Shoe Carnival Inc (SCVL) 2003 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the Shoe Carnival's first quarter earnings conference call. Today's call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual 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 begin.

Thank you. Thank you for joining us today.

Welcome to Shoe Carnival's 2003 first quarter earnings call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer, Cliff Sifford, our General Merchandise Manager and Tim Baker, Executive Vice President, Store Operations.

There is no question the retail environment softened during the first quarter of 2003, particularly in the footwear and apparel industry. The combination of a weak U.S. economy, the war in Iraq, and other geopolitical issues, along with abnormally cool and wet Spring weather resulted in lower customer traffic. Shoe Carnival was not immune to these issues and consequently, we experienced a very difficult quarter.

Net sales for the first quarter rose 5.8% to 136.9 million, from sales of 129.4 million in the same period last year. Comparable store sales decreased by 5.5% for the quarter.

Earnings per share fell to 38 cents in the first quarter of 2003 from 44 cents per diluted share in the first quarter of 2002. Although we were able to cut about $700,000 in expenses from the original SG&A plan, we just couldn't cut enough to offset the lower than expected sales. We therefore experienced a deleveraging effect on distribution, occupancy, and store selling costs. Kerry will go into more of those details later.

Despite the softer than expected sales in the first quarter, we feel our product assortment is fashion right and geared specifically to our target consumer. We saw reduced traffic patterns that resulted in fewer transactions in the first quarter, but both our conversion rate and transaction size were up slightly over last year.

Almost 18 months ago, we initiated a business strategy that centered on accelerating our store expansion plan and lowering total inventory levels while the U.S. economy struggled. This inventory reduction was concentrated in seasonal and fashion forward product, particularly in the women's nonathletic category. At the end of the first quarter, 2002, our inventories per store were almost 10% lower than the year before.

Despite the lackluster sales, our inventories on a per store basis at the end of the first quarter 2003 were down about 1.2% from those 2002 levels. We believe this inventory strategy was not only prudent but was largely responsible for the reduced level of markdowns last year. Although we don't expect to significantly decrease our inventory on a store-for-store basis going forward, we will maintain high control over seasonal product. We feel comfortable with our inventory levels as we enter the second quarter and believe we're well-positioned going into summer.

Due to our past and present success, relative to our competitors in the footwear industry, we're not going to radically change our pricing and promotional strategies at this time. However, in reaction to what we anticipate will be a very promotional second quarter, we expect to place greater emphasis on targeting our markdowns on slow selling styles and categories of footwear as opposed to more widespread promotions.

We're able to take this approach because our inventories have been effectively managed. Additionally, we will sharpen our everyday pricing on certain key recognizable styles in both the athletic and nonathletic categories. By taking this approach, we anticipate our second quarter merchandise margins will be flat to up slightly from last year's second quarter.

During the quarter we opened 13 new stores, each of which incorporates our new, updated store design. In addition to several now small single store markets, we made our initial entry in the Houston, Texas, and the Denver, Colorado areas. We expect these large markets to be increasingly successful as we fill them in with stores later this year and in the future.

We are very pleased with our new store results and believe the new design will produce tangible results. Even after incurring preopening expenses of about $700,000 in the first quarter, the stores we opened in the first quarter almost broke even on a collective basis. These stores were open an average of only 45 days in the quarter.

We have not changed our expansion strategy as we expect to open a total of approximately 40 new stores and close 4 existing stores during 2003. This equates to net square footage growth of approximately 17%. With very few exceptions, our new store openings for the remainder of this year will fill in existing markets. We continue to believe there is substantial opportunity to grow our square footage in new and existing markets.

With that, I would like to turn the call over to Cliff Sifford for some more details about the merchandising stock.

Thank you, Mark.

As Mark said, I'm going to take the next couple of minutes and give you a recap of each product category's performance for the quarter. In women's, our business on a comparable basis was down mid single digits. Our percent to total, however, was up slightly.

Inventories in seasonal, dress and sandal categories were down low single digits. This decline in per store inventories comes on top of a high single digit decline a year ago. Our continued emphasis on inventory control is contributing to driving higher margins out of the women's department with gross margins improving 220 basis points for the quarter.

