Shoe Carnival Inc (SCVL) 2002 Q2 法說會逐字稿

Please stand by. We're about to begin.

Good day, everyone, and welcome to Shoe Carnival's quarterly earnings conference call. Today's call is being recorded, and is also being broadcast via live web cast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

This conference may contain forward-looking statements and involve a number of risk factors. These risk factors may cause the company's results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date.

The company disclaims any obligation to update any of the risk factors, or to publicly announce any revisions to the forward-looking statements talked about during this conference call, or contained in today's press release, to reflect future events or developments.

I will now turn the call over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival, for opening remarks. Mr. Lemond, please go ahead.

Thank you. Welcome to Shoe Carnival's 2002 second quarter earnings conference call.

Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer, , our General Merchandise Manager, and Tim Baker, our Executive Vice President of Store Operations.

Despite a tough retail climate in the apparel and footwear sectors, we are proud to announce another record-setting sales and earnings performance in the second quarter, and for the first half of fiscal 2002.

Sales rose over nine percent to 125 million for the quarter, from $114 million last year. And earnings per diluted share rose 36 percent to 27 cents per share for the second quarter, from 20 cents per share last year. The increase in earnings per share is on top of a 42 percent increase in earnings per share in the second quarter of last year.

Our second quarter trends were pretty much a mirror image of what we experienced in the first quarter of this year, with total sales rising almost 10 percent, gross margins improving significantly over last year, due to a cleaner inventory position, leveraged SG&A expenses, and lower interest costs. Although, we were not happy with the comp store sales decrease of one half of one percent for the quarter, that disappointment is tempered somewhat by an increase in net earnings over the second quarter of last year of over 40 percent.

What I'd like to do is briefly discuss the operating highlights for the second quarter. Total sales increased by 9.3 percent for the quarter. Our sales trended down early in the second quarter, improved nicely in June, and declined somewhat in the latter part of July. Sales came back strongly in the last weekend of July, however, bolstered by sales tax holidays in six states. And sales in the first part of August have remained positive, with comps in the low single-digit range.

While sales increased by nine percent, the increase in gross profit was even stronger, almost 11 percent. Our gross profit margins increased by four tenths of a percent or 40 basis points. Again, we attribute this improvement to our plan of reduced inventory levels, especially in the women's non-athletic categories. Thereby reducing the end of season mark down exposure.

Store for store inventory in that category were down over 10 percent at both the beginning and end of the quarter. More importantly, our inventory levels are slightly higher on a per store basis in the athletic category, which is a product classification that does see a significantly increasing sales trend over the past year.

The increase in gross profit margins combined with an almost 30 basis point improvement in the SG&A ratio, resulting in an increase in the operating margin to 4.7 percent from 4.1 percent in last year's second quarter. This represents an increase in operating costs of over 27 percent. These operating improvements combined with the continued decline in interest costs resulted in increases in net income for the second quarter and first six months of 42 percent and 36 percent respectively.

We're pretty proud about that accomplishment. From the product standpoint, we again saw some very strong comp store performance in athletic product for men, women and children. And we don't see any reason why this trend won't continue through the early fall season. Cliff Sifford will speak about footwear trends in a little more detail in just a minute.

In previous conference calls we have discussed the elimination of athletic apparel from our product mix. Looking at the quarter from this perspective, nearly all of our half of a point decline in comp store sales come from this decline in athletic apparel sales. The decline in sales from this product category negatively impacted our comp store sales by three tenths of a percent for the first half of this year.

Once again, I want to congratulate the members of our management team on their ability to react to changing market conditions and sales trends throughout the quarter. Although sales for the second quarter were less than planned, our expenses were not only controlled but actually lowered as a percent of sales versus last years second quarter. Additionally, our inventory levels at the end of the quarter were almost exactly on plan and well below last years level on a store for store basis.

During the second quarter, we opened nine new stores versus 10 in the second quarter of last year. We will open 10 new stores in the second half of the year for a total of 25 new stores for the full year. That new store-opening schedule will result in 207 stores open at the end of this year. At this time, we plan to open approximately 40 new stores in fiscal 2003, concentrating on existing markets when buyable real estate opportunities arise.

With the exception of only a couple of store closures next year, excuse me, with the expectations of only a couple of store closures next year, we plan to end fiscal 2003 with approximately 245 stores. On a perspective basis we're not going to change very much in the way that we are planning or operating this business for the remainder of the year. From an external standpoint, we don't see anything that would lead us to predict significantly worse or significantly better retail environment.

Consequently, we will continue to plan comp store sales in the one to two percent range for the third quarter and flat comps for the fourth quarter of this year. Both of which are consistent with our previous expectations. Importantly, we will continue to manage our inventories to these sales plans with the expectation of slightly increased turns, particularly in the women's fashion categories.

