Shoe Carnival Inc (SCVL) 2003 Q2 法說會逐字稿

Good afternoon and welcome to Shoe Carnival's second-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 can 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 would now like to turn the call over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival, for opening comments. Mr. Lemond, please begin.

Welcome to Shoe Carnival's 2003 second quarter and six months earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our CFO; Cliff Sifford, Executive Vice President and General Merchandise Manager; and Tim Baker, Executive Vice President, Store Operations. While we are disappointed that we didn't meet our expectations during the second quarter and first six months of 2003, we were extremely pleased that our back-to-school sales have shown a significant improvement over our first-half sales results. While this upward trend is certainly a very short-term three- or four-week phenomenon, these stronger sales results leave us more optimistic for an improving retail environment in the second half of 2003.

Net sales for the second quarter increased 7.9 percent to 134.5 million from sales of 124.6 million in the same period last year. Earnings per share were 12 cents per diluted share in the second quarter compared to 27 cents per diluted share in the second quarter 2002. During the second quarter, our same-store sales decreased by 3 percent. The shopping patterns in May and June were pretty consistent. The combination of lower store traffic and higher conversion rates resulted in about the same number of transactions in comp stores. However, customers bought fewer units per transaction, and this led to the decline in the comp store sales. In other words, fewer customers bought more often, but those purchases, we believe, were often driven more by immediate need rather than by want.

In mid-July, this pattern started to change. While we continued to experience an increase in conversion rates, traffic patterns in comp stores started to turn positive. This led to an increase in the number of transactions, and consequently, an increase in comp store sales that accelerated in the early part of August. We believe that the combination of customers back-to-school needs and the impetus provided by certain tax relief initiatives has given life to an otherwise lackluster retail environment. We certainly hope it is not a short-lived trend.

Despite the substantial reduction in sales during the quarter relative to our original plans, our inventories at the end of the quarter were up less than 1 percent on a per-store basis. Just as we have done for the past 18 months, we continued to focus on clearing out seasonal goods on a timely basis and effectively manage our inventories during these difficult economic times. Although our percent mix of women's summer products was slightly higher than last year at the end of July, the strong increase in traffic flow in August has allowed us to liquidate most of these excess goods. Importantly, the quality of our athletic and children's and junior nonathletic inventories were in better shape as we entered the back-to-school season. We feel very good about the quantity and the quality of our inventory today.

I would now like to talk about several initiatives the management team at Shoe Carnival undertook during the second quarter to ensure that our product offering, merchandising and store format continue to be on target with our customers' needs. First, the senior management team, including myself, has been traveling extensively to visit stores, speak with customers and compare our store operations and product offering with those of our close competitors. Augmenting this grass-roots effort, we conducted focus group research in three of our larger markets to determine the effectiveness of our advertising and the acceptability of our product mix and pricing structure. Additionally, we inquired as to whether the format and operation of our stores is in tune with what our core customer wants and expects from Shoe Carnival.

While we will certainly make some changes to improve the overall execution, this research reinforces the fact that customers make a strong connection between Shoe Carnival and a full family shopping experience. This research also tells us that our stores are certainly top of mind when it comes to fulfilling the family's shopping needs in the mid-tier price sector. We believe this is evidenced by the strong back-to-school trends we experienced during the past three or four weeks. When a customer decides to shop, they are definitely shopping at Shoe Carnival. We view this family connection as a key competitive advantage and we intend to more fully exploit this advantage in the future.

Secondly, we hired a consulting firm that completed a thorough analysis of Shoe Carnival data to produce customer profiles utilizing core customer lifestyle segments and to determine accurate and specific trade areas. We will use this to build index performance models that will evaluate the relative sales potential of any given location. Although some of the findings of this quantitative research simply confirm our previous understanding of Shoe Carnival's primary customers, we believe this detailed analysis will benefit us greatly in new store site selection. Additionally, this study will provide us with detailed media analysis to assist us in developing more concentrated marketing efforts as well.

During the first half of 2003, we opened 24 new stores, with 11 of those stores opening in the second quarter. We expect to open 13 stores in the second half to bring the total of new store openings to 37 for the year. We thus should end fiscal 2003 with 239 stores in operation. Right now, we are planning to open 35 to 40 new stores in 2002 -- or excuse me, 2004. Almost all of these new stores will backfill our current geographic footprint, as we see tremendous opportunity to expand our store base in a number of larger markets we have entered in the past few years. The intent is to enhance our advertising efforts in these markets and to leverage other operating expenses as we penetrate larger markets with multiple stores.

