Shoe Carnival Inc (SCVL) 2004 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 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, including 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 comments. Mr. Lemond please begin.

Good afternoon, this is Mark Lemond, by the way. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer, Cliff Sifford, General Merchandise Manager and Timothy Baker, our Executive VP of Store Operations. What I'd like to do this afternoon is briefly discuss the second quarter then give you a look at what we're seeing in the early back-to-school business and finish with an update of our expansion plans. While we saw a difficult sales pattern in the second quarter, we were able to tightly control inventory, increase the gross profit margin, leverage overall SG&A costs and actually reduce administrative expenses.

All of this resulted in an improved operating margin and a 26% increase in earnings. Sales for the second quarter rose 2.7% to 138.1 million from sales of 134.5 million in the same period last year. Comp store sales for the quarter declined 3.7%. Net earnings for the quarter were 1.9 million or 15 cents per diluted share compared to net earnings of 1.5 million or 12 cents per diluted share in the third quarter of 2003. We believe sales in the second quarter were negatively impacted by slow consumer spending in June and July, certain fashion misses in our spring merchandise assortments and a continued, although smaller of factors, resulting from our earlier change of advertising strategies.

Additionally, late in the quarter, we were impacted by the movement of certain states' tax free holidays out of July and into August and consequently out of our second fiscal quarter into our third. With the exception of a softening economy, we think we have effected the changes necessary to positively impact our business in the second half, particularly in our merchandise mix and advertising effort. Having said that, our early back-to-school - - our early sales in back-to-school have been generally slow with comp store sales declining low single digits for the first 10 days of August. But because we have seen some very erratic sales patterns, we think sales may pick up in the latter part of August and into September.

Let me give you a few specifics to help explain that comment and bear with me, I will try to go slow because the numbers, although they're accurate, become a little convoluted. Number 1, the comp store sales comparison to last year is much tougher earlier in the month of August and easier toward the end. Last year, for the full month of August we recorded a comp store sales increase of 5.1%, but that increase occurred for the most part early in the month. The first 10 days last year generated a comp store increase of over 10% while comp store sales increased only slightly better than 1% during the last 18 days of fiscal August. We believe this disparity resulted primarily from the release of child care credit checks in late July and early August last last year.

We now realize this economic shot in the arm last year had a more pronounced impact than we, or most other people for that matter, realized at that time. Number 2, as I just said, we have so far recorded a low single digit decline in comps in August. However, sales in our comp stores in areas that have already gone back to school have increased high single digits during the first 10 days of August. This statistic is somewhat skewed by the fact that generally our Southern stores go back to school earlier than the Northern stores and the states that have sales tax holidays are for the most part in the southern half of our footprint. However, stores in areas that have yet to go back to school have seen a decline in sales in the very high single digits.

What this tells us is that the tax credit checks last year had a big impact on early sales in all areas of the country and without that influx of cash, back-to-school sales may occur later this year, particularly in the Northern areas where schools are not yet in season. The real takeaway from this is that we, like most other retailers, won't have a really good handle on August sales until much later this month. For that reason and the fact that August normally constitutes over 70% of third quarter earnings, we have decided to delay third quarter EPS guidance until we release August sales. Turning now to store openings and expansion plans, during the quarter we opened 2 stores, one each in Abilene and Texarkana, Texas.

In the second half, we expect to open approximately 7 stores in the third quarter and 2 stores in the fourth quarter. 2 stores will close late in the fourth quarter and thus we expect to end the year with about 257 stores. Although comp store sales are not positive, we continue to see better performance relative to our expectations from our older, more established stores compared to our newer stores, particularly those in the larger, newly opened markets. Consequently, our focus for 2005 will center on improving the productivity of our existing store base.

But in order to significantly impact those newly opened stores, we recognize the need to fill in those markets and enhance the advertising effort. So, in regards to our 2005 expansion plans, as I have stated before, we intend to only open store sites that come available in existing markets and certain select smaller markets where we think we can dominate the shoe business very quickly. Therefore, I have not targeted a specific expansion rate for next year. Currently we have 3 leases signed for 2005 openings.

