Shoe Carnival Inc (SCVL) 2004 Q1 法說會逐字稿

Good afternoon and welcome to 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 expressively 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.

Welcome to Shoe Carnival's 2004 first-quarter earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer, and Cliff Sifford, General Merchandise Manager.

Net sales for the first quarter rose 6.3 percent to 145.5 million from sales of 136.9 million in the same period last year. Comp-store sales for the quarter declined 2.2 percent. Net earnings for the quarter were 4.6 million, or 35 cents per diluted share, compared to net earnings of 5.1 million, or 39 cents per diluted share, in the first quarter of 2003.

Certainly, we are disappointed with our sales results for the first quarter of 2004. Despite certain shifts in marketing strategies, we saw a decline in customer traffic in March and April after a pretty good start in February. Consequently, both comp-store sales and new store sales were well below our initial expectations. We attribute this decline to a number of interrelated factors, the primary three of which were certain product misses in our women's and men's dress, casual and sport product; two, a definitive shift in advertising strategies centered on very heavy television usage; and three, our earlier decision to significantly reduce the number of entire stock BOGO promotions.

Consequently, net earnings fell below our original expectations and about 10 percent below last year's first quarter. However, the effect on both first-quarter earnings and, importantly, future operations could have been worse if not for our ability to very tightly control both expenses and inventory.

Primarily due to a decline in administrative costs, SG&A expenses as a percentage of sales rose by only 10 basis points and our buying staff did a good job of limiting the effect of a decline in cost of sales of over $5 million relative to our initial merchandise plan. Inventories on a per-store basis were 1.2 percent lower than last year at the end of the quarter.

What I'd like to do is talk about the marketing/promotional issues before I hand the call over to Cliff to talk about product issues. During the first quarter, we shifted the media mix to much heavier usage of television, concentrated around the primary Easter selling period and away from print and radio/media. This was done in a broad stroke across the chain, whereas in the past, we've tailored the media mix to individual market needs. We also tried to give more advertising support to certain of our previously underfunded, larger markets.

It is difficult, if not impossible, to judge the success or failure of a shift in advertising strategy on a very short-term basis. We saw mixed results by market with no readily apparent trend for the total company except that traffic in combined comp-store markets was down by over 4 percent for the March/April time period. Additionally, most of the larger markets with an insufficient store base did not respond to the increase in advertising.

We've certainly learned some things during the first quarter, particularly on a market-by-market basis, regarding the response of each market to the schedule of television provided. Consequently, we will change the advertising strategy for the remainder of year by re-establishing a market-specific media mix tailored to the needs of the individual stores in each market. We will also wait to fund those larger markets that did not respond to the additional ad spend until such time as we are able to fill in those markets with sufficient stores to justify an increase in spending.

Turning to promotions, for one of the few times in Shoe Carnival's history, we were definitely less promotional that our close competitors during the March/April time period from a BOGO standpoint. Additionally, certain of the more targeted merchandise promotions we've tested in the first quarter clearly did not work. We still believe that significantly reducing storewide Buy One, get One At Half Price promotions is the appropriate strategy for the long-term good of the Company. However, we will be slower to wean ourselves off of these BOGO promotions as long as our competitors continue using them to the extent they did in the March/April period. Therefore, particularly in the second half of the year, we will react promotionally to what we see happening in the marketplace while at the same time still reducing the reducing the amount of weeks we run Buy One Get One at half-price sales. We will continue to test new promotions as alternatives to BOGO promotions, but we will probably do so in individual markets before rolling them out companywide.

Turning to store openings, during the first quarter, we open 11 stores and did not close any. We now expect to open a total of 22 to 25 new stores, close two and relocate four additional stores. All of our new store openings for the remainder of the year will be in existing markets or small to medium-sized markets within our current geographical print. We have performed better in stores opened during the last couple of years in those a small and medium-sized markets and we will continue to concentrate our real estate efforts there.

What I'd like to do now is turn the call over to Cliff Sifford to discuss some product issues and then after Cliff, Kerry Jackson will run through the numbers and we will turn then to Q&A. Cliff?