With the fall-off in consumer activity in the first half, our non-comp stores have recorded average sales trends of about 80 percent of comp store sales averages. This is down from the historical rate of 85 percent we saw in prior years under better economic conditions. Our marketing strategy over the past couple of years has been to feed our more profitable comp store markets in order to drive overall profitability. In 2004, we intend to focus more intently on filling in those larger markets and to provide those markets with the advertising they need to produce better sales trends.

After closing four stores in 2004, the resultant square footage expansion rate will approximate 13 to 15 percent. This is a little slower than our long-term goal of a 20 percent growth rate, but we believe it is a prudent expansion strategy at this time. While back-to-school sales have been strong and we are more optimistic about the second half, we would like to see more than a few weeks of strong sales data before we become more aggressive with our store opening plans. Right now, I would like to turn the call over to Cliff Sifford to give a little bit more detail on the product.

As Mark stated, we experienced a comp store loss of 3 percent in the quarter. For the next couple of minutes, I'm going to walk you through the results by department. I'll also give you a quick look at what we see as we move through the back-to-school season. In women's nonathletic, our business was down mid single digits for the quarter. Inventories were up mid single digits due to a planned increase in our junior category for back-to-school and a mid single digit increase in our sandal department, which I will address in just a few seconds.

We enjoyed a good business in our traditional dress and casual categories. In dress, pumps and special occasion classifications, and in casual, our softy (ph), comfort and tailored flat (ph) classifications all experienced double-digit growth. Sandals were down double digits on a comp basis. The issue with the sandal category was a thong classification. We sold 2.5 times more thongs than we did last year, but thongs did not add enough pair sales to make up for the decline in all other sandal classifications. Thongs did succeed in decreasing our average price per pair of the sandal category. So with fewer pairs sold at a lower average price, sandals ended the season with a double-digit negative comp.

The only bright spot in the sandal classification came from the athletic soccer slide category, where we produced double-digit growth. As I stated earlier, our sandal department ended the season with inventory slightly up from where we planned them. Our buyers have aggressively addressed this increase in sandals and as of this past week, our inventories on a per-door basis are flat to last year. Our plans next year will be to plan the thong business flat to this year along with the total sandal category. I feel that we have endured the worst of the thong phenomenon.

On a positive note, even with the weaker sandal season, women's shoes as a percent of total remained virtually flat with last year, and we continue to see the trend of our new store design driving a higher percentage of women's business. The good news today is that we are moving out of sandal season and into back-to-school. We have been encouraged by early results in our junior department. Junior sport shoes and boots have performed well for the first three weeks of back-to-school.

In men's nonathletic, our business was down mid single digits on a comp basis. Men's percent total was down slightly versus last year. Inventories remained flat on a per-door basis. We enjoyed double-digit growth in both our traditional and young men's casual categories. Sandals as a total was down, but terrain and sports sandals both showed positive gains. The overall story in men's footwear was that there was no trend to excite the consumer to buy during a tough economy. We became more promotional to drive pairs, but the average price declined and sales continued to slide. Our pairs ended the quarter up low single digits, while lower average price declined high single digit.

In kids' athletic and nonathletic shoes, we ended the quarter down low single digits. Kids as a percent of total was down slightly versus last year. The two categories that drove this loss were kids' sandals and boys' athletic. In sandals, the loss came from the boys' sport and soccer classifications. Our girls' sandal classification actually showed a low single digit increase for the quarter. We ended the quarter in kids' sandals with inventories down double digits on a per-door basis.

In boys' athletic we experienced double-digit losses in slip-on and running. We feel that the boys' business as a whole is lacking true direction from our key brands. There has been no new, exciting product from our major brands to make up for the changing trend from last year, like slip-ons and alternative closures. On a positive note, the girls' athletic business was up double-digit. The running and white fashion athletic lead the way with this double-digit growth. Kids' athletic inventory remained flat on a per-door basis at the end of the quarter.

In adult athletics, our total business was up low single digits. Adult athletic percent of total was up slightly versus last year. Women's athletic posted a mid single digit increase, while men's posted a low single digit decrease. Our women's athletic business was driven by women's -- by white fashion and running. Both categories experienced strong double-digit growth. Our men's athletic business shared robust growth in white fashion and basketball. Retro basketball remains a strong category. We have seen some price compression within this department as a retro product tends to bring lower retail. We have also seen price compression in men's running, as our traditional customer is shopping price more than he has in the past. Inventories in athletic ended the quarter up low single digits. This increase was the result of a planned increase in women's athletic as we headed into back-to-school.