Accordingly, we currently expect earnings for the third quarter to be in the range of 40 to 42 cents per share, and earnings for fiscal 2002, full year, to be in the range of $1.24 to $1.27 per share.

And with that I'll turn the call over to from the merchandise side.

Thank you . As stated, our comp sales for the quarter were down one half of one percent. As we reported last quarter, this quarter was driven by athletic footwear. Fashion athletic from New Balance, Reebok, Skechers, and K-Swiss continues to be the answer for the denim apparel that is so strong at retail. And with the growth in retro looks from all major suppliers, I don't foresee a slowdown in this department.

The athletic business showed increased in all categories in men's and in most categories in women's. In women's athletic clogs and slip-ons from Nike, Reebok and Skechers show the strongest gains. In the men's athletic, we experienced double-digit growth in walking, New Balance and Reebok lead the way in walking with very high double-digit growth. Running also continued to grow in men's, generating very high single-digit growth. Vendors like New Balance, Nike, Reebok and Tommy Hilfiger lead this growth. The only disappointment in men's athletic was basketball. It experienced a mid-single-digit loss. The only brands performing to plan in that category were Nike and adidas. And One, Converse and Reebok are not achieving plan.

In kids, like adults, athletics outperformed all categories, growing at low single-digit rates. Boys athletic was up double-digit and girls were down double-digit, excuse me.

We are convinced that are seeing some cross over business as girls are responding to styles that have traditionally been sold to boys.

Totally, it's all about slip-ons, slip-ons for boys and girls from vendors like New Balance, And One and Nike, each showing tremendous growth. Again we attribute our growth in kids to the continued strength of the denim business. Sandals don't work with denim, slip-on athletics and athletic clogs do.

Moving out of athletic, our women's business this quarter continued to suffer. I believe there are many reasons for this from lack of direction in the marketplace to a continued shift in demand towards new and exciting silhouettes in athletic. The number one silhouette for the season in women's non-athletic was the following. has a category come on strong across so many age groups, thongs were everywhere at every price. This phenomenon just like is not a healthy situation for the traditional non-athletic shoe business. With every retail outlet from mass merchants, specialty apparel, drug stores and traditional sporting goods stores, building walls of thongs, all priced well under $10, they reap the benefit of add-on business.

We also sold thongs, but we didn't play in the low-end thong business. We sold our customers better thongs priced over $10 and our thong business was phenomenal. It was not strong enough category however to make up for the lack of excitement throughout the reset of the women's mix. Fortunately we saw this lack of direction in the industry intend for lowering our overall women's inventory very aggressively. This minimized our markdown risk and helped raising our overall margins for the quarter. The very positive result is that we are walking into fall with cleaner, fresher inventories.

Today, we are beginning to see some positive signs out of our women's business as we move through back-to-school. Clogs are selling through at close to double-digit rate, with vendors like , and our own private label all performing well. Just about anything with patchwork is selling, from clogs to boots. Bowling shoes are also checking out at high rates, which in my mind, proves our point; women are looking for something new and exciting to put in their closet. Patchwork and bowling offer that opportunity. We were very pleased with our business, and it continues to perform well above plan. We are now in the process of receiving our first shipments of and , and look forward to seeing sales on that product over the next several weeks.

In our Men's business, we experienced slow, single-digit loss, as we saw a shift from traditional brown product toward athletic. As in Women's our Sandal business struggled all season. We did manage a low single-digit increase in Men's Sandals, due to a resurgence in soccer sandals from Nike and Adidas, but the excitement was not in the Sandal category. The excitement was in clogs, and an area we classify as Young Men's and Urban Fashion. Clogs experienced double-digit growth on top of a very strong performance last year. Clogs from Skechers and have set the standard with high double-digit increases. Bowling shoes are also showing strong performance from brands like and Skechers. We are very pleased with our continued increases in our Young Men's and the Urban Casual program, as we are becoming the destination shoe store for these brands.

Our Accessory business was down mid-single digits as we continued to exit the low-margin apparel business. Although we are now close to void of this inventory, in this department, we will continue to see declines for the remainder of the year as we cycle out of these sales. From a positive standpoint, however, we are experiencing solid mid-single digit increases in the high-margin sock business.

In closing, I would like to say that as we entered spring season, our number one goal was to control our inventories, shifting dollars from under-performing businesses to growth businesses. This strategy, when executed properly, will result in stronger sales and margin. I feel we have executed this plan extremely well, with overall inventories down mid-single digits on a store-to-store basis, yet Athletics, our best performing category, is up mid-single digits. We were well--very well positioned as we entered into back-to-school, but more importantly, these leaner inventories will allow us to react quickly to any emerging trends or opportunities that we see over the next 30 to 60 days, and we are diligently looking every day for these emerging trend categories.