Thank you, Mark. As Mark stated, we experienced a 2.2 percent comp decline for the quarter. I want to take the next few moments and walk you through each department to shed some light on these results.

The women's non-athletic -- our comparable store sales for the quarter were down mid-single digits. However, we saw gains in both the traditional and junior dress categories. I have also been very pleased with the performance of our sandal category over the past four to six weeks. These gains, however, were overridden with double-digit comparable declines in our casual category. Casual losses are an indication of the shift to dressier fashion in women's shoes. Feminine, lighter silhouettes and the explosion of color is a product of choice this spring. We bought into this trend but we did not go as broad or deep enough in color or trend to effectively compete with the department stores.

In men's non-athletic, our business was down mid-single digits on a comparable store basis. We suffered losses in every category except sandals. We continue to struggle in this department but we feel there is a turn coming. Dress shoes and dressier casuals will lead us out of this downward trend. We have already begun to see positive trends in several of our traditional dress categories and some traditional casuals.

We continue, however, to experience decline in the some of our more fashionable young men's and urban categories. We believe that we have identified the correct product for this consumer and that we will see an approving trend as this product is delivered over the next 60 days.

Our overall athletic business outperformed the company, posting flat, comparable sales for the quarter. We saw continuing strength in the basketball, skate and retro product. The walking category continued to show year-over-year declines. We're still experiencing double-digit increases in retro product. We see this trend continuing at least through the back-to-school season. Fashion classic white athletic product is still running well ahead of last year, although not to plan. We have experienced price compression on this product, as some mall retailers have become very promotional.

Lastly, we're pleased with the performance of our children's athletic department, which has been driven by exclusive make-up product, skate and retro.

Overall, we expensed a low single-digit decline in average price per pair, due in part to mix of product sales. We have identified the categories and brands that are driving this decline, and we are reacting. Our inventories are down on a per-door basis at the end of the quarter, which gives us flexibility to make adjustments to our mix, going forward. We believe that, with these changes, we will see average price per pair increase as we move through the second half.

In closing, I'd like to say that we have adjusted our marketing and promotional strategy and the early results of that change have been positive. In addition to this, our buyers have been actively shopping the marketplace and are reacting quickly to product trends. Our challenge is to gather pre-season trend information from our vendors and fashion services and translate it to our customers. I feel that, for the first time in years, our vendors in the mid-tier channel misread the move to a more feminine product and color. Our customer is smarter and more fashion-savvy than ever before. She sees and reacts to fashion shifts faster than in the past, thanks to the Internet and cable TV channels directed exclusively to her. We have initiated solid programs to get our buyers in front of fashion and we will continue to see the results of these programs as we move into back-to-school.

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

Thanks, Cliff. Our net sales for the first quarter increased 6.3 percent to $145.5 million, compared to $136.9 million for the first quarter of 2003. Our same-store sales were down 2.2 percent when compared to last year. Comparable store sales were up 4.7 in February, down 4.9 percent in March and down 4.6 percent in April.

Gross margin for the first quarter of 2004 decreased 70 basis points to 29.2 percent, compared to 29.9 percent in the same period last year. This decrease resulted exclusively from an increase in buying, distribution and occupancy costs as a percentage of sales. The increase was due to deleveraging effects of negative same-store sales and lower sales productivity of new stores.

SG&A expense, as a percentage of sales, increased to 23.9 percent for the first quarter, compared to 23.8 percent in the same period last year. We aggressively controlled our expenses during the quarter and were able to limit the deleveraging effect of the lower sales productivity during the quarter on SG&A -- (technical difficulty) -- 10 basis points increase.

New store pre-opening costs incurred in the first quarter were $729,000, or 0.5 percent of sales, compared with 772,000, or 0.6 percent of sales, last year. We opened 11 new stores during the first quarter of 2004, compared to 13 stores in the first quarter of last year.