In accessories, our business continued to slide due to the planned exit of a very unprofitable apparel business and the exit of handbags in some stores. As I stated in our last conference call, the major impact of exiting these two businesses will diminish after this quarter. We have taken several steps to stabilize our accessory business. First, we added shoe care and most of our socks to our basic, never-out replenishment program. We also worked with each vendor to establish cross-stockable fill-ins on this product. Additionally, we have added a new and exciting kids program that we are beginning to see some positive results from. Our goal continues to be to increase this high margin department percent to total.

In closing, I would like to make a couple of observations concerning the back-to-school season. While there are still a couple of weeks left in the season, I have been pleased with the early results. We spoke on the last conference call about our opportunities for back-to-school. We felt that we would see strong sales growth in fashion, white classic athletic and retro athletic. Both of these categories are performing as planned. I want to congratulate my buying team for recognizing and reacting to this and other key brands trends that have surfaced for back-to-school. Thanks for your time and I would like to turn the call over to Kerry.

I will start with an income statement and then work my way down the balance sheet. Net sales for the second quarter increased 7.9 percent to a record $134.5 million, compared to $124.6 million for the second quarter of 2002. Our comparable store sales were down 3 percent for the second quarter. Gross margins for the second quarter of 2003 decreased 120 basis points to 27.5 percent from 28.7 percent in the same period last year. This decrease resulted from a 40 basis point decrease in the merchandise margin and an 80 basis point increase in buying, distribution and occupancy costs. The decrease in the merchandise margin was primarily due to higher promotional activity during the quarter. The increase in buying, distribution and occupancy costs as a percentage of sales was primarily due to the deleveraging effect of negative same-store sales.

SG&A expense as a percentage of sales increased 150 basis points to 25.5 percent in the second quarter of 2003 compared to 24.0 percent in the same period last year. The increase in SG&A as a percentage of sales was primarily due to a deleveraging effect on the negative same-store sales. Preopening expenses during the second quarter of 2003 were $828,000 compared to $663,000 in the second quarter last year. Interest expense decreased $176,000 during the second quarter compared to $200,000 last year. The main reason for the lower interest expense is a lower effective interest rate.

Net income for the second quarter of 2003 was $1.5 million, or 12 cents per diluted share, compared with net income of $3.6 million, or 27 cents per diluted share in the second quarter of 2002. For the first six months, net sales increased 6.8 percent to $271.3 million compared to $254.0 million for the first half of 2002. Same-store sales fell 4.3 percent for the first six months of 2003. Gross margins for the first half of 2003 decreased 80 basis points to 28.7 percent compared to 29.5 percent last year. SG&A as a percentage of sales increased 120 basis points to 24.7 percent compared to 23.5 percent in the first half of 2002. Preopening expenses for the first six months of 2003 increased $505,000 to $1.6 million compared to $1.1 million in the first half of 2002. Net income for the first half of 2003 was $6.6 million, or 51 cents per diluted share, compared with net income of $9.2 million, or 71 cents per diluted share, last year.

Our balance sheet continues to be in excellent shape. We ended the second quarter with over $10 million in cash and working capital of $113 million. Our inventories were up 17.3 percent in total, but less than 1 percent on a per-store basis. After opening 34 stores during the past four quarters, long-term debt has only increased $4.5 million to $27.9 million at the end of the second quarter of 2003 from 23.4 million at the end of the second quarter last year. Depreciation expense for the second quarter and first half of 2003 was $3.5 million and $6.8 million respectively.

Capital expenditures, net of lease incentives, for the first half of 2003 were $9.4 million, which breaks down as follows. New stores net of lease incentives were $7.3 million; store remodeling costs were $1.1 million, and all other expenditures were $1 million. For the full year of 2003, we expect capital expenditures to be about $17 million and depreciation to be about $13.7 million.

I would now like to provide some guidance for the third and fourth quarters of 2003. We currently expect sales for the third quarter to increase year-over-year between 11 and 13 percent, with same-store sales range of flat to up 2 percent. We expect gross margins to be flat to up slightly and SG&A to be slightly down at the high end of the sales range and slightly up at the low end of the sales range. Earnings per diluted share are expected to range from 41 cents to 46 cents in the third quarter.