By category, we were disappointed with our dress and dress casual business. Both classifications showed low double digit comp sales declines. We also experienced comp sale declines in the low to mid single digits in sports casuals and sandals. However, the two weeks leading into Easter, as customer traffic increased, women reacted well for our women's product. Women's shoes was the only department to show an increase on a per store basis for those two weeks.

Several categories did perform either at or above planned. Thongs as a classification and athletic inspired sports shoes both achieved plan.

On a forward-looking basis, we'll drive our seasonal sandal business through this quarter very aggressively. We expect to end the season with inventories down mid to high single digits on a per store basis.

In men's, our comps were down mid single digits. By category, dress shoe comps were down double digits as traditionally Easter prompt just simply did not happen. Additionally, our men's fashion categories of retro and bowling did not perform to expectations and had to be driven at lower margins. Two very positive notes were our sandal classification which produced double digit comps, and work shoes which produced double digit comps on the streets of nonslip technology.

In the children's department, comp sales were down high single digits, primarily due to the lack of interest in children's athletic. The loss in children's athletic was driven by the boy's department. Slip-ons, alternative closure, and running all had double digit per store losses.

It's important to note here that our children's athletic department was going against a high single digit comp increase from first quarter last year. A key closeout from one of our major vendors drove that increase a year ago. Unfortunately, we were not able to comp that closeout this year. The effect of that closeout diminishes as we move through this quarter and we should so this business flatten out as we head into Back-to-School. Due to the lackluster performance through the first quarter industry-wide in kids athletics, we fully expect to see closeout products become available throughout the second quarter.

In the children's brown's business, we're pleased with our performance in sandals, which posted a mid single digit comp increase. The dress shoe business, however, did not materialize for Easter, and, consequently, posted a low double digit loss. Again, our buyers have done a terrific job at controlling inventories. Children's inventories are down on a per store basis.

In athletic, our comparable store sales were down low single digits. Total athletic, including children as a percent of total sales, were flat to last year. In women's classic white fashion athletic continues to perform extremely well. This classification posted a very high double digit increase on a per store basis for the quarter. Additionally, we saw a double digit comp increase in women's running as well. We feel both of these categories will drive our business through Back-to-School.

The underperforming classifications for women's athletic were slip-ons and fashion retro. The men's athletic, it was another story on fashion retro, especially retro basketball. We posted high, double digit growth on a per store base in our basketball category, with most of that growth coming from retro product.

In addition to retro, fashion white classic product continues to perform with high double digit increase on a per store basis. We see both of these classifications continuing to gain strength through Back-to-School and, therefore, have aggressively gone after this business. Underperforming categories of men's athletic are cross training and skate.

In accessories we're continuing to feel the effects of our planned exit from apparel in all stores and handbags from some stores. These planned reductions had a 0.3% effect on our total comps for the quarter. Second quarter comps will be effected less than 0.2% and third quarter comps should not be effected at all.

In closing, I want to say that while I'm not at all pleased with our first quarter sales performance, I continue to be pleased with the way we have been able to control inventories. Inventory control is critical as we manage our way through these tough economic conditions. By keeping our inventories clean, we have the ability to react to trends as they arise. We also expect to see an opportunity to buy good closeout product as we move through second quarter.

Second, I am excited about our opportunity for Back-to-School and Fall business this year. We have implemented four key strategies as we move into Back-to-School.

First, we felt our inventory in Junior product was too lean last year, which resulted in our leaving potential business on the table. We have addressed that for this year. We have significantly increased our branded presences in junior shoes and boots for Back-to-School and Fall.

Second, we have increased our purchases on fashion white athletic by triple digits, putting Shoe Carnival as the destination shop for these shoes as we go into this key time period.

Third, we have increased our purchases in retro basketball products, again, by triple digits. There are four key brands that will draw these sales. Our goal again is to be the destination shop in this category.

And four, we have already begun and will continue to take advantage of good key closeouts as they become available. As I said earlier, due to current retail conditions, we believe these closeouts will continue to pop up.

I want to thank you for your time this afternoon and now I would like to turn the call over to Kerry Jackson.

Thank you, Cliff.

I will start off with the income statement and work my way down the balance sheet. Net sales for the first quarter increased 5.8% to $136.9 million, compared to $129.4 million for the first quarter, 2002. Our same store sales were down 5.5% when compared to last year.