I just want to close by saying that as we enter the fall and winter season, we are anxious to see the impact of a pretty significant change in our men's and women's nonathletic merchandise mix. We have placed much more emphasis on more fashion forward product in the dress and dress casual product. Also, the changes in our advertising strategy, to a market by market ad plan, will be fully implemented this fall. What I'd like to do now is turn the call over to Cliff and go through some of the merchandising issues.

Thank you, Mark. As Mark stated, we experienced a 3.7% comp decline for the quarter. I'm going to take the next few minutes and walk you through each department to shed some light on these results. In women's nonathletic, our comparable store sales for the quarter were down mid-single digits. However, we saw gains in both the traditional and junior dress categories. In addition to dress shoes, we experienced flat sales on a per door basis and the casual sandal category while inventories were down double digit on a per door basis. Unfortunately, we experienced double digit comparable declines in our closed up casual category.

The casual losses are a continuing indication of a shift to a dressier fashion in women's shoes. As we shift our business to fall, our buyers have done a much better job of studying the market to be be in front of fashion trends in color, style and important silhouettes. 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 magazines, Internet and cable TV channels directed to her. With this in mind, we are no longer counting exclusively on the vendor community for this information.

Earlier this year, we initiated a program to get our buyers the trend information they need to effectively do their jobs. And now that fall is beginning to transition and we have been in the marketplace, we feel very confident that these programs are going to pay off. Based on what we see at key department stores and boutiques, we believe our team has put together a trend right product mix for fall. In men's nonathletic, our business was down low single digits on a comparable store basis. As I stated last conference call, we feel that we are beginning to see a turnaround in men's shoes.

Dress shoes, sandals and work boots all showed gains on a comparative basis. We continue, however, to experience declines in our casual categories for both the traditional customer and the fashionable young men's customer. Our overall athletic business outperformed the Company posting a low single digit comparable sales loss for the quarter. We saw continuing strength in the basketball, skate and retro product. Fashion classic, white, athletic product is still selling well ahead of last year although not to plan.

And children's athletic, we were very pleased with the performance of our girls and infants category for second quarter. Both of which have been driven by exclusive makeup product and the running classification. Additionally for back-to-school, we have experienced some price compression in our athletic departments as some mall and off the mall retailers have become very promotional. This price compression and the slower than expected sales on classic white product have produced sales and margins that are below expectations.

In closing, total inventories for the Company finished the quarter up 1.6% on a per door basis. The increase, which was primarily in the traditional back-to-school departments of kids and athletics, was planned to address the shift in tax free holidays and back-to-school. Last year, tax free and most markets was the last week in July, whereas this year tax free and consequently the sales that go along with this event move to the first week of August. It is important to note, however, that our inventories in the seasonal product categories were down double digit on a per door basis. Our buying staff has done a very good job controlling this potentially volatile seasonal inventory. Now I'd like to turn the call over to Kerry Jackson.

Thank you, Cliff. Our net sales for the second quarter increased 2.7% to $138.1 million compared to 134.5 million for the second quarter of 2003. The increase in sales was due exclusively to the opening of 26 new stores since the second quarter of last year. Our same store sales were down 3.7%. As we had discussed before, part of this decline was due to a shift in tax free days from end of July last year to beginning of August this year.

Comparable store sales were up 0.5% in May, down 4.6% in June and down 6.3% in July. Gross margins for the second quarter 2004 increased 20 basis points to 27.7% compared to 27.5% in the same period last year. Excuse me. The overall increase hides the fact that our merchandise margin actually increased 90 basis points but due to lower sales productivity during the quarter, we deleveraged our buying, distribution and occupancy costs by 70 basis points. We are pleased with the increase in the merchandise margin an increase that exceeded our original estimates for the quarter.

SG&A expense, as a percentage of sales, decreased 20 basis points to 25.3% for the second quarter, compared to 25.5% last year. Breaking SG&A into components: store selling expenses increased 10 basis points despite a 50 basis point reduction in preopening costs. On the other hand, we did leverage our G&A expenses 30 basis points by holding actual expenses to a level below that was spent last year in Q2. New store preopening costs incurred in the second quarter were 147,000 or 0.1% of sales compared with 828,000 or 0.6% of sales last year.