Operating income for the first quarter was 7.7 million, compared to 8.3 million in the same period last year. Interest expense increased to $193,000 for the first quarter, versus $166,000 last year, due to higher debt levels.

The effective income tax rate for the first quarter of 2004 increased to 39 percent from 37.5 percent in the first quarter of 2003, due to higher state income taxes.

Net income decreased 10.1 percent to $4.6 million for the quarter, compared to $5.1 million last year. Diluted earnings per share declined 10.3 percent to 35 cents per share, compared to 39 cents per share last year.

We were in solid financial condition as of May 1, 2004. Our inventories were up 11.4 percent to $167.1 million but down 1.2 percent on a per-store basis. After opening 35 new stores over the past four quarters, our long-term debt has only increased $7.5 million to $26.1 million versus $18.6 million at the end of Q1 last year.

Long-term debt to total cap (indiscernible) the quarter was a modest 14.8 percent.

Depreciation expense for the first quarter was $3.6 million. For the year, we expect depreciation expense to be about $14.5 million.

Capital Expenditures for the first quarter of 2004, net of lease incentives, were $4.2 million, broken down as follows -- 2004 new stores were $2.4 million; the remodeling and relocation of stores cost $634,000; all other additions were $1.2 million. Capital Expenditures for the full year are still expected to be about $14 million.

I would now like to provide some guidance for the second quarter of 2004. One issue that is having an effect on our sales in the second quarter is the shift of tax-free days. Multiple states where we have a large presence will be shifting tax-free shopping days from late in the second quarter last year to early in the third quarter this year. Taking this into account, we are anticipating total sales for the quarter to increase year-over-year between 4.5 and 6.5 percent. Inherent in this sales assumption is a decline in comp-store sales of about 1 to 3 percent.

We currently expect earnings per diluted share of 12 to 15 cents for the quarter. Included in this expectation is a small decline in our gross margins in Q2, compared with last year's Q2, due to the deleveraging effect of the expected lower sales productivity on buying, distribution and occupancy costs.

We also expect a small decline in our SG&A as a percentage of sales, compared with last year's second quarter. The decline in SG&A is due to continued, aggressive expense controls and lower store pre-opening costs. We expect to open nine fewer stores during the second quarter than we did in the second quarter last year.

This concludes our financial review for the second quarter. I would now like to open up the call for questions.

Thank you. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Jeff Stein from Key/McDonald.

Good morning, Mark. I was wondering if you might guestimate for us what the estimated shift in the number of tax-free days is worth from a comp-store standpoint from second to third quarter?

The majority of the expected comp decline is from the shift in the tax-free days.

Okay. If you could just talk a little bit about your ability to show flat to somewhat higher earnings on a comp-store sales decline that you are expecting for the second quarter?

Jeff, as you well know, we controlled expenses fairly well in the first quarter, particularly administrative costs. We expect to continue that type cost control in the second quarter. Additionally, we're going to open fewer stores in the second quarter this year relative to last year, and that's going to cut down on the amount of pre-opening costs and consequently SG&A that we will experience in the second quarter, again, relative to last year.

Okay. Finally, can you comment a little bit about your performance in footwear relative to department stores and some of the other specialty chains? I'm wondering how much of that underperformance might be your position in the marketplace, relative to some of the errors that you believe you made in marketing. (multiple speakers) -- merchandising.

As you well know and most of the audience knows, the footwear sector performed pretty well in the first quarter. There were some exceptions, obviously, to that; we were one of them. But our competitors clearly outperform us in the March/April time period.

Again, I think there's a number of interrelated factors that affected our performance in the first quarter. You know, we did test some things in terms of the marketing strategy, particularly the shift to television and away somewhat from the print and radio media. We also tested (indiscernible) if you will the advertising very heavily around the couple of weeks prior to Easter, and I don't think that worked; I think we were better off when we had a more flat-line schedule of advertising throughout the entire quarter, particularly the March/April time period. So that certainly didn't work.

What we could tell, from a trend standpoint, is there really was no defensive trend on a total market basis. However, we did see certain markets react positively to the television scheduling and some that reacted very poorly to the television scheduling. We will take those into account as we change that media strategy, going forward.