For the fourth quarter of 2003, we currently expect that sales will increase between 14 and 16 percent, with same-store sales range of flat to up 2 percent. We expect gross margins to be flat to slightly up, SG&A to be slightly down at the high end of the sales range, and slightly up at the low end of the sales range. All of this equates to earnings per diluted share expectations for the fourth quarter in the range of 15 to 18 cents per diluted share. I would now like to turn the call back over to Mark.

In closing, I'd like to say that while we are pleased with the current sales trends, we are going to continue to plan conservatively and effectively manage our inventories. I believe that we are appropriately positioned to take our fair share of the footwear market as the economic environment improves in the coming periods. I wanted to thank our employees for their continued hard work and our shareholders for their support. I'd now like to turn the call over to the operator for the question-and-answer portion of the call.

Jeff Stein, McDonald Investments.

A question for you with regards to expansion for next year. Can you talk about some of the back-fill markets you're planning on focusing on for 2004?

Sure, Jeff. Over the past few years, we have entered a number of mid to larger markets in the Midwest, and now that we have entered Denver, towards the West. Denver will be one of those markets, Houston will be one of those markets. As you well know, we went into Cleveland with about three stores; we need to backfill that market. Focused on Milwaukee, Wisconsin as a market and a few others.

Okay. Can you talk about the performance of your new prototype store and how it is comparing to your plan, given the fact that the economy has been somewhat weaker than expected?

As I mentioned in my remarks, we have seen the new stores trend down to about 80 percent running rate of our existing store base, and that had been traditionally or historically trending about 85 percent. Some of that, you would expect, I believe it, if our existing store base is not doing very well, which obviously it didn't in the second quarter and the first quarter -- certainly not to our expectations, that with the void of advertising in those newer markets that the new stores wouldn't trend as well.

What we have seen, however, on the positive side from the new store design, as Cliff mentioned, is that our women's nonathletic percent to total has increased relative -- or for the stores that we have opened in 2003 relative to the stores that we opened in 2002 under the older store design. We think it is having the effect that we anticipated with respect to increasing our women's business as a percent of the total, so we are pretty happy with that, despite the lackluster sales across the chain in the first half.

Okay, thank you.

Harry Eison (ph) from First Albany.

Could you give us -- go into a little more detail related to what you did with the focus group? I know you said part of it was you were (indiscernible) feedback from marketing. Can you give us an update on any new plans for your marketing spend? Any changes there? Any new initiatives on marketing versus what you've learned so far?

What we have done here is, both with the focus groups and with the quantitative study that we hired a consulting firm to run for us, we understand -- or we understood for the past few years that we've focused our marketing effort on our comp stores in order to drive the overall profitability, as we have discussed before. What we are intending to do now, along with that real estate strategy of filling in those larger markets, is pump more advertising into those markets that we've kind of avoided in the past two years.

Along with that strategy, though, we have got to figure out a way to effectively utilize those dollars, or I should say more effectively utilize those dollars than we have in the past. So hence, one of the reasons why we undertook that quantitative study to the to determine our primary, our secondary and our tertiary customer base and how that customer base fits around the existing stores and the stores that we anticipate opening in those larger markets over the next year or so. What that allows us to do is really hone our marketing efforts in those particular locales much better than we have in the past, and consequently, the obvious intent is to more effectively spend those advertising dollars.

And that makes a lot of sense, but in addition to that, I mean, some of my other companies -- everybody's trying to do something different or come up with something else that makes them more effective. I mean, some companies who never used a bounce-back coupon are using a bounce-back coupon. Are there any other change, tweaking in relation to marketing or something that you are thinking of that might be new and different that might help?

Not from an overall standpoint. Again, we are going to look at it on a -- I want to say market specific basis. But really, from a store level specific basis in those particular markets, whether we do more print, whether we do more direct advertising, more radio, more TV, the mix of media is going to depend largely upon what we have gleaned so far from those studies and what we anticipate to glean from those studies in the future. From a marketing standpoint, there's really not going to be a huge change from what we have done. We don't anticipate a big increase nor do we anticipate a big decrease in the amount of advertising that we'll spend relative to our sales base. But we will tweak that advertising in terms of where we feel that advertising is best spent within that particular market.

The one thing that we are taking a look at and, as a result -- really the focus group studies more than the quantitative analysis -- but we are going to take a look at the creative side of our advertising and try to do some enhancements there, affect some enhancements there.

So maybe with something a little more creative that could affect more top of the mind (ph) awareness?