Now I'd like to turn the call over to Kerry Jackson, our CFO.

Thank you .

Let me review some financial statement highlights that may not be readily identifiable from the statements included in the press release.

For the quarter, we incurred a slight comparable store-sales decline. The total company number masked the strong fashion trends apparent in our sales in the second quarter. Athletic sales for the quarter were strong, achieving a comparable store-sales in the mid-single digits. Conversely, our Men's, Women's and Children's Non-Athletic category all had comparable store-sales decreases, and in the aggregate, sales in these categories declined in the mid-single digits for the quarter. The sales trends by category in the second quarter were very similar to what we reported in the first quarter of this year. The gross profit margin for the second quarter increase 40 basis points, to 28.7 percent, from 28.3 percent last year. The 50 basis points increase in our merchandise margin for the quarter resulted from reduced markdown exposure in our Women's Non-Athletic category, due to lower inventory levels, and increased margins obtained on a sale of athletic footwear, our hottest selling category.

Buying, distribution and occupancy costs as a percentage of sales increased 10 basis points for the quarter. Selling, general administrative expenses as a percentage of sales decreased to 24.0 percent, from 24.2 percent last year. Of the 20 basis point decrease, 10 basis points of the decrease resulted from lower pre-opening costs as a percentage of sales. The remaining savings resulted from tight expense controls during the quarter.

Just a note on third quarter SG&A: currently, we do not anticipate leveraging SG&A in the third quarter, based on a one to two percent comparable store sales increase. Pre-opening costs in the third quarter are anticipated to be approximately $950,000, compared to $342,000 last year. This represents a year-over-year increase in pre-opening costs of 40 basis points. Excluding pre-opening costs, we expect all other SG&A costs to be flat, or slightly down, as a percent of sales in the third quarter.

Net interest expense decreased to $200,000 in the second quarter, from $626,000 last year, due to a 56 percent decrease in average during the quarter, and a lower effective interest rate.

The effective income tax rate remains steady at 37.5 percent for the second quarter of this year and last year. We expect this rate to remain steady for the remainder of the year.

Our strategies that led to strong earnings have also led to strong cash flow. Cash generated by operations for the first half of 2002 were $12.9 million, compared to $3.6 million generated in the first half of 2001. Working capital at the end of the quarter was $94.5 million, compared with working capital of $99 million at the end of last year's second quarter. The decrease in working capital was primarily due to lower inventories, payables, and an increase in accrued and other liabilities.

Merchandise inventories $4.1 million, or just under three percent on a year-over-year basis. On a store-for-store basis, total inventories were down seven percent. The reduction is consistent with our strategy to reduce inventory, and was in line with our internal expectations.

Capital expenditures for the first half, to $514,000, were $10.2 million. The additions are summarized as follows: new store expenditures were $5.9 million; computer hardware and software purchases were $2.2 million. Included in this amount is the purchase in the first quarter of our existing P.O.S. offer from the vendor for $1.8 million. Additional conveyers and technology for our were purchased for a half million dollars, and all were $1.6 million.

Fixed asset in the year 2002 are expected to be approximately 15 to $16 million. Of this amount, approximately $9.5 million will be incurred for the 25 stores expected to open in 2002.

Total cash advances against our line of credit into the second quarter stood at $23 million, compared to $45 million outstanding at the end of the second quarter last year. This represents almost a 50 percent reduction in borrowings outstanding since last year. Letters of credit outstanding at the end of the quarter totaled $8.4 million. Long-term debt and total capital at the end of the second quarter decreased to 15.9 percent, compared with 19.8 percent at the end of 2001, and 30.5 percent at the end of the second quarter last year.

This concludes a run down of financial results for the second quarter 2002. Now we'll open up the call for questions.

Today's question and answer session will be conducted electronically. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your touchtone telephone. We will come to you in any order that you signal and we'll take as many questions as time permits.

Again, that is star one to ask a question. We'll pause just a moment while everyone a chance to signal. We'll take our first question from with William Blair.

Hi. Thanks. Great quarter. Cliff, I just wanted to start with a couple of questions for you. Can you comment - you talked a little bit about Easy Spirit. Will you be expanding the distribution to more stores based on your initial results and then can you also talk about some of the newer brands like Anne Klein II, Sam & Libby, et cetera?

And if there's going to be any additional distribution for those?

, today we carry Easy Spirit in every store. So, obviously, we'll add those to any new store that we open up.

And we're, again, I'll say that we're very pleased with the results which somewhat goes against country trend there, but working very well for us. The - as far as expanding distribution on the better lines, we really need to get more - we need to get more experience with it.