Gross margins for the first quarter of 2003 were down 30 basis points to 29.9% compared to 30.2% in the same period last year. This decrease resulted from a 60 basis point increase in buying, distribution, occupancy cost due to the deleveraging effective of negative same store sales. Partially offset by a 20 basis point increase in the merchandise margin and a 10 basis point gain on an insurance settlement.

The merchandise margin improvement was a direct result of lower levels to markdowns. The insurance gain resulted from an inventory damaged by a tornado in September of 2002.

SG&A expense as a percentage of sales increased 80 basis points to 23.8% for the quarter. Compared to 23% in the same period last year. The increase in SG&A expense is due to a 20 basis point increase in preopening expenses and the deleveraging effects from negative same store sales.

New store preopening costs incurred in the first quarter were $772,000 or 0.6% of sales, compared with $432,000 or 0.3% of sales last year. We opened 13 new stores during the first quarter of 2003 compared to 6 stores in the first quarter last year. SG&A expenses are net of a gain of $89,000 from an insurance settlement for fixed assets damaged by a tornado.

Interest expense declined to $166,000 for the first quarter versus $264,000 last year due to lower average borrowings and a lower effective interest rate. Net income decreased 10% to $5.1 million for the first quarter, compared to $5.7 million last year. Diluted earnings per share decreased 11% to 39 cents per share compared to 44 cents per share last year.

At the end of the quarter we were in solid financial shape. Our inventories were up 16% to $150.1 million, but down 1.2% on a per store basis. Our working capital increased 17% to $102.2 million compared to $87.3 million at May 4, 2002. Long term debt to total capital stood at 12% at the end of the first quarter of 2003, which is flat to last year's first quarter.

The increase in the accounts receivable at the end of the quarter was primarily due to insurance proceeds due the company related to a tornado damage to a store in September of 2002.

For the first quarter, depreciation was $3.3 million. Capital expenditures were $5.8 million, of which, $5.2 million was for new stores. For the full year 2003 we continue to expect depreciation expense to be 14 million and capital expenditures to be 17 to 19 million.

I would now like to provide some guidance for the second quarter. We currently expect sales for the second quarter to increase year over year between 12 and 15%. This sales assumption includes same store sales expectations ranging from down 2% to up 1%. While we expect our merchandise margins to be flat to slightly up, our overall gross margins are expected to be slightly down due to higher buying distribution occupancy cost as a percentage of sales.

SG&A expenses are expected to be flat to slightly up over last year's second quarter, which includes a 10 basis point increase in new store preopening costs over last year. We currently expect earnings to be in the range of 27 cents to 31 cents per diluted share for the second quarter.

While we do not feel the second half of this year will be as difficult as the first half has been thus far, due to erratic sales patterns that we saw in the first quarter, we will be more comfortable giving sales and earnings guidance on the second half after we see how sales and earnings in the second quarter trend.

I would now like to turn the call back to Mark for some additional comments.

Thanks, Kerry.

In closing, I'd like to say we expect results to improve as the external factors affecting retail abate and consumers return to normal spending patterns. We will continue to focus on areas that we can control, such as product, cost, and inventory, and will strive to execute at the level people have come to expect from the Shoe Carnival team.

I would now like to turn the call over to the operator for the question and answer session.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you're using a speaker phone, please make sure the mute function is turned off to allow the signal to reach our equipment. Star 1 for questions. We'll pause just a moment to gather our audience.

We'll take our first question from Jeff Stein with McDonald Investments. Please go ahead.

Good morning, Mark. Question in terms of, you know, looking at the performance of your various regions recently. We understand that you have seen good, you know, fairly descent sales performance in the Midwest but the South and Southeast have not been very robust.

I'm wondering at this juncture if you had a chance to step back and look at the performance of your regions and be able to pin down any factors as to why you have seen the variability between regions?

Well, up until very recently, when I say that, I'm talking the past couple of days, we saw results that were better in our Northern stores up around the Chicago area, for example, as opposed to the Southern stores and the Southeastern stores.

We have gotten a lot of comments from the people around here exactly what's happening, South versus North. When you take a step back and you look at this year versus last year, the Southern stores way outperformed our Northern stores last year, so they're going up against difficult comparisons to start with. That's part of the issue.