We opened 2 new stores during the second quarter of 2004, compared with 11 stores in the second quarter last year. Operating income for the second quarter increased 27% to $3.4 million compared to $2.6 million in the same period last year. As a percentage of sales, operating income increased to 2.4% from 2.0% last year. Interest expense for the second quarter was $178,000, which was slightly more than last year. The effective income tax rate for the second quarter 2004 increased to 39% from 37.5% in the second quarter 2003, due to higher state income taxes.

We expect for the full year our effective income tax rate to be 39%. Net income increased $403,000 to $1.9 million for the second quarter from $1.5 million last year. Diluted earnings per share increased to 15 cents per share from 12 cents per share last year. For the first 6 months, net sales increased 4.5% to $283.6 million compared to $271.3 million in the first half of 2003. Same store sales fell 2.8% for the first 6 months of 2004.

Gross margins for the first half of 2004 decreased 20 basis points to 28.5% compared to 28.7% last year due to higher buying, distribution, occupancy costs as a percentage of sales. SG&A, as a percentage of sales, decreased 10 basis points to 24.6% compared to 24.7% in the first half of 2003. Preopening expenses for the first 6 months in 2004 were $876,000 compared to 1.6 million in the first half of 2003. Net income for the first half of 2004 was $6.5 million or 50 cents per diluted share compared with net income of $6.6 million or 51 cents per diluted share last year.

We were in solid financial condition as of July 31, 2004. Our inventories were up 10.9% to $190.7 million but only up 1.6% on a per store basis. As Cliff said earlier, the increase in per store inventories is primarily in athletics and children's nonathletic footwear, the primary categories we sell at back-to-school. After opening 26 new stores over the past 4 quarters, our long term debt has only increased $4.5 million to end the quarter at $32.5 million. Long-term debt to total capital at the end of the second quarter was a modest 18%.

Depreciation expense for the second quarter and first half of 2004 were $3.6 million and $7.3 million respectively. Capital expenditures for the first half of 2004, net of lease incentives, were $6.7 million broken down as follows: 2004 new stores were $3.5 million, the remodeling and relocation of stores cost $1.8 million, all other additions were $1.4 million. Capital expenditures for the full year are expected to be between $13 and $14 million. This concludes my financial review of the second quarter. I'd now like to open the call up for questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like ask a question, please press the star key followed by the digit 1 on your touch tone telephone. Once again, if you would like to ask a question, please press star 1 at this time. We'll take our first question from Jeff Stein with KeyBanc Capital Markets.

Good afternoon, Mark. This has been a pretty tough environment for most mid tier retailers. And nonetheless you guys have to, you know, play the hand your dealt. And I'm curious what initiatives do you have that you believe you have to outperform your peers? And to take market share? And to figure out a way to grow in this difficult environment?

Well, Jeff, certainly we can't do anything about high oil prices. We can't do anything about the lack of tax checks being distributed this year versus last year and some of the other economic issues that all retailers are facing, certainly in the mid-tier and lower-priced channels. Where we are focusing, though, is is the things we can effect from our own execution standpoint. I think our merchants have done a very nice job transitioning our product in the fall season. Again, we've talked about the fashion influence in the fall season that we did not have in our inventory in a great way in the first part of this year, especially with respect to color. Although color becomes a lot more muted in the fall than it does for spring, just by the inherent nature of it. You know, we've talked about the advertising changes that we effected in the first half that turned out to be the incorrect strategy and we've reversed those. Some of the effects we saw in July, but the full effect of those changes, I think, will come in the second half of this year, especially as we start moving into fall and winter seasons. So, those primary, you know, 2 things, from an athletic standpoint, what we've got to be able to do is drive product with the - - or drive sales with the product selection that we're given, from some of the larger athletic vendors like Nike and New Balance and so forth. So, we've got to do a - - you know, I think our athletic merchants do a pretty good job executing that strategy. We're going to continue to put pressure on our vendors for better product selection, particularly with our large - - you know, our largest vendors, so that's a very important priority for us. I know that's an important priority for all the people in the mid-tier channel right now. So, you know, if I were going to boil it down a couple of things, it's - - well, 3 things primarily. Number 1 is the merchandising mix that we're putting in our stores. Number 2 is the way we advertise that merchandise mix. And the reason for customers to come into Shoe Carnival. And number 3 is the store opening plan that I described.