As I said, we're just now delivering Nine West and and I'd like to see performance of those brands along with the rest of our better brands for at least another season before I decide to extend the store base there.

OK. And then a question about athletics. Out at the WSA last week or however many weeks ago that was already. Time's flying. It seems like the trend in footwear is a little bit less technical than it had been in the past, meaning less high priced.

And I'm wondering if you view that as good because the trend falls into your sweet spot of prices, or bad because it's just going to be more competitive?

I'm not sure I can get any more competitive than it's been this back to school. I will say that a lot of the non-technical product that you saw, or a good bit of the non-technical product that we saw at the show was retro in nature. And I see that as good because that's not in their closet today and this is a category that just drives them back to buy an additional pair.

As far as the overall price decline in the specialty stores, you know, we're onto our vendors every day or every season about creating a strategy by segment of business. So - and most of them are reacting to that with product that comes to us in our segment of business and another product going to the better, excuse me, to the mall based guys.

Right.

So I don't see it as a major problem. What I see as a major problem to continue promotional activity within the affluent business in the mall based units.

OK. And then, from an inventory per store perspective, where do you guys think you'll end up the third quarter and then ending the fourth quarter? Will it be similar to how you ended this quarter? Are you going to be a little more aggressive with funding some of the inventory categories?

We will continue to decline our women's inventory throughout the year unless we see a trend catch on. If bowling shoes or if boots take off and we'll fund that category because I think that's the strength of Shoe Carnival, to fund whatever is hot today. And we'll fund that.

But my plan is not to increase the women's inventory at all from a percentage standpoint until we see some trend break loose.

And so should we expect similar declines to what we saw in the last quarter?

Yes, we should.

OK. Thanks.

We'll take our next question from with Wells Fargo.

Good afternoon and congratulations on a nice quarter guys.

Could either or , could you give us a breakdown on the sales by major product category in the quarter, men's, women's athletic and so on?

, I don't have a specific breakdown, but if you take what we did last year, you know, the athletic was, the athletic category was the category we saw increased in, so it would have moved up in terms of percentage of the total approximately, one to two percent. And the other categories would have collectively been down, you know, that one or two percent.

Right. So that makes athletic around 48 percent?

I think for the quarter it would have been somewhere close to almost 52 percent.

Wow. OK. That's great. Then in conjunction with that, again, either or , wonder if you could give us a little more insight in terms of what's happening with the athletic, maybe average selling price and in 2Q '02 versus 2Q '01, and maybe some insight in terms of margin contribution that you're getting on the product? Are we seeing a substantial increase in gross margin in terms of the different product lines that you're now bringing into the source?

Well there's a couple of answers to that, . This is Mark. One thing is we're not seeing very much of a, when I say very much, not enough has been changed to really hang our hats on in terms of the price points in athletic that we're selling. It's moving up a little bit, but I wouldn't say it's significant. What we are seeing is in terms of the net realized, price is moving up a little bit and consequently we're seeing a little bit better margin our of that classification, particularly in the second quarter than what we saw last year. Again, we've controlled our inventories very well in that category and you know, the margins have moved up accordingly. So it's more of a net realized price out of our athletics. Again, the athletic piece has been the hot category.

Now I want to caution you and, in when you look at our percent of business in the athletic category as well, relative to other retailers, you have to consider what we internally call athletic product. That may include some of the brands and some of the classifications of product that would, that in other retailers stores would cross over into what they would consider their women's core products. So you know, anything with an athletic bent, we pretty much include with the athletic product categories in our stores.

So that would include all your Skechers and Vans and that kind of stuff?

For the most part, unless there's, you know, unless it's definitely a non-white or non-athletic, you know, classification or product, for example, women's product.

, just to add to what Mark just said about the margins in athletic, we've seen a, we've seen a very strong self-throughs on make-up product from our major guys like Nike and New Balance, which also bring higher margins.

That's great. Is make-up now a substantially significant factor in terms of your business class?

I think make-up is becoming a significant factor for everyone, the only way you can get a point of difference and with the promotional activity again in the mall, you need a point of difference.

Right. OK. Turning to the woman's product line, I wonder if you could give us a little bit of insight in terms of, is the average price point because of these thongs and, thank you for sharing that, I didn't even know there was such a major thrust in thongs going on out there, I always thought that was a bathing suit, but it's great to hear it's in the shoe business as well. But, is this lowering the average price point substantially, or is there something that we have to really kind of model, that takes into consideration the increased interest in this particular type of low-end product line?