You know, people have talked about because of the war in Iraq and the amount of military bases in the South versus the amount in the North, in other words, more military bases in the South with large populations than in the North, you know, that's having an effect. Certainly, there have been some very large employers in the Southeast that have fallen upon hard times, Delta and some others, so that's having an effect. You know, there is a number of reasons that people have thrown about for potential reasons, anyway, that the South has performed a little bit, or has lagged the North.

I'm not really sure that you can pin anything down and actually quantify what the reasons are at this point in time, but, again, I want to stress that, you know, our Southern regions had a very good year last year relative to the Northern stores and we're seeing it reverse a little bit this year.

Okay. And final question. In light of the uncertainty facing you for the rest of the Spring, and still for the back half of the year, do you still feel comfortable going ahead and opening 40 stores this year?

Yes. The reason, Jeff, I don't think there is anything wrong with the Shoe Carnival format. When we take a look at the numbers, when we take a look at our competitors, when we listen to our vendors, when we listen to other retailers, when we talk to other consumers, it's still pretty evident to us that the Shoe Carnival format is still very much productive, and for the most part more productive than our family footwear, you know, competition.

You know, part of our strategy is, you know, as you and I have discussed over the past couple of years, for the past couple of years, has been that acceleration of that expansion of our store openings, so, that's going to continue. We think the format is not only viable but one of the best formats in the family footwear sector today and, you know, we're going to continue to expand the chain.

If we see the U.S. economy, you know, falter from this point or back up significantly, you know, then we're going to address the issues at that point in time, but until we see, you know, a further deterioration, I think it's prudent to go ahead and open new stores.

Okay. Thanks.

We'll take our next question from Ellen Schlossberg with William Blair. Please go ahead.

Hi, Ellen Schlossberg. Just to follow up on that question first, Mark, and then some merchandising questions for Cliff. Can you give us a sense of what you're thinking for new stores for '04 at this point?

Ellen, it's obviously a ways off, you know, we stated before that we would like to grow this chain at a 20% clip so that would entail somewhere around 50 stores for next year. You know, that's still our strategy at this point in time. You know, we'll, as we have told you before, we'll look at that from an operational basis as well and primarily ask ourselves the question: Are there 50 viable sites to do in 2004? Those are the kinds of questions that we really -- that really determine the amount of stores that will open next year.

So, you know, we're going to Las Vegas for the ICSC convention, the real estate convention next week. We'll have a much better handle on it after next week and as we move into the third and fourth quarters of this year, exactly how many we're going to pin for next year. But, the strategy is to open that 18 to 20% square footage per year.

Okay, thanks. And then Cliff, a couple of questions for you. First, just to touch upon some of the things you said in your remarks. It was interesting to me that you noted that men's sandals was up double digit and kid's up mid single digit because with the weather issues, I would have assumed that sandals would have been one of the categories that would have been hurt the most. I was wondering if you could comment on that?

I believe that the performance of men's sandals comes off of a weaker performance from a year ago. So, they are up a double digit base off of a weaker performance. And in kid's sandals, we actually had a fairly good Spring last year and and she was able to put it back-to-back again this year. She's, the buyer has done an excellent job of buying just the right product at the right price, and I believe the customers are reacting to that.

Can you talk about inventory differences in those categories this year over last year?

We are, in men's sandals, we are down just slightly on a per store basis and in kid's sandals we're down significantly on a per store basis.

Through the quarter, during the selling season, were you up significantly for men's sandals? You just sold through them?

No, not --

Really?

Not at all.

That's interesting. Then, you commented on beefing up your junior shoe and boots business for Back-to-School and for Fall, if you could maybe elaborate on that a little bit, with respect to what brands we may expect to see new, or be stopped, price points, style, that kind of stuff without giving away any secrets.

Ellen, we don't talk in terms of brands. I will expand upon it a little bit, but we really don't talk in terms of brands. We -- a year ago we made the decision to beef up our athletic inventories as we moved into Back-to-School, and we did that at the expense of some of our ladies' products. And the customers told us real loud and clear that that was not a very good decision. So this year we put the money in the budget and we went after it.

And what we did, basically, was we added one new brand, and I think I've talked about that on the conference call before, so I will mention it today, and that's Doc Martin. We thought Doc Martin looked outstanding when we were in Vegas in February, so we bought that for roughly a hundred in women's and we look forward to getting that in for Back-to-School. We think that will be very successful. It definitely will help raise our average price point.