Yes, one thing we have learned from all of that research and study and the travel that myself and Cliff and Tim have done over the past few months is that the customer, like I said in my remarks, definitely connects Shoe Carnival with the full family shopping experience. And that is one thing that we are going to try to do more from a creative -- that is one of the ways that when I say we're going to exploit that advantage more fully, that is one of the ways -- we will incorporate that idea of family into our television spots and the radio commercials and our print ads, etc.

Okay, and then another area, but somewhat related. Could you give an update on the progress of -- I know the Company is working on planning allocation for regional tastes. Where are you on that? Could you give us an update on that?

Ask that one more time, Harry.

Okay. In reference to you had put in some systems and you were going to be -- like for instance, if one area, you have a lot of smaller sizes in (ph) one part of the state and another part of the state, you have bigger sizes or different tastes. So you were going to regionalize it a little bit more. I was wondering what's going on with that initiative.

We have completed that process; in fact, completed that process midyear last year. We now write sizes down to the store level by department and classification, so the size grid in our stores are much improved over last year. From a product standpoint, we completed that -- our Geo Team is what we call them -- the Geo Flyers (ph). We completed that process about a year ago, and most of those people, or the vast majority of those people are up and running at full speed. We have had to make a few changes and we have a few folks that are still in training, but overall, it is working in my mind very well.

Okay, because I was under the impression that you thought that it would take awhile after you were up and running to really see much of a progress.

It came in stages. The first thing we did is we changed the product on a door-by-door-- excuse me, region-by-region basis. Then we started drilling down a little further into the door. Then the second phase that was put in was size -- the size graphics by store. Now, we are working on assortment planning by store, where you actually build the assortment from the very bottom up for each store based on many, many components, mainly from history. That project will be complete within the next 60 days. So it's a dynamic process, so it will change some this year, it will change even further next year. So it's a dynamic process. It's something that we've never done before and to be perfectly honest, we haven't actually heard of any other retailer doing it exactly the way we do it, so dynamically, it's going to change from year-to-year.

Finally, could somebody give us an update on any new change in the competitive landscape and any updates for the future or what you've seen in the most recent Vegas show?

From a competitive standpoint, I don't think there is a whole lot of difference than what we've seen in the recent past. It's still a very promotional footwear environment at retail on the marketplace today.

As far as the Vegas show, we've just returned back obviously two weeks ago and we're putting our plans together. We do see the dress business continuing to increase -- speaking strictly in the women's business -- there seems to be a strong movement toward dress. We do see the brown shoes for business and casual business continue to increase. Sandals, as I said in my prepared statement, we are going to plan that flat. We do believe that we're going to also plan the thong business flat. We believe that business has -- the thong phenomenon is past us, and now it is time to just to maintain that business and look for ways with color and silhouettes to improve our overall business in the sandal category.

We see also a movement back to more of a granola look -- Warren (ph), if you would. What Warren's doing, what Merrill is doing, and a few other brands like that. So we see that classification getting stronger. As far as athletic is concerned, we don't talk strictly about brands, but we are not prepared to say today that we're going to continue to have double-digit growth in classic white athletic, but we do see some other opportunities there by brand.

Thank you very much.

Ellen Schlossberg from William Blair.

Before I ask a question, I just wanted to clarify, when you were talking about marketing, more effectively using your marketing dollars, were you saying that you're still working on a plan or you have a plan in place that we should start to see executed this back half?

No, Ellen, what we're talking about is we're currently working on that. We have just completed a study utilizing that consulting group. It was more designed -- the study was more geared toward site selection and all the pertinent data points involved with site selection. Mainly, life style demographics, psychographics, demographic information, all of those pertinent points. Analyzing our current store base, trying to understand better who our primary, our secondary, our tertiary customer bases are in and around the existing store base and then applying that data to better site selection techniques in the future. Along with that, by identifying those different customer bases around our existing store base and potential future sites, particularly in those larger markets, we think we can more finely identify the types of advertising, the media that we should use and direct that toward those specific customer groups in any specific locale. That's what I'm talking about from a media analysis.

And did that site selection process have anything to do with bringing the store count down at all or was that just completely separate?

No, absolutely not. Again, the reason that we want to open between -- we think 35 to 40 stores is a prudent strategy at this point in time. Certainly, if the retail economy continues to improve -- we've seen a very sharp swing in the upward trend -- but if it continues to improve, then we will flex our store opening plan as well. However, right now, with a very short upward trend, we think it's more prudent to plan 35 to 40 new stores.