Okay. You alluded to the fact, Mark that you only have a couple of leases signed for next year. It sounds like your real estate strategy is going to be very opportunistic. I mean within a range, can you kind of narrow it down? Are we maybe looking at just a handful of locations next year? Or do you hope enough show up that you might be able to get up to 20 or so locations?

Well, Jeff, let me answer it a couple of different ways. First of all, I would like to get a number of stores open, merely because I'd like to be able to fill in the markets where we need fill-in stores desperately, in the worst way. So, I'd like to say that, you know, there's a good number of stores out there that I'm looking at - - there are a good number of stores that we're looking at. But I want to make sure that those are good, viable stores in markets that I need fill-in locations. You know, we've always, up to this point in time, given a range of stores that we're going to open or we have given a quantified indication of our expansion plans. I'm not willing at this point in time to do that. And, you know, we're looking at it as, okay, start with a ground based store expansion rate next year of 0. And on top of that, if we do have good sites that come available in existing marketplaces, which we hope happen. Or in small market areas, where we've done pretty well, then we're going to take advantage of those sites. Otherwise we're not going to open the stores. And focus on our existing store base. That's the way we're approaching next year. We've got the capital to open stores, both from a personnel standpoint and from a financial standpoint. So, we have the wherewithal to open a good number of stores but, you know, the different tactic we're going to take with this upcoming year is, instead of laying out a certain number of stores that we're going to open, we're looking at it internally as if there are opportunities available to fill in our larger marketplaces, then we're going to do that.

Okay. Thanks a lot, Mark.

We'll go next to John Shanley with Susquehanna Financial Group.

Good afternoon, guys. Mark, I wonder if you can give us an idea of how many Shoe Carnivals' 250 stores are located in markets or states where this tax issue, moving from the second quarter to the third quarter, had a major impact on sales in the second quarter?

Going to have a number for you in just a minute. I got 3 guys working on it as we speak.

Okay, let me move to my other question, which is: In the market areas where you mentioned at the end of the first quarter there was some areas you went into and really didn't bulk it up enough with your new store openings plan. Where you have had an opportunity start filling in these market opportunities, what's been the results in terms of the comp store sales numbers in those - - for those existing stores? And those specific trading areas? Do you have a sense of how well you've done --?

Well, the fact of the matter is, John, we have not been able to sufficiently fill in those larger market areas. And again, I will give you some examples like Cleveland, Milwaukee, Denver, Houston, so far we've been unable to put a sufficient number of stores in there to drive comp store sales. In market areas like Chicago, where we've been able to put in a pretty significant number - - I think we've got 18 right now in that market area, comp store sales, with the exception of the early back-to-school period, have been pretty good. So...

But Chicago you've been a major factor in that market for some time. I'm talking about expansion of the existing markets, whether it's Cleveland or whatever, where you need to bulk up. And then how long would it take in terms of your current plans for new store openings to get to the position where you've got enough of a presence in these - - some of these markets? Do you have any time horizon? And are we talking about '05, are we talking about '06?

That's going to depend largely on the number of sites that become available in those marketplaces. You know, we've identified a few locations in Houston for next year, that in and of itself is not going to give us sufficient mass to do a bang-up job with advertising. But again, you know, I want to emphasize that as sites become available, we're willing to take advantage of it. We just don't have a good time horizon as to when we'll, you know, be fully flushed out in those market areas.

Okay.

John, hey John, we've got a - - I think we've got a pretty good answer on the first one here.

John, we had 4 states that shifted their tax free days from July last year to August this year and that encompassed about 55 stores.

So, 55 of 250, about 20%, Kerry, of your store base?

Yeah.

Okay. Fair enough. And then the last question I have is can you give us an proximate sales breakdown in the quarter of between your major merchandise category? Did it change dramatically from the second quarter of last year? In terms of how much of business was done in each of the core components?

John it didn't - - this is Cliff. It did not change dramatically but kids business went up somewhat. I will give you a breakdown. Women's 24%. Men's 14. Kid's went up to 16. Athletic was 41.5. And accessories was 4.