We also went after three additional brands in women's brand, brands that will help us keep our average price point up and be fashion right. And I think that's a great strategy and we're going to reap some very good rewards from it.

So those are in addition to Doc Martin, three additional new brands we should expect?

Existing brands that we -- that we have increased their presence in.

All right. Okay. And last year you added some of the new brands like Nine West, or Easy, I think Easy was [INAUDIBLE] but just, some of the doors, not all of them, and I was wondering if you're -- if you have been or planning on expanding doors of those brands?

We added Easy Spirit last year in May to all doors, so we continue that, obviously.

But -- but some of the other -- didn't you just add Nine West and maybe, Bandolino, and some of the others?

We added Bandolino to 70 doors and we plan on increasing that, as we go forward, to around 90 doors and possibly, as we go into spring next year, to 120 doors.

We're very happy with our Bandolino performance for Spring. We were not as excited this past Fall, that's the reason why we didn't take it any further than 90 stores, but the Spring product has performed well. Nine West, we opened up in 30 doors and we're expanding that now to 40 doors, and as we head into Spring of '04, we'll probably take it to 50. We also added a brand called Incline Two.

Uh-huh.

And we added that in 30 doors and we're keeping that at 30 doors for the time being.

Okay, thanks.

Our next question is from David Turner with BB&T Capital Markets.

Thanks. Good afternoon. I wanted to spend some time on merchandising initiatives as well. In particular, buying patterns. Are you -- you basically -- it sounds like you're obviously being defensive. Is it just leaving open to buy open, only chasing closeout, and is there any -- any chance to pull forward some of the Back-to-School products that, you know, could be -- could generate comps?

David we are -- the last statement you made is very true. We are pulling as much Back-to-School product, especially in the fashion, classic, white classic product. We're trying to push that forward as quickly as we can. That product is selling through a tremendous rate.

We also left ourselves in tremendous position to go after closeouts and any other opportunistic buys that may come up in athletic, and as I eluded to in my prepared remarks, some of those opportunities have already presented themselves and we have taken advantage of that. We are not -- our plans are not to reduce our inventories any further. Our plan is to keep our inventories at planned, but to drive that with these key categories that are working.

And, any changes on the advertising or marketing front, you know, maybe getting more aggressive as you get closer to Back-to-School?

We will get -- we're definitely going to get more aggressive on the seasonal product as we move through second quarter, sandals, anything opened up, especially in the women's brown category. We'll get much more aggressive on that.

As far as key categories, getting aggressive, if you're asking me in athletics, if we plan on getting more aggressive, that's what we'll use any of the opportunistic or closeout buys.

I was more trying to zero in on circulars or, you know, marketing initiatives, not so much merchandise.

We really don't like to talk about our marketing initiatives on a conference call. I'll tell that you very similar patterns to last year, maybe a bit more aggressive.

And one last question. Is there any way -- this might be a stretch, but is there any way to, you know, the -- it sounds like it's not -- your consumers don't mind, you know, stepping up and paying a little bit more for the shoes than they're used to, so for the product that is coming in in the second half, is there any -- have you measured, you know, the average price point change this year versus last year? Or -- you know, I guess what is the, you know, what is the change there? Obviously you've got some closeout product that's going to come in the door, but as it stands right now --

We actually believe that the athletic sector of our business, that the price points will be flat to last year. And the reason for that, we can get extra dollars out of all the -- we can get extra dollars out of the retro and the fashion white athletic I have been talking about. Those shoes will sell through at regular price very well.

But, conversely, we'll also be buying closeouts and those shoes will sell through at a lower-than-average price point, so the balance of that will be somewhat flat, average price points in athletic. I believe that we'll drive significantly higher, somewhere between 5 to 8% higher average price points out of our women's department. Price points in our men's department will be somewhat flat as will kid's.

David, let me add a little bit from a strategic standpoint. I addressed this in my opening remarks, that part of our pricing strategy as we go through the second quarter and into the second half is to try to get away a little bit from global all-store product kind of promotions and target, you know, specifically markdowns and price promotions around certain styles and certain categories of footwear that are slower selling than other styles or categories of footwear.