We didn't allow it to lower our average price point this past spring, John, we decided that when we bought thongs, we'd buy thongs again that would retail in excess of $10. In fact, we brought most of our thongs in at an average retail of 19.99, so our average price point for spring actually went up slightly. But my concern, as thongs continue to gain importance next year, is if we don't find a way at the shoe business end, Shoe Carnival doesn't find a way to excite the customer with new, fresh product, and get to her emotionally when she's--you know, purchases, shoe purchases are an emotional thing for women in most cases--we will--we would get ourselves caught in the same trap of trying to sell cheap thongs, and I really don't believe that's a direction we want to take. I believe we want to find something that's going to excite the lady when she walks in, in color and style and heel height and the whole gamut, and give her a reason to pay a higher price point. So today, I'm going to say I'm not looking to lower price points next spring, so I wouldn't put it in the model.

Okay. That's fine, and I appreciate that, Cliff. And then the last question I had is, how did you manage to really kind of go against the trend in terms of what you're doing so far in the--in August, you mentioned in your opening comments, Mark, that you got low-positive single digit. Are you promoting a little bit more, or is this basically coming from just good merchandising content in terms of your merchandise product lines?

I--you know, John, it's--we're promoting more in certain stores. The way we directed our promotions and our ad is this year is more on a store-to-store basis than on a overall company basis, and I think that's helped with respect to the performance of our stores on an individual basis, so, you know, we're seeing, again, you know, some of our stores are less promotional at this point in time, particularly in the northern half of the country, where the back-to-school periods are later than the southern half of the country. But in some of the southern markets, we have been a little more promotional than what we were last year. Again, it's a store--more of a store-for-store marketing plan this year than it was last year.

Did you see a noticeable change in terms of the back-to-school period, were your consumers buying product closer to when the school year actually started in different communities in the South, for example?

I--you know I think it's a trend that we've seen for a few years now, that continually, the consumer buys closer and closer to need, and I don't think this back-to-school is any different. I mean, it's certainly closer to the time that the kids actually go back to school, so yeah, as a general statement, I would say yes. Now if you pin--you know, I can't pinpoint any specific store, and say, this--you know, the people in this particular market area are buying, you know, one day ahead of time versus two days ahead of time last year, so I'm not trying to be that specific, but as a general rule, it does seem as if the back-to-school period is becoming shorter and shorter with respect to the number of days prior to when the kids go back to school.

Okay, that's very helpful. Thank you very much, I appreciate your insights.

Okay.

We'll go now to with RBC.

Hi. Thanks very much.

Could you talk about when last year you started lowering your inventory in women's non-athletic? I can't remember if it was the fourth quarter or when you started that initiative.

We started in the fourth quarter, , and as we moved in the first quarter, we obviously began to lower them even more, and then as we're going into the second quarter. So, it was an initiative that began in the fourth quarter of last year.

OK. So, we're gonna see more of that in the third quarter coming up, sounds like. What about, then, as we anniversary that in the fourth quarter of '02? What should we expect in terms of the inventories in the women's non-athletic? Will they go down at that point, or go up?

For first quarter of '03, did you say?

For fourth quarter of '02, then.

Oh, no. It will go down. It should go down, because of the Easter shift. Easter shifts into April next year, so we won't need to bring as much new product in in December and January, as we did a year ago.

OK. And then Cliff -- we're kind of -- this seems like a, sort of a fashion drought on the women's non-athletic side. When was the last time that you experienced something like this, and how long did it last, where there wasn't a clear leader in the marketplace?

I actually haven't -- this is the first time -- I'm doing the shoe business for 25 years, and this is the first time in 25 years I've seen a drought last this long. The last time the athletic business got very strong was I guess back in the '70s, and there was a small drought in the women's shoe market, but it was -- it came back very strong in dress shoes. And then from there it continued on. But, this is just -- it just continues on. This is the third year.

Um hmm.

And I think that the manufacturers are searching. I know that the retailers are searching, and I believe that we're gonna all have to find the answer real soon.

OK. And then, it sounds like you're making more of a commitment in boots for the sale. Is that correct? And then, have you talked about how much the inventories will be up for the fall?

We're planning our boot business in women's flat.

OK.

But, I say that -- I tell you that, and then I'm gonna put a little asterisk behind that because if boots take off strong, then we'll chase after it. We've seen some things happen in boots over the past couple of weeks. We've seen a couple of our junior boots -- platform junior boots, surprisingly -- sell. Patchwork, as I mentioned in my comments, are selling very well. We expect to see some movement with Americana product. And if that happens, then we will go out and buy a few more boots, and boot business up -- boot plan up slightly.

OK. And then, the Easy Spirit -- I know you talked about that being ahead of plan. Was that ahead of plan going into the in July, or was that event really the thing, you know, that got people to recognize that it was in the stores, and that's when the brand really started to take off?