Where was athletic, Cliff, in the second quarter of last year, was it about 41?

Athletic last year was 41.5. So it stayed flat. Athletic is the one that - - children's is the area that went up.

Okay.

Totally athletic counts for about 52.8%, 52.5.

You're talking about for the full year?

Generally --

Is that the expectation?

John, let me clarify that. Children's, when I say 14 -- excuse me, kids, that's ground and athletic.

Okay, got it. Okay, guys, thanks a lot. Appreciate it.

Okay.

We'll take our next question come Virginia Genereux with Merrill Lynch.

Thank you. First, maybe, Mark, just so I understand what your comments about the comps at the beginning of the month. Tou're saying even with the tax free holiday shift, the comps were still sort of down low singles, but you didn't get the boost that either you anticipated or enough to offset the anniversary of the tax rebates last year?

That's correct. You know, the states that moved for us were North and South Carolina, - -

Texas and Iowa.

Georgia and Texas. And even if the case of - - and you know, I'm getting more specific than I normally like to on these calls, but in the case of North Carolina, a lot of those stores had gone back to school before the time they had the tax-free holiday. So, what we saw was in a number of stores not across the board, but in a number of stores, the tax free holidays didn't mean as much last year because of that effect. We saw that and we know some other retailers saw that effect in a couple of different states, where the schools went back before the tax free holiday this year as opposed to not in the year before. What we saw in the early part of August is that we had close to double digit or at double digit increases year over year comps in our southern region and big negative declines in our, again, in the northern region. And the northern regions did not have the sales tax impact - - or the movement of the sales tax holidays the way we saw in the southern region. But what we think had the biggest impact overall was the lack of tax credit checks that didn't come out this year early in the month, impacted the northern regions more than it did the southern regions. If you see what I'm saying.

That was your commentary at the beginning. Okay, thanks. And on the advertising - - on your advertising initiatives, going towards more of the back to the sort of market's specific focus, can you give us any update? Have you seen whether they're gaining any traction or is it too early to say?

Well, that's what I thought I said, maybe I didn't make myself clear. We changed that strategy in second quarter.

Right.

And the strategy was not fully put in place in the second quarter. We couldn't cancel TV, for example, and place television in certain markets, for example. What I'm saying is that now that we are going into the third quarter and as we move further into the third quarter, we will see that strategy fully implemented, but we couldn't fully implement that in the second quarter.

Okay. That was your - - I just really mean in the first couple of weeks of - - in the beginning of August you haven't - - it's too early to see any impact?

Well, again, you know - - if you could - - you can slice and dice sales, you know, 50 million ways. And yes, in certain markets we have definitely seen a big impact and particularly those markets in have gone back to school. Again, we saw close to double digit increases in a lot of markets that did go back to school with very specific market advertising plans for those markets. But again, I think there's other factors that have impacted that and not just the ad plan in those particular markets.

Okay. Thanks - -

Is that okay?

Thanks. And on the athletic side, if I may, you all remarked on this I think on your last call. Tou seem to be saying that the white athletic product is ahead of last year, Cliff said, but it's running below plan and. Then you said that the - - every other retailer - - or other retailers and some mall guys are being more promotional there. 1, can you give us some more detail? I mean you're talking about Locker doing 2 for 89. Is it just white classics? And then you said that we want - - if we get better we're also trying to pushing to get better product selection in athletics. So, on the one and that sounds like you're running into some competition on the white classics, but then on the other hand, do you think it's a product thing where you don't have, you know, are the vendors not - - are they not developing better product for the moderate channel? Or are you not getting the access that you'd like to it? If you could just talk a little bit more about that?

Virginia, the hottest product in the marketplace today and you guys see it when you're talking to the mall based guys are Shocks and Air Force 1's and we're obviously open to that product and neither is anyone else in our trade channel. So, we're talking about getting better product, although that probably won't happen in the near term, but it's product that attracts that consumer. And we don't have that today. As far as the white athletic product, we are seeing - - I don't believe we're alone in the fact that we're not making plan on that product. Our original plans on white athletic product. And consequently as such, the competition, including the guys in the mall and the one that you mentioned, very promotional with that product. And that requires us to be somewhat more promotional, as well. Just to sell through. And I don't see that slowing down for the next 4 to 5, 6 weeks.