Part of that strategy involves, you know, communicating to the customer that Shoe Carnival is not necessarily the cheapest in terms of both price and quality, retailer for footwear, but, you know, communicate to the customer that price/value relationship, or that price/quality relationship that results in value. And to accomplish that, what we're undertaking right now is, we have identified certain very recognizable patterns or styles that most of the people, most of the people in the footwear industry share in our price, in our moderate price stores, and be very sharp from a price standpoint on that on an everyday basis.

I think that we haven't shouted to the consumer that we have got the best value, and I don't care whether it's in the mall or outside the mall. We're going to get back to giving the customer the impression that Shoe Carnival does provide the best value for products, certainly outside the mall, that we can.

So, that's the product, you know, that's part and parcel of our pricing strategy on a go forward base, and we think it's going to be very important as we go through the second quarter because we -- we do feel like that because of the inventory positions that some of our competitors look like they're in, we think it's going to be a very promotional second quarter.

Our inventories are in good shape, and certainly from an overall standpoint, they're down versus last year when they were down 10% versus the year before. So, we don't feel that we have to get that promotional across the board, but we are going to definitely communicate an image of value to the consumer that we think we may have lacked in the past year or two.

Thank you.

Operator.

Mr. Ikenson, please go ahead.

Sorry, my questions were just asked and answered. Thank you.

We'll take our next question from John Shanley with Wells Fargo. Please go ahead.

Morning. Afternoon, guys. Mark, I wonder if you can give us a little bit of an insight in terms of whether there has been any noticeable change in the business climate as we have gotten into May versus what you have experienced for much of the first quarter. Is sales or customer traffic levels about the same or have they improved somewhat?

John, you know, we don't specifically talk about midmonth results but, you know, in May, it's slightly better than what we saw in April. It's very difficult this year versus, and I'm not trying to evade the question, but we have changed some of our advertising and promotional events. So it's a little bit of a mixed bag right now. You're giving me a very short time period to work with, obviously.

Sure.

If we look at individual days, business, which is not a very good indicator, even 10 days worth of business is not a very good indicator of Spring business. You know, those individual days where the promotions were the same, I would have to say it's trending better than April, but I want to caution you, John, that 10 days worth of business is not a good indicator for the second quarter.

I'm fully -- I understand, I appreciate it. I wonder if you could give us an approximate sales breakdown in terms of how the overall business fell in the first quarter between men's and women's and athletic and so on.

Not significantly different than it was last year, you know, the athletic business was, almost dead on with what it was last year. Our women's business, our women's nonathletic business was up slightly, which we would expect from the emphasis we've placed on that. Our children's overall business, if you include athletic and nonathletic styles together, was down somewhat. And men's business overall was, you know, got flat or just very, very, very slightly down.

Okay. And based on the comments that Cliff made about ramping up a couple of product categories and maybe pulling back on a couple, do you expect that your second half merchandise mix will be similar or substantially different than what you had in the second half of last year?

Well, I know, I will let Cliff address it, but we expect that there is going to be some differences from what we had last year, particularly in that junior category. It's one of the reasons why we're somewhat optimistic about, you know, about the business that we can effect from an internal standpoint because we're going to make that mix. You know, we lost some business last year in that junior category and that's what we expect to fill this year. Cliff you want to --

That's exactly right, Mark. That's going to be significantly different this year than last year. The other significant changes, John, come in the athletic area where we're going to own quite a bit. It's an unbelievable amount more of retro basketball in men's and in this fashion white athletic, which continues to perform well at retail.

That was actually going to be my next question. Are the product margins that you're likely to attain for things like the men's retro basketball and fashion white classic shoes substantially different that what you get from the other components of your athletic merchandise mix?

They are slightly higher than what we're going to get from the rest of the athletic mix, and it was those margins, those margins and the closeout margins, that allow us to clear through our Spring and Summer product.

So we should see some improvement, then, in the product margin level at least, as we get into the Back-to-School third quarter season?

We think -- we believe it will be flat to slightly up to last year. Remember, we can usually -- we'll use the higher margins we're going to obtain from closeouts and these hot, hot categories to keep us clean in the seasonal product.

Okay. The threefold increase in those two athletic categories, plus the ramp up in the junior's and closeouts, where are you going to be freeing up the open to buy, Cliff, in order to allow you to make those kind of significant merchandise changes? What are you going to pull back from?