It was just ahead of plan as we went into the . The actually started off very slow for us. The first week was disappointing. The second, third and fourth week were very, very strong. Here's some great news, is that last week was not a week, and we had -- we sold -- and I think I'm right on this number -- between 75 and 80 percent of the pairs last week, that we sold the week prior, which was part of the . So, I believe that what happened is, is that we communicated to our consumer that we have the product. And, she came in. She was able to find the size, style that she wanted, and now they are continuing to come back, or she's sending her friends, or whatever. We become somewhat of a destination shop for that -- for our consumer.

OK. Sounds great. And then on the Nine West and the , can you just remind me of what the penetration will be this fall in terms of the number of stores with each of those brands?

We're going to open up with right at, excuse me, Nine West, right at 30 doors and with 70.

OK. And then, Mark or Kerry, could you guys comment on the performance or productivity of your latest batch of new stores?

We haven't seen a significantly different operating performance come out of the new stores as a group. We've opened some very good new stores that have exceeded plan - way exceeded plan in some of our Southern markets. But as a group I would say they're performing pretty much in accordance with what we've seen in recent past. Recent past, being past couple of years.

OK. Great. And then, Kerry, can you give us some information on average order size and UPT in the quarter?

You're saying average ...

Average ticket or average order size, whatever you can provide and then UPT in the quarter if you have that?

We don't typically disclose that. It's something that we haven't disclosed in the past.

OK. Can you just review guidance again, quickly, Kerry? I missed that part.

This is Mark. It was 40 to 42 cents for the third quarter and $1.24 to a $1.27 for the year.

$1.24 to $1.27?

Right.

OK. Thanks guys.

We'll go next to with Manchester Management.

Hi. Yes, I had a couple of follow up questions for you. One is, I wonder if you could provide for sort of a break down in inventory by category for this year and compare it to last year at this point in time?

Help me understand more specifically what you're looking for.

Wondering as a percentage of inventory, for example, what percentage women athletic and men's are this year versus last year. I know you said that women's, for example, will be declining as a percentage of total inventory.

Yes. We haven't got into - we don't get into specifics regarding the actual makeup of the inventory by store. But I will tell you that as I stated in my remarks, that the women's non-athletic category has declined on a year over year basis at both the beginning of the quarter and at the end of the quarter by over 10 percent.

And the athletic products in, excuse me, the athletic product in both men's, women's, has increased slightly. Not to that extent, but slightly. Overall our total inventories on a store for store basis are down about seven percent.

Sure. I saw that. And I wondered if you could help me. I apologize. What is the makeup factor in the athletics business that you said helped with the margins?

You want to talk about that Cliff?

It really depends upon the vendor we're dealing with, but overall - and this is going to be somewhat of an educated guess. Somewhere between 15 and 20 percent.

OK. But I'm just not - could you describe what it is?

Oh ...

What it represents?

I apologize. Makeup product is where you take - there's two ways to do it. You can take inline product that is going to specialty store or at a higher price point and tweak it. Put a different outsole on it or a different mold and change, maybe color or inlays and then it becomes ours.

And we're able to buy that at a discounted price. The other way to do that is that manufacturers - we'll tell them where our void is. We'll say we need something in an urban running or our urban jogging shoe and together we'll create that style and they'll make it up for us.

OK, so it's something that's slightly changed from the mass lines and with a propriety for you.

Correct.

OK. I wonder, could you also talk about the impact that, you mentioned the tax-free holiday. How long is that period?

That's over. That was primarily it was Friday, Saturday, and a couple states Sunday of last week, the week before last.

OK, so you continue to see the positive comps even after that was over.

Slightly positive.

OK. Great.

Low single digits.

Terrific, and do you give out an average price point?

No.

You don't? Great. Thanks for your help.

Our next question is from with .

Hi. Could you give us an idea on capital expenditures next year in total, and you know, if you meet the goals that you had, margin wise and sales wise, whether or not we would be adding to debt or we'd be breaking even on cash flow?

Yes, , we're expecting next year to add, between 17 and $18 million in cap ex, which would include new stores, include about 40 new stores and you know, if we hit our goals, we would be adding you know, somewhere around, between $4 to $7 million in capital.

In debt?

Debt.

If you're going to be primarily working in existing markets now here. On just math you would have a 60 percent increase in pre-opening costs next year, you know, 40 divided by 25, but maybe pre-opening costs in existing markets are a great deal less than new markets, so it isn't that much or maybe you know, you learn each year from opening, so the pre-opening costs go down.

Kerry what would be the percentage change you would expect in pre-opening costs next year.

, this is Mark. We're expecting somewhere around, this year we should wind up with about three-tenths of a point in percent of sales in, between three-tenths and four-tenths for percent of sales in pre-opening expenses for the 25 new stores. Next year we're expecting that to increase to somewhere between four-tenths to five-tenths of a percent.