Again, the real reason behind that number of stores is that we think there is a substantial amount of opportunity within our larger markets that we have opened over the past few years to back-fill those markets and really enhance the advertising effort and to gain the leverage in our other operating expenses. So it is really -- it really is a result of a backfill strategy. That is the total focus right now, is to backfill our current, existing geographic footprint, and more specifically, the larger markets that we have entered.

And as you pursue that backfill strategy next year, obviously that should have an impact on the stores in that market already with respect to comps. Have you looked at how much you think that using all of the new stores to back-fill will impact the comps, and how should we think about that? I mean, is it meaningful enough for us to rethink about how we're planning our comps for next year?

The biggest driver of comps right now is the economic climate that we are operating in. And I should say that in conjunction with the advertising effort that we are putting forth in the particular marketplaces. That is the biggest driver. I think that when we do start to fill in the larger markets, again that is going to allow us to spend more money in advertising and consequently, that will allow us to drive comp store sales in those markets. But again, the biggest impact that we're seeing right now is from an economic -- just an overall economic condition and retail climate during the past -- really during the past two years.

Okay, so you're saying that you think that the additional advertising pumped into those markets will offset any cannibalization from opening stores in the same market? Is that right?

Yes.

Do you have any sense yet of how that 35 to 40 new stores plus the foreclosures will break out by quarter?

Not at this point in time.

What about the 13 back half? Are they all going to be in the third quarter?

Two are going to be in the fourth quarter. That is the way they are slated right now. Obviously, if we have got stores at the very end of the third quarter, they could shift very easily into the fourth quarter depending upon the construction schedules, etc. But right now, only two are expected to open in the fourth quarter. I would suspect, Ellen, that the 35 to 40 stores that we planned for next year would have basically the same kind of openings per quarter that we have seen this year.

Okay. Thanks. And a couple for Cliff. Cliff, can you just expand a little bit -- you mentioned that you are starting a kids' accessory program. Can you give us a little color on that? And then also, I notice some holes in merchandising from an HR perspective. Can you give us an update if there is one there?

Yes, the sock program I was talking about in kids really is a girly-girl kind of socks with sequins and studs and just a real pretty, girly-girls sock program that is working very, very well at retail. I hate to even attach a (indiscernible) name to it, but that type of program. It's working real well at retail and we hope we're going to expand that.

How many stores is that in now?

I don't know the answer to that, so I'd rather not give you an answer.

But roughly 20 percent, half or more?

I would say probably between 20 percent and half the stores. From a human resource standpoint, we have -- I guess you were alluding to the VP DMM (ph) position in my women's business. We hope that we are very close to that. We hope to have an answer to that within the next couple of weeks.

Great. Okay, thanks.

Steve Martin (ph) from Slater (ph) Asset Management.

Mark, can you talk about the competitive environment from a BOGO standpoint and how that differs regionally? And there has been speculation on store closings by a couple of your marginal competitors. What you might want to comment about that. And then Cliff, you talked about the white and I guess some of the girls' athletic doing well. What is the surprise there, brandwise or fashionwise?

Let me address the promotional and competitive nature first. I think the intent of most of the retailers in the footwear industry, particularly -- and more specifically, I guess, is to say the family footwear retailers are trying to move away from the buy one, get one half price promotions as much as possible. Obviously, you can't do that all at one time and there is going to continue to be times that retailers need to use that, including Shoe Carnival. We react to competitors' promotional calendar as much as anything else.

You have also got a segment of the athletic sector at retail that's very heavily relied upon buy one, get one promotions now, whether that be in their stores or through their Websites. And again, we react as much as anything according to the competition out there. So even though we're trying to move away from that as much as possible and we will continue to do that -- we did it somewhat during the second quarter; we anticipate doing it somewhat in the third quarter and even more so in the fourth quarter -- we will react to the competitors' promotional activity.

I had understood that there were at least on the part of some of the competitors, a few less weekends of BOGOing this past quarter versus last year.

Not only weekends but full weeks. Certainly I think we cut down the number of weeks. I would like to say it is going to be more dramatic than it has in the past but a lot of that is going to depend upon what the retail climate is going forward. We play that by ear as we go along.

Okay. Some of the marginal competitors and what you have heard about store closings?