From a promotion standpoint, again, getting off the number of weeks -- the first and half (ph) that we got off of in the first quarter of this year, relative to the first quarter of last year and relative to a lot of our competitors that were still running first and half (ph) through April. You know, that served to hold down the sales as well.

So, I don't think there was any one particular thing. There were a number of other small factors, including going up against primarily Just For Feet and to a lesser extent Foot Action; liquidation sales was one -- without sounding like a weatherman, certain weather issues in the Midwest in early spring and in certain areas of the country. I wish I had stores in California and Phoenix; I understand the West did particularly good this first quarter.

Again, I don't think it was any one big, particular big factor; it was just a combination of those things. What we're doing obviously to react to that is going back to a much more market-by-market look at our advertising media mix instead of a broad-brush approach that we took in the first quarter. Doing it on an individual store by individual store, actually, basis in certain markets, so it's a much more targeted media mix that what we had in the first quarter. I think that's going to play significantly into our performance for the rest of year.

Additionally, like I said in my remarks, we will be much more cognizant of what the promotional calendar looks like for the rest of the year as it relates to our competitors and react accordingly. So, that would probably include a few more weeks than we had originally anticipated of Buy One Get One promotions, but I want everyone to understand we're not going to give up on that initiative of reducing the number of weeks of BOGO on a long-term basis. So I hope that answered the question.

John Shanley from Wells Fargo Securities.

Good afternoon, guys. Mark, on the number of large markets versus small markets, I'm a little confused. Can you give me a rough idea of how many large market stores you have versus smaller markets?

When I'm talking about larger markets, John, not all of these are the stores -- the markets that I was referring to in the comments that I made on the underpenetrated large markets but markets that are large in our universe, like an Atlanta or Chicago or Houston or Denver, or St. Louis, those types of markets, as opposed to a Jonesboro, Arkansas or a Fort Smith, Arkansas or an Evansville, Indiana or markets of that size.

Okay, but in aggregate, the approximate percentage of your stores that are in a bigger market like Atlanta or Chicago, versus the smaller markets, how does it break out, roughly?

We will have to get back to you with that number, John.

Okay. I had a question in terms of the merchandise adjustments that you are going to make. How quickly can you adjust to get the more women's dress-shoe products, for example, in your merchandise mix, or more men's casual shoes, or more retro-tech athletic footwear? Is that going to take until the back half of the year or is there some availability in terms of (indiscernible) product that you may be able to get in from some of your key vendors that would help you in the second quarter?

John, we identified the problem back in November and December as we were traveling different markets and seeing what was going on in the department stores and realizing that our buy did not have the percentage of dress as a part of the buys it should have. So, we started reacting to that immediately and did, I think, a fairly good job for spring -- still not near strong enough as it should have been, as I commented on in my remarks, but since we saw it in November and December, we were able to react for back-to-school and that's why I specifically called out back-to-school as a time period when we can start looking for changes -- significant changes in our comp sales, because the product mix is going to reflect what we saw. As you know, most product trends, especially in the brown (ph) shoe business, go on a three-year cycle. So, we're just looking at the beginning of a nice dress shoe and a nice color story run that, to be quite frank with you, the shoe business really needed to breathe life into it. I believe the life was put into the shoe business this spring and it's just going to continue on into the fall.

Is that true across the whole merchandise categories, Cliff, or are there some that -- like women's dress shoes that are just really outstanding in terms of how well they are performing for you?

I think you'll see color and more feminine silhouettes throughout the women's product mix. I may have mentioned our casual shoe business is not very good and the reason being is that it's a little too heavy. The lighter-weight casuals and more feminine casuals are selling, and that's what we need to get as a larger percentage of our business. Color is really the big story, I think, for spring and on a go-forward basis. I mean, you can just look at what's going on in the retro and classic product; classic product with color is selling, and the consumer is out there looking for new color.

