 and 2023, I think it was in around the 70% range, and it was 127% and 130% in 2024 and 2025.
We got a really strong track record of returning value to our shareholders.
Mm-hmm. Got you. Right. As far as the, I guess, competitive landscape that's out there, I know you touched on this a little bit earlier, Steve, I believe. Just wondering, given what's going on with housing and kind of the macro environment, are you seeing any changes in promotional intensity or perhaps discounting from your competitors? If you could speak to that and then maybe how you're differentiating yourselves on service and quality and obviously the design piece that you spoke before.
Yeah, exactly. I would tell you, Anthony, we're back into that cadence of where we are. Business is okay during the weeks, the weekends are good, and the holidays are where you're doing the business again. That promotional activity is ramped around that, and you're seeing quite a bit of promotional activity from our competitors around the promotional weekends, i.e., the Labor Day we just got out of. Everybody's aggressive. They're out there pushing and going. They have their best promotions out there. As far as getting more aggressive or not, there may be a little bit of some of them gone from 15% to 20% off or something, but nothing extreme that we're seeing out there. This business has a big back-end cost to it. So you've got to have your margins.
You can't give it away on that side of it to continue to be profitable as you grow. From that side of it, we're not seeing it. Our differentiators is in execution. We think we ought to execute our competitors in what we do. We have our, as Tiffany said earlier, it's our Haverty team members that are operating throughout the company at every touchpoint with the customer. We do not have anybody that's not a Haverty team member that is touching the customer when we deliver product or speak to the customer. We think that's a deal. The regret-free experience that we offer, none of our competitors offer that. They charge restocking fees if you don't like it, if it didn't work out well. They may hassle you on a cancellation. They charge X amount if a special order can't be canceled for this.
We got a regret-free experience. We want you to be happy. My favorite line is, "I'm not looking to sell you one time, I'm looking to sell you a lifetime." To do that, I have to understand that things can happen in the sales process. But we offer that because we have confidence in our sales team, our design team, the product quality we have, our suppliers, and it makes it where we can do that. The last thing is design. We feel like we got an advantage with design and the values that we're offering with our products, and we're looking forward to see how we can continue to grow that. We think that is a huge opportunity for us, and it does extremely well for us. We just got out of a design training meeting.
We just had about 70 of our designers here in Atlanta just for the last past two days talking about how we can do more business, help them to be more productive in their work. We believe in training, and we're investing in that, and I'm not sure all our competitors are committed to it as much as we are. I hear that from people that we hire from other competitors coming to work for us. It's a pretty intense training that we take them through, so that'll be another differentiating factor.
Got you. Yeah. We're almost out of time here, but as far as just thinking about the business longer term, if housing turnover remains below historical levels but consumer demand stabilizes, perhaps we see a replacement cycle kind of kick in. How do we think about the right long-term growth algorithm for Haverty in terms of same-store sales, store growth, operating margins, free cash flow?
I'll tell you, Anthony, we can't give guidance as we go forward, but in generic form of things, give me low single-digit comp store growth with the controls that we have with our expenses, with the store growth that we're doing on top of that, and then we will improve and get back to those double-digit operating margins. We want to get back to that billion-dollar mark. That's our goal to get to. We get there, the cash flow is money just flows down. We don't have any debt. Everything is a cash business. It's either Synchrony or it's credit card. It's just a little bit of a discounted cash that we give back. We've got good controls on our inventories. I'm positive about all of those. We don't need double-digit comp. They're good to have, and we love them when those quarters happen.
If we can get sustained low single-digit comp store growth on top of the five stores a year and what we're trying to accomplish, manage the business correctly, I think all those things, we'll get back to double-digit operating margins, and drive this business back to a billion dollars, and make sure we take care of all our shareholders, as well as our team members, and ultimately our customers.
Got you. All right. Well, thanks so much. I think we'll wrap it up here. Do you guys have any final closing remarks? Any thoughts? Anything that we didn't cover that you want to make sure that the investors are aware of?
I'd like to invite everyone to visit our investor relations website. That's going to be at ir.havertys.com. On the homepage, you'll find three videos. One is a short video about the history of the company. There's also a store tour video that shows our new design center set up, and also a tour of our distribution and delivery operations. So feel free to check that out whenever you all have the time.
Yeah, and I just want to wrap it up, Anthony. We appreciate it, on behalf of all of us here at Haverty's, your interest in Haverty's. If you get a chance, come by one of our stores and visit. We'd love to show you around.
All right. Well, thank you so much, and enjoy the rest of your day. Thanks again.
Thank you, Anthony.
Thanks, everyone.
All right. Take care. Thank you.