You know, year after year after year we hear about some of the tougher retailers closing stores especially in the family footwear sector. I shouldn't say especially in the family footwear sector, in both the athletic and the nonathletic sectors we have heard of competitors closing stores. I don't think you will be able to see an immediate impact in our's or anybody else's business because of that. Certainly some of the markets where we have stores where competitors are expecting to close we will see an impact, but longer-term obviously a shrinking of the industry in terms of retail is healthier for the retailers that are still in the industry. So I think it is going to benefit us from a long-term standpoint but I really -- I hesitate to say we will see an immediate impact of any significant amount of closing at this point in time anyway.

And Cliff?

As I said in my prepared remarks, we were real pleased and I can't say that it caught us by surprise because we obviously prepared for it, real pleased with what happened with the fashion white classic athletic products and with retro basketball. The white product in both men's and women's and the retro in men's. We don't specifically -- we make it a policy not to specifically address any brand but Skechers actually has performed really well for back to school. And I guess if there was a surprise brand that would be the one. We plan for it to be a pretty good brand for us but especially in our women's brown and our men's brown and kids' white it has done very well.

And is it very promotional or are the margins adequate?

We have actually driven these increases with higher margins so we are very pleased, both top line and bottom.

Thanks a lot.

John Shanley from Wells Fargo.

Mark, I wonder if you can take us through just a little bit more on the comments you made about back to school. Was the strength that you saw coming into the early stage of the back to school season regional or was it chainwide? And was there certain product lines that did particularly well or at least better than your earlier expectations that helped to drive the back to school business so far?

Let me talk about the product lines first, John, that is an easy one. The athletic business is definitely the dominant business right now. We have been as a percent of last year, we have seen some increases in our junior nonathletic business but we funded those inventories better this year then we did last year, particularly in the month of July. That strength carried over into August by the way. But at back to school time the athletic business is far and away the key driver of the business. What was the first question?

Whether as regional, I mean are you seeing north-south variation as you do periodically?

We are but if you think of it in terms of when schools go back, it seems like the Southern markets, the schools go back earlier than the northern market. So it is almost like a wave going from south to north in terms of how the markets are performing relative to last year. Southern markets have performed better as a group than the northern markets and the reason is that their schools are going back earlier than the northern markets are. We have still got another, a number of markets in our northern regions like Chicago and certain other areas that have yet to go back to school and we expect those markets to really take off in the very near future.

Okay. Along the same lines of back-to-school, are you driving the business with regular or promotional merchandise? And can you also comment on whether the child tax credit or any of the sales tax holidays in various states like Texas helped to stimulate sales activity this year?

I think there is no question that, first of all, the sales tax relief in a number of states really does drive the business -- this year, as well as years in the past. It's amazing what a 5 to 8 percent discount paid for by the government will do to sales in certain market areas. In terms of promotional activity, yes, it has been a promotional back-to-school; there is no question. It probably is about the same promotion-wise as it was in the prior past two years.

One thing we have been able to do this year is going into the back-to-school period with a few more sandals than what we anticipated or would have liked because of the lackluster sales in the second quarter, we have utilized this traffic to liquidate a pretty significant piece of that excess product. So, from that standpoint -- it has been a little bit more promotional from the standpoint of summer product, but we have also sold a decent amount of goods. And again, going back to that junior product at regular price or with the global promotions that we have been running, better than we had last year.

Okay. Cliff, based on your allocation of open-to-buy (ph) dollars for the back half of the current year, do you expect to see much of a change in terms of merchandise categories? You mentioned classic and retro basketball doing well, as well as women's dress and casual. Do you think those product categories are likely to be a bigger chunk of your business in the back half than they were in the back half of '02, and what does that do to your margins?

I do believe that the trend (technical difficulty)

(technical difficulty) merchandise categories, but changes within the merchandise mix, is that --?

That's exactly what you hear.

Will athletics still represent a little over half your revenues, do you believe, in the back half?

Just right at half or a little over.

And the classic product, I assume you're talking about the basic classic as most of us understand it, like a K-Swiss or a Reebok kind of classic. Are there other types of classic, and the retro -- I know you don't like to mention brands, but it is kinda confusing when you say retro basketball. Are we talking Converse kind of shoes or is there something else in there?

You are on the right track.

Okay, fair enough. And are those products also higher gross margin than what you normally get for maybe some of the shelf space that they are going to occupy?

Anytime there is a fashion swing that has become as popular as this, that always drives a higher margin. And so, yes, all that you have just mentioned are higher margin items.

Thanks a lot, guys.

Travis Sell from RBC Capital Markets Management.