OK.

But we think we can get enough leverage off of other expenses, some fixed expenses, and you know, some variable expenses that we're trying to put pressure on right now to at least offset that increase if not more than offset that increase. So you know, internally, even though I haven't given guidance yet for next year, what we're planning on is a slight decrease in the amount of SG&A expenses as a percent of sales.

Where we really do expect to gain some leverage in terms of the operating margins is from a continued increase in gross profit margins.

OK. One last question, , I've heard it from you directly and indirectly on these conference calls that denim's been very important to driving the shoes that you've been putting our positive comps in. You know, I'm not that much of an observer of what's going on, but it's seems as though a lot of the teen retailers, all of whom have pretty much identical denim product are kind of like assassinating one another, since mid to late July. Making me wonder a little bit is it that there's just too much product out there or is denim beginning to give way to somebody else? That doesn't sound like what you think is happening, but if it's been so important a driver of the choice of shoes chosen, it makes you wonder a little bit, if it--I don't know, we go back to corduroys or whatever the hell they go back to.

I think, you know, I'm not a--I'm not a expert in the, especially apparel business, but I'll tell you, it's probably a lot like the shoe business, they grab a hold of something that's hot, and they ride it until it's dead, so it doesn't surprise me that they're stepping on one another.

Well, I don't--what would be--you know, if you're doing some internal, gee, this is not a good thing if it were to happen, sort of thinking, what kind of clothing would the kids have to adopt that would stop the strength that you've been showing?

Well I--Jim, this is Mark--I think, more importantly, the question is, where do our buyers shift their focus when that does change?

Exactly.

I mean, that--that's just part of execution of the business, is when styles change, you know our buyers have to identify that as early as possible, and change with it. You know, again, not to be repetitive from the standpoint of the advantages of the Shoe Carnival, but that is one of the advantages that we have, is that we're in most of those businesses already, whether it be dress shoes or casual shoes, or athletic shoes, whether it be Skechers or , or, you know, we're in all of those businesses, so for us, it's a matter of our merchandising staff identifying those trends as early as possible, and shifting the focus of their forward-looking purchases to that particular trend.

Okay.

You know, our buyers have done a great job identifying what's going on with this denim craze, and the kinds of products that customers are buying to satisfy the footwear needs with that denim craze. So from a forward-looking basis, as well as chasing the products where we see slight shifts, you know, we expect that to continue. We expect the denim craze to continue for a while, so for us, it's a matter of, you know, whether the hot new color is going to be red, or whether the hot new color is going to be blue. We just shift our focusing purchase.

To carry that even one step further, to reiterate what Mark just said, there's a lot of talk about the Junior business going dress, and dressing up this fall, and we're watching that. We're--we own it. We don't own it in a big way, but we're watching it every day, and as that proves out, if it does prove out, we'll be all over it.

Okay. Thanks.

We'll take our next question from David , with .

Hi guys, congratulations.

Thank you.

I was wondering if you could just embellish a little bit upon your new stores that you're--that you've been opening, and you know, how--if you could just talk a little bit more about how well they are doing, and too, if you could also talk about the clustering strategy. Do the stores do better in the existing markets, and, you know, in terms of the overall cost when you go into new markets, what do you do when you do that?

Well, this is Mark Lemond, let me take the last part of the question first, and then I'll let Tim Baker, our ...

Okay, thanks.

... our store expert talk about the first part. You know, the--we're going to open 25 stores this current fiscal year, approximately half of those are in existing marketplaces. That is, you know, if we can find good real estate within our existing marketplaces, I would open every store in current markets, but that's not always possible. We're currently looking--we're constantly looking for the best real estate possible. Some of that happens in new markets, but approximately half of our stores this year will be opened in existing markets, or existing geographic areas. Next year, out of that 40 stores, I would expect, although I don't' have specific locations we're going to open, I would expect that, you know, approximately half would be in existing marketplaces as well.

So, what we're constantly on the lookout for is viable real estate opportunities in those existing markets. We entered the Chicago area, just as an example, three years ago with one or two stores, and now it's our largest market. And certainly, we gained, you know, advantages from the bottom line standpoint when we do that. So, that's a constant focus of ours. And, I want to point out that it's not just the Chicago area that we entered three years ago, or the Atlanta area where we don't have enough stores to satisfy our profit needs, but it's our larger comp store markets, as well. We're continuing to add stores in the St. Louis market, which is one of the oldest larger markets that we're in. We're continuing to add stores in the Indianapolis market area. So, wherever we can find good real estate -- and to further that -- I don't want to get into a long dissertation on real estate and the way we work it here at Shoe Carnival -- but when the retail sector within a particular demographic area or market area within a market shifts, we're constantly looking for new opportunities in that shifting retail area. So, it's constantly on the lookout for new real estate opportunities in existing marketplaces.