That's an excellent question, and what we're -- what we're doing is taking a department at a time. We have -- a year ago, John, we had urban product or what we classified as urban product, you classify as fashion, I assume, in all our doors, and what we have done is we ramped that business back to just doors that generate real true urban business.

That's one area where we're going to save dollars. We're also going to take -- we also took a look at all of our underperforming categories from a year ago and we're ramping that back. We had an issue last year where with cheaper or lower than what Shoe Carnival would normally carry boots, and we ramped all of that back. And we put those dollars into better quality and better merchandise and into our junior department. So we believe the overall product mix in women's is much, much better, much more in tune to what our customer is looking for.

As far as athletic's concerned, we are going to incrementally, grow our women's athletic business because it continues to grow from a store to store basis, and we feel that that can generate some incremental dollars. But along with that, as I mentioned in my prepared remarks, slip-ons, athletic clogs, all this retro and women's product that did not perform and we walked away from all of that and we threw those dollars into our fashion categories that are working. So I feel that the mix as we head into the Back-to-School is much more balanced and leans more toward what is happening today in the marketplace.

Okay, and just last question on the merchandise mix, is there an inverse correlation, Cliff, between when you get, you know, a higher consumer level of interest in classic, and some of the retro, or does that mean your performance-type footwear is diminishing in importance? I think if I recall, you had mentioned there was a little bit of a pullback in performance, product interest at the last quarterly conference call. Is that still the case and how do you look at it going forward?

In the -- that's another good question, John. We've really never been a true performance athletic retailer. We have carried some performance shoes and it's just such a small part of our business. I consider us more, you know, if you think back to over the past several years the way our athletic business has trended, and Skechers came on strong and the fashion athletic business really took off, we were leaders in that because we are a fashion family footwear store.

When New Balance came on strong and fashion running shoes came, you know, took off in importance, we were a leader in that because, again, our customer understands it. And the same thing, there's no different from this retro look and with the fashion white classics. Those are fashion items and we're a fashion to our consumer, that is what we are.

And they don't come to us. The true runner, the guy that's going to run a marathon is not shopping in our stores. A guy that's going to play basketball, real basketball. He's not shopping at our stores, but, that fashion customer is and we love them a lot. They got a little expendible income.

Right. The other issue that I had is, either Mark or Cliff, we're talking about some pretty significant changes perhaps in some of the merchandise categories. Do you have the capability and the flexibility within your store layouts to be to be able expand or diminish some of the department's pretty readily to be able to physically house some of these changes in product mix adjustments that Cliff was outlining for us?

I think that's the strength of our stores, that you can flex, you can flex our-- if women's shoes, or women's brown is growing at great rates, you can flex into the women's athletic area. If the women's athletic area is growing at great rates, it flexes into the women's brown, so absolutely. We can make those adjustments.

Great. Sounds very exciting. Thank you very much. Appreciate it, guys.

Uh-huh.

Our next question is from Travis Sell with RBC Capital Markets. Please go ahead.

Hi. Thanks. Last quarter you talked about the new stores with the new updated design were producing about 3% higher average sales than the older stores. Did you see this trend continue in the first quarter?

Not quite at that 30% rate, because overall, sales were a little bit lackluster. But the new stores definitely performed very well, like I said, in the first quarter, which is pretty unusual for us. Collectively, the stores that we opened in the first quarter almost broke even. Not quite, but almost broke even from a profitability standpoint and, again, those stores were open an average of 45 days. So we're pretty excited about the new format and the new stores.

Okay, a follow-up with that. Did you see an increase in the women's business in your new stores? The new design with your kind of increased focus on the women's product?

We -- this is Cliff. We did see an increase in a percent of total with this new design. I can't quantify it for you today, I don't have that number with me, but it's definitely working for women's product.

Okay, great. Thank you.

Our next question is from Steve Martin, Slater Asset Management. Please go ahead.

Hi, guys, most of my questions have been answered. Just a couple of small ones. Apparel as a percentage of the mix. Is that now out or are we done and -- ?

Not quite. Almost.

Almost?

Almost. One more quarter. It's going to cost us about 2/10 of a percent to our comps in the second quarter.

Okay, so that's gone.

The first quarter it was about 3/10.