That was actually my next question; you mentioned classic being a little light for you I guess with the all-white version of classic that you are doing well on the colored?

That's correct.

You mentioned you're getting competition from the mall-based, the specialty guys that are now competing in that space with aggressive pricing. Is that what you're referring to?

That is correct.

Do they have the color or is it just that the strong demand is just -- (multiple speakers)?

Mall-based guys are doing it with white/platinum, white/white and white with color. In fact, if we walked through and I know you do that quite a bit, as you walk down the mall, you see a color on the mall level, on the mall line. So, they are doing quite a bit of that.

Our problem is that they've taken this product and again, I'm very aggressive from price standpoint for whatever reason. White classic with color is selling. I just don't really see the reason in promoting it as heavily as it's been promoted.

Okay, so that's just an adjustment. Again, you could probably make, you think, by the back-to-school period --?

The adjustment was, again, as we saw it happening in the marketplace back in November and December, we placed our buys as we went to back-to-school with that in mind.

Okay, great. Are there any new merchandise products or any new brands that you've added to your mix that you're excited about that could offer some additional potential for you?

The only thing that I'm really prepared to talk about as far as a huge addition to us or a huge growth would be skate. We see that playing a huge part in back-to-school.

Is that the whole brands or is there is -- like, is it basically in the young guys' business or is it teenage and pre-adolescent girls wearing the skate shoe again?

Yes, all of the above. (multiple speakers).

Stevie Martin from Slater Capital Management.

A follow-up to a couple of John's -- you guys have always had a problem with skate across all your stores. What's different this time than before? Is there, I guess, John started to ask -- is there something new? Is it DC and (indiscernible) or is it Vans? What are you seeing that you didn't see before?

Steve, we actually -- I think it's been about three years since skate has been a really strong player in the marketplace, and we had a very successful year in skate at that time. The next year, there was a vendor that -- and I think maybe what you're recalling. As soon as I got into the skate business, I probably should not have gotten into the skate business and we took some heavy markdowns on that product. We quickly got away from that particular vendor in skate.

Today, what's happening -- and we're seeing it already in our sales -- we own skate today; in women's, we own a little over 100 stores in skate product and men's all stores and we're seeing great sell-throughs (sic) on some of the traditional brands that you mentioned earlier. We think that's not going to do anything but get stronger. I just got back from a market trip to a large Midwestern city, and skate is all over that town, so -- and selling, so I think skate is going to be a great opportunity for us as we move forward.

Are you carry Hawk and/or the new Quicksilver product?

The midtier brands we're not, at this point, open to those brands. Midtier brands mainly and Vans and NSS (ph) and a few of the other -- (multiple speakers).

I got you. Your comments about classic -- it seemed that you were in one breath saying that it's doing very well but in the other breath it's below plan. Can you dissect that a little more?

Well, very well versus year ago. You know, a year ago, we were running almost triple digit increases in fashion classics, and we've planned that business up high double digits. We're getting pretty high double-digit sales on the product today but just not where our plan was.

How are your inventories?

Inventories are a little heavier than we want them to be today. They will be back in line by back-to-school.

I got you. Well, I know you don't like to do this. Is there any brand that is more or less contributing to that?

We really don't talk about brands. I just don't feel comfortable doing that.

Harry Ikenson from First Albany Capital.

Good afternoon. I just want to follow-up on one of the topics because I would like to sort of do a (indiscernible) plus I'm a little confused. I thought that, on the last conference call, the Company indicated that you were ready for spring, that there is going to be a lot more color in spring, which checked out with all of my apparel retailers are telling me -- and that that would be a boom to the business. So where was the miss? Because in the past, I viewed two things -- two very strong points of the Company has been the buying team, be able to react quickly and also systems. So how did this miss come about when it seemed to be pretty obvious at my level and on the apparel level that color was going to be such an important issue to be under-purchased? I would appreciate any light on that. Thank you.