Tim, why don't talk a little bit about our new store?

Yeah. The first 15 stores we opened in the first half of the year -- we're trending right now about mid-single digits gains above our plan, above our expectation. As Mark alluded to earlier, we've got some stores that we opened up that are absolutely far exceeding our expectation. We have a few stores that are below expectation. We've got quite a few stores that are just right on plan. So in total, we're about mid-single digit above our initial goals.

OK. Terrific. Well done. That sounds really good.

Thank you.

We'll take a follow-up question from Ellen Schlossburg with William Blair.

Hi. Thank you.

Question on pre-opening. I think, Kerry, it was in your remarks that you suggested that third quarter would be closer to 950, and if you put that with the temp stores, that was a , or a little bit more than I typically am expecting from you guys. I think you talked like 75 to 80. And, I was just wondering if there's anything going on there that we should kind of think about as we plan forward. Is pre-opening going up, or is it just some anomaly in this third quarter?

Well, mainly an anomaly, and also a carryover. We opened two stores at the very end of the second quarter, and we still have to open those stores and the grand opening events will happen in the third quarter. So, part of the pre-opening costs were recorded in the second quarter, and part of them were going to be recorded in the third quarter. So, that's causing your expenses to be greater than the temp storage you might expect on average -- in addition, that the Q3 stores that will open are trending toward the high end of the pre-opening range. So, I think this is a one-time event.

OK. So in general, the range of 75 to 80 is still where we should be thinking about?

Yes.

OK. Also, as you guys look back at the last season, and you look at your inventory turns by category -- and I know you're not gonna give that to me, so I'm not even gonna ask -- but, as you look it, do you think that you pulled inventory back too far in any one category in hindsight? And if so, how is that gonna impact forward plans?

Well, if you listen to my buyers, we absolutely pulled all of our inventory back too far. You know, that's a tough question, Ellen. You know, if I had it all over to do again, I would do it exactly the way I did it. You know, if you look strictly at our sales, they were less than what we had planned originally, particularly in the women's non-athletic category. However, when I look at what the industry is doing and get feedback from, you know, people we do business with as to how other retailers are trending in their women's non-athletic product.

I think we did exactly the right thing in pulling our inventories back as far as we did. So, no, I don't think it's a matter of pulling inventories back. And could we have created more top line sales, yes. We probably - absolutely could have created more top line sales, but I would tell you in the same breath it would have been at the expense of margin and consequently gross profits.

So, you know, I don't - and certainly on a prospective basis. I'm sitting with - I don't want to be sitting with anymore sandals than what I've got just for the sake of driving July comp store sales.

Right. Right. Correct.

The intent all along this year, as we've told everybody up front, was we're going to lower our inventories. We're going to increase our gross profit margins and we're going to focus on that as the key driver of the net profitability of Shoe Carnival.

I haven't changed my mind and that's what we'll continue to do.

OK. And then, is there any difference in the way you guys are flowing small merchandise it the third quarter versus last year?

We - there's been a slight difference in the way we close the merchandise as much as - we had a stronger build up in athletic and children's product in June and July than we did a year ago and we've flown our new women's fall product in August.

And our men's new fall product in August. So we own less traditional fall product today than we did a year ago, but we own a little more junior fall product than we did a year ago.

OK.

Junior and athletic.

Yes. Correct.

OK. So did I hear you right that you've flown women's and men's non athletic or athletic?

Non-athletic.

Non-athletic in August this year and last year it was in more June, July?

More in July. We didn't flow much in June, but June and July.

OK. And then tell me again, I'm sorry, what did you say about the juniors and young men's?

Junior and young men's we continue to flow in July at a heavier rate than we did a year ago.

Gotcha. OK. Thanks.

Which makes for back to school.

Yes. OK. Thank you.

Gentlemen, there are no further questions holding in the queue. At this time I'd like to turn the conference back over to you, Mr. Lemond, for any additional or closing comments.

OK. Thank you. You know, I want to reiterate the point that I just made. Is that we don't really see much of a change in the retail environment going forward. You know, I'm not a great prognosticator of what's going to happen in the overall macro retail economic environment. So we, again, don't really see much happening that's going to sway that retail environment much, one way or another.

Either positively or negatively. So, you know, as far as Shoe Carnival is concerned, we're going to continue to plan tight inventories. We're going to continue to plan tight expenses. We are going to continue to expand the store base and try to accelerate that store expansion next year.

And continue to focus on the bottom line of the company, you know, much more so than we're focused on the top line. But at the same time focus on the top line through store growth as well.

So with that, thank you for joining us.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.