Mark or Cliff, could you talk about your inventory plans for the third quarter for both adult athletics and women's nonathletics as compared to last year?

We are planning our women's athletic inventories up mid to high single digits due to the trend that we've been experiencing, our men's athletic inventory at flat, and the rest of the product categories at flat to slightly down.

Could you give us the square footage at the end of the second quarter, please?

Just under 2.7 million.

Okay, great. Thank you.

Ellen Schlossberg from William Blair.

Topic being opportunistic buys, can you talk about the market for those buys now and what you've left for your open-to-buy, maybe what we should expect this year versus last year per store, or however way you can help us understand how much this year versus last year. And is there any difference in margin you are getting on that type of product this year versus last year?

I can address what we own today. I can also tell you that we are looking for additional product as we move forward. But the Vegas show was actually fairly active for the kind of product, and we were able to buy some for both immediate delivery and for September delivery. As far as the percent to total this year versus last year, I don't have that. I can get it and get back with you, but I don't have that in my hand right now. As you remember, last year as we moved into the fourth quarter, quite a bit of product became available, but most of that product became available in September. So I am just not prepared to talk to you about the fourth quarter yet.

Okay. And is margin you are getting on that good? Is this kind of similar trends or getting any better or worse?

Very similar to the trends -- we ran very high margins on that product last year and we expect to do the same this year, and we are doing so.

Great. Kerry, what's your CAPEX plan for '04?

We haven't given out -- we don't have any numbers out for '04 yet, Ellen.

Okay. Are there any new brands that you can talk to us about that we should be looking for, or brands that you've started to introduce that you're going to be expanding doors?

There will be a couple of new brands for spring, and I would like to if I could, put off telling you about those until we develop all our plans. We're putting together our matrix for spring now and there are a couple of brands that we are adding to the total mix. But as far as expanding brands, there are none that we are expanding at this point. Nine West and Bandolino, as we've talked in the past, are in anywhere from 30 to 40 doors for Nine West and 70 to 80 doors in Bandolino. Easy Spirit was in all stores. But we've been talking about that for some time. At the next conference call or sometime between now and the next, we may be able to talk about that further.

Will those new brands be in women's.

Yes, there are no new brands in the athletic or kids' arena, and none at this point in men's arena. So we are only looking to expand our brand selection in women's.

Great. Thanks, Cliff.

Ellen, let me follow up on that number. While we don't have any numbers out for '04, we're going to be opening a similar number of stores in '04. I think you can take what we are doing this year, which we are expecting about 17, and figure that would be reasonably close.

Okay. Any other projects going on for next year that would add to that that we should know about?

Nothing of substance. There will be different projects than we had this year, but that would be taken into account in that 17, possibly 18 million, just to be an estimate at this point.

Okay. Thanks, Kerry.

Jeff Stein with McDonald Investments.

Mark and for Cliff, I guess, a question with regard to just general fashion trends and how that ties into footwear and mix. We are seeing a lot more in the way of khakis, corduroy, cargo pants being shown for fall, and this would seem to imply that we are now going to see a mix that might be more skewed toward brown shoes on a go-forward basis, at least intermediate-term. How do you see this affecting your margin? Should this be a favorable mix for you if it does continue?

We do believe that is happening. We do believe that we're going to see some increases in brown shoe footwear because of that. As you remember in the last call or the call prior, I talked about the fact that we had a Doc Martin in 70 stores due to the fact that we saw this trend developing. I also believe, even though we don't really talk about brands, I believe that is one of the reasons our Skecher brown shoe business is performing so well and some of the other junior brands that we have in stock today, is that there is a general change in fashion, and we think that we are going to reap the benefit of that.

It is just beginning, however. And I don't want to get too euphoric over it. It is beginning. And the last time this began, it took a year for it to really catch hold. So I think we will see better results out of that or a bigger swing out of that next year. So brown shoes do traditionally drive a little higher margin than the athletic footwear sector. And if that were to happen, if it were to swing in full force, we should enjoy a little better margin due to that.

So as we go into next year, I guess providing that that trend begins to develop in the back half of this year, I presume your new orders for spring of '04 will probably reflect a slightly higher mix of brown shoes.

It would, yes.

That does conclude our question-and-answer session. I'd like to turn the call back over to Mr. Mark Lemond for closing remarks.

I would just like to say thank you for joining us today. Thank you.

That concludes today's conference call for Shoe Carnival. We do appreciate your participation. You may now disconnect.