Harry, I will be glad to answer that. I think it's two things. As you know, we buy four to six months in advance; the majority of our buy, probably 80 percent of the total is placed that far in advance. We rely pretty heavily on the mid-tier, on our vendors, for direction. I'm going to tell you, if you go out and shop our competitors in the mid-tier retail, you're going to see pretty much the same thing I just talked about; there's not near as much color as you see when you walk into department stores. The higher-end brands recognized what was going on better than the mid-tier brands. It put us at a competitive disadvantage.

We went out in November, as I was telling John, and shopped the marketplace -- went to South Florida and L.A. and shopped the marketplace and saw that color was becoming very, very important in department stores -- although we still didn't see it in the mid-tier retailers. We then went out and reacted to that as quickly as we possibly could, getting product made and shipped in, buying product off the floor, doing whatever we could to get product in. We, from a percentage standpoint versus last year, increased our color selection I'm going to tell you triple digits; it was phenomenal how much of an increase we had in color, but it still wasn't enough. When you go in and look at department stores (indiscernible) color and come into a mid-tier retail like us and -- and I'm not going to name my competitors but you know who they are -- and see the lack of colors, it's very, very evident that the mid-tier wholesalers just plain missed it.

Now, if you count on -- we're not a department store and I don't have a parent company that has been -- we're not a department store and don't feel comfortable talking in terms of that -- where you're listening to the apparel people every day talk about the color coming into the apparel lines. You then have to count on your vendors for that information. We found that's just not going to work on a go-forward basis. So, we've taken big steps and we're going to start attending other types of shows and other types of venues to get this color information. We've signed up for color trend reports and fashion forecast reports, and I think that we are on top of it on a go-forward basis. It was a miss and I did talk about in the last conference call and we did increase the color assortment and the dress-up assortment in our product mix but it was not near enough, if you compare us to the department stores. Unfortunately, not to drag this out this long, but unfortunately, we don't hear how to department store shoe business is performing -- but just from when you look at it from an aesthetic standpoint, they were much more prepared for spring than we were.

I appreciate that answer. Thank you very much.

Virginia Genereux from Merrill Lynch.

Thank you. Two questions, please? First, Mark you sort of summarized I think what went wrong with the ad strategy and what you had sort of went through what went wrong. Maybe I didn't catch it. Can you tell us have you had a chance to retool and see if something is working, or do you sort of need to wait for back-to-school to do that because that's bigger ad spend?

No, Virginia. As I say, we're making changes as we speak today. You know, a lot of those changes won't be able to be effective until late in the second or third quarters, but we're making changes already. As I said before, we did not see a good, definitive trend on where additional spending worked, or where additional spending didn't work, except on a market-by-market basis.

So, the most important take away from the reversal of strategy, if you will, right now is that we're going back to a more market-by market specific media mix strategy, as opposed to just a broad-stroke television campaign across all of our markets. That's the key. Those changes are being implemented today. As you well know, when you are placing television buys and canceling television buys and placing -- you know, print is pretty easy, and radio, to an extent, is much easier than television. A lot of those changes will be affected, are being affected now; more will be affected towards the end of the second quarter and will be -- you know, if you want to look at it this way, full-blown into the new strategy in third quarter and beyond.

Great, thank you. Secondly, if you all could comment on how the new stores are doing? It looks sort of stores not in the comp base. It looks to us like, even in this last quarter, that the newer stores -- and you've talked about this -- the newer, non-comp stores are still lagging the comps by 4-plus percent. If you could talk about how they are doing and sort of part B of that, Mark -- I see that you opened some stores -- well, you know, San Antonio, Wichita Falls, a couple of your markets are sort of one-off -- I mean, are still small -- you know, there aren't many stores in those markets where you seem to be opening some stores. If you can talk about that.

The stores in San Antonio and Austin were committed last year. Beyond those two markets, we're not opening any stores in markets that we are either not already in or that are smaller markets within our current geographic regions. There's no question; we're not happy with the performance of new stores from a topline standpoint. A lot of those stores in 2000 -- a number of those stores in 2002-2003 were opened in larger markets where we are still very much underpenetrated. Again, it goes to the real estate strategy that we've set out for this current year and probably for the entire next year -- is that we're only going to open stores that, again, either fill in those marketplaces or are very small, one-store markets or two-store markets where we can quickly gain an advantage in advertising and promotions.