Okay. Back-to-School calendar last year was a little funky, and there were all sorts of things with tax abatements, shifting, Texas going back earlier, et cetera. Is there anything funky that you're aware of right now or changes to that calendar?

Steve, today, we're not aware of anything, but we're in the process, as we speak, that's due today, as a matter of fact, contacting every school system that we service to get that information.

Okay, so that's --

Right now, we're not aware of any --

There's always going to be changes, but we're not aware of any significant changes at this point in time.

What about tax abatements?

As it stands now, every one that had tax free holidays last year are still planning on it this year. There was one state that was -- that had a slight question, but when we called them, they said no, no. It's going to happen.

Okay. And as you guys go further West and outside of your sort of core regions, how do you adjust, or how are you adjusting, your buying? You know, do you find like going into Denver there is a lot of experimentation? And it will just take time for you to get that mix right?

What we do, Steve, is when we head into a new area like Colorado, first of all, it's business, not a real estate committee. Then the merchants go in and visit it and do an extensive shopping program on those new areas. We then come back and we, as you know, we have the geo team, or the geographic buyers that actually distribute the product into those areas. We also send them there.

So, once that's done, we bring the regional manager for that area into the main office and we show them the product mix that we put together, and we all sign off on that. As it turns out, we believe we're right on the button in Colorado.

Colorado being, I mean, examples of other markets where you have gone into and maybe not gotten it right the first season?

We have done that with every new market we've entered this year. In the Houston market and in the Colorado market. That -- there are two steps added to that that we can did not do in the past.

Got you.

We try, as you know, we try to, and do a pretty good job of it, merchandise our stores to individual store. Not just to the regions, to the individual store. Now, I use the example all the time with the two Chicago stores, one in [INAUDIBLE] and one in Berwyn, 20 minutes apart, but their merchandise mix is diversely different.

Okay. And you keep talking about the retro basketball, I presume you're not getting, you know, Nike Air Force Ones, so, what are you -- what is your substitute for that, and what are you doing that is so, you know, hot in the retro basketball category?

Let's see, if I were to say that they were Air Force One inspired, would that --

Okay, so it's an Air Force One-like product. It's not something we haven't --

That is correct.

All right.

From a number of different vendors. [ Laughter ]

You mean someone has the audacity to copy Nike on something? Thanks a lot, guys.

At this time time, we'll take our last question from Ellen Schlossberg with William Blair. Please go ahead.

Thanks, I just had a couple of follow-ups, actually, tailing off of Steve. With respect to Nike, obviously for awhile there has been a lot of talk about how they're going to do a better job focusing on your channel. Can you just give us an update on what's going on there, and what you have seen? And then Cliff, I'm not sure if you will talk to this or not, but with respect to your participation in the Easy Spirit even this July, are you planning on beefing it up at all, or should we see the same as last year?

I'm not sure I understand the second question, Ellen. Beefing it up, you mean from a collection standpoint or --

Marketing. From a marketing standpoint. Will you be able to be more communicative? I think there were some restrictions if I recall correctly last year, and I just was wondering if you would be able to more forcefully participate from a marketing perspective?

The only restrictions we had last year, Ellen, was the fact that we got the product in right as the event was beginning, so we weren't able to do an effective job advertising it until the last two weeks. Now that we own the product, we will support that event to our fullest.

Okay.

Okay? Your -- your first question as it relates to Nike, I'm not real sure how to answer. I think that -- we never believed that we get everything we need from Nike, and I'm not sure we ever will. When you have product that's selling through in the mall like the Air Force One and the Shocks running shoes, and that is kept from us, we're never going to be happy. So it's tough to answer that question from that perspective.

I will tell you this. The Nike folks that deal with our channel are working with us quite well and doing everything they can to get us the kind of product that we need. And the product that we have going into the Back-to-School is much, much stronger than the product we had last year. So, I have to answer yes and no. I mean, we obviously would like to have some of their retro product that is selling in the mall, and that's not going to happen, but from an overall perspective, I'm fairly pleased.

Okay, thanks.

This does conclude today's discussion and answer session.

I would like to turn the conference back to Mr. Lemond for any additional or closing remarks.

Thank you for joining us today. We look forward to third quarter results, or second quarter results.

This does conclude today's call. Thank you for your participation. You may now disconnect.