Okay, so this should be the last quarter effectively -- I men, on the go-forward, you've had the ability to sort of rationalize that store opening and this should be the last quarter where we see sort of -- where there will be stores opened that might not fit that cluster strategy. Is that right?

That's exactly right.

Kevin Foll from Next Generation Equity.

Hi, guys. Just another color question -- I apologize but I wanted a more specific question in terms of some of the women's apparel retailers I saw, you know, one of the companies had about 60 percent of their inventory in pink in this first quarter and they blew away the comp guidance. Now, they are seeing very strong sell-through to the citrus so far in the second quarter. I'm wondering what percentage of your inventory do you think is in the citrus color in the second quarter in the women's fashion? Are you seeing pretty strong sell-throughs so far?

I couldn't tell you the percentage of inventory in the citrus. It wouldn't be a large percent but I will tell you that we are experiencing strong sell-throughs not only in pink but in citrus colors.

Okay. Kind of, Kerry, maybe a kind of detailed in the gross margin break-out for your guidance (sic), what sort of merchandise margin are you implicitly expecting in the second quarter? It looks like you are up against some pretty easy comparisons versus last year.

We expect our merchandise margin to be flat to slightly up but because of the lower sales productivity in the quarter, we're looking to be down anywhere from 20 to 50 basis points on the gross margin.

Okay. How much of the --?

That would include the buying distribution occupancy.

Right. What percentage of that merchandise mix potential or merchandise margin improvement is kind of the mix shift towards the women's dress shoe, which carries the higher margin? Is that kind of driving that?

I think more so what happened, in comparison to last year, we had to take some very aggressive markdowns during Q2 of last year to liquidate a lot of (indiscernible) footwear. Our merchandise margins fell 40 basis points. I think what we will see is when anticipation with our inventory is in better shape that we're not going to have to be as aggressive.

Right. Looking into the key third-quarter back-to-school season, are you confident enough at this stage in terms of your tweaking your advertising and getting the right product in the stores that you're going to be able to put a little more inventory in the stores after several quarters of taking it out to kind of support a comp for the back half?

No, we will continue to pressure the inventories. We think that, on a long-term basis, we can force more productivity out of the inventory that we do carrier. You know, we will shift that inventory mix as we go from season to season. Obviously, the back-to-school season becomes a much more athletic-driven inventory and we will probably increase the amount of athletic product that we carry for that period of time but decrease the amount of other categories.

As we shift into the later part of fall, then we expect our women's products to start -- or women's non-athletic product to start performing much better than it has in past years and will increase the amount of women's non-athletic but relative to last year at that point in time.

Okay. One quick follow-up for Cliff in terms - you mentioned you're going to drive higher average unit retails in the second half. Kind of what are some of the drivers behind that?

Well, we believe that, first of all, we've taken a look at this infrastructure very tightly and those vendors that are driving the lower price, and we've cut those guys back and increased the guys that we believe we can get a higher price prepare out of. We all we also think they are heading into a fairly good item season. There are some strong items out there (inaudible) a lot of questions, but a lot of strong items out there that we think we can -- that we bought into fairly aggressively that we can drive through some pretty high prices out of.

That concludes our question-and-answer session today. At this time, I'd like to turn the call back over to Mr. Mark Lemond for any closing remarks.

Well, we tested some pretty significant marketing and promotion strategy changes in the first quarter of this year. A lot of those changes didn't work but some did, particularly on a market-by-market basis. We intend to react very quickly to those and (indiscernible) that didn't work and continue to fine-tune those that show promise as we look forward to getting these sales and earnings results back on track. We're looking forward to the rest of the year, particularly the second half, as we adjust our promotional calendar.

With that, I thank you for joining us today.

That does complete today's Shoe Carnival conference call. We appreciate your participation. You may now disconnect.