Okay. Cliff and I - - are you seeing, you know, understanding that, you know, that the Shocks is not available to you and product like that. Is there better product for the moderate retailers the way, you know, the vendors have talked about and some moderate retailers have talked about?

I'll tell you that we're getting our vendor partners are working with us closer than they've ever worked with us before. Nike has put together a product team just for this channel, along with the management team for this channel and working with us. And we saw improving sales in the first half of the year with Nike. And not completely where we want to be there, but we see great progress. I can also tell you that is happening with other of our major partners. I don't want to get too specific because there are some things that we're doing exclusively with some of the other guys I would really rather my competition not know about, I guess to retail. But we are finding that the vendors are looking toward us this channel as very important part of their business. On a go forward basis.

Okay, and then just last one, if I may, for Mark. Mark, you've been - - you've had some insightful commentary here. If you look at the retail landscape to your point - - at the retail landscape, rather, you said we're going to see where there's opportunity to fill in. Has it gotten a lot tougher to find, I mean to fill in these markets that talking about? I mean what's the - - the real estate is in the just not available or the stuff that is available isn't compelling - -?

In the past 2 years we have seen a decline in the number of sites that - - I should say number of what I consider viable sites available in the midwest and into Texas. What we our guys are telling me, because I didn't get a chance to get to ITSC this year, is what I'm hearing is that a lot of things are opening up, some in the Texas market, some in the other parts of the midwest where we need to fill in stores for 2005 and certainly into 2006. So it seems like the - - I don't want to quantify that, but we've got a lot of store sites that we're looking at for the next 2 years. A good number of those are in the fill-in markets. I'll never get specific on exactly how many are on each side but we have seen it open up a little bit and in certain of the market areas, anyway. In certain other mark - - in certain other southern markets, it's still very tight. And what we're going to have to rely upon is secondary usage real estate becoming available and not that new development taking place in those particular markets. And that takes a little bit longer time to avail yourself of those kind of sites.

Right. Okay. Thank you.

We'll go next to David Turner with BB&T Capital.

Thanks. I thought you might have changed your name, Mark. Mr. Lemond. Anyway, I was curious about how the comp broke down by maturity of store. You had touched on earlier that some markets are obviously doing better than others. But you know, have you looked at it by stores that are 5 years or older, what they comp versus the younger ones? And does that help formulate your strategy for marking or that it is just a marketing plan that you need to build a brand?

David, we certainly - - we look at obviously we look at each individual story and group those together a number of different ways to look for trends and in comp store sales and trends, not only in total store comp store sales, but down to the product category levels. So, yeah, we break the sales down a number of different ways. You know, what we're really looking at there is from a merchandising on an individual store need as well as a marketing effort, an advertising effort, if you will. That's why we think that now that we're going to get back to market by market specific ad plans it's going to benefit those - - all those stores collectively more so than we did in the first quarter. So, - - does that answer your question?

Well, I guess the easiest way would be to quantify. Is there a way to say that all the stores that are 4 years and older are comping at 3% and the ones that aren't - - you know if you don't have the numbers in front of you, that's fine. We can talk off line but.

We have the numbers, but I'm not going to release the numbers. We don't release individual store comps. You know, suffice it to say that some of our older stores are doing better than our newer stores. But again, you know, that's a generalized statement, obviously with retail you've got - - you know, stores in any particular year that we open are doing well and we've got others that are not doing well. I think it makes more sense in our case to look at the stores more on a market to market basis and analyze, certainly we do, anyway, analyze why those stores are not doing well or why certain stores are doing particularly well. And when it comes down to it, the biggest reason that we see, although not the only reason, but the biggest reason why we see is the dearth of advertising in particular market areas.

Okay, and then the August - - the early read on the early August sales. Does is this change your mind regarding promotional activity - - you have played it closer to the vest this year. You know, it's kind of accelerated a little bit, but could it - - I guess the myth, so to speak,early August, is this going to lead to a re-acceleration of promotional activity in an effort to drive traffic? Or is just the product not available? Or are you - - you know, what other ammo do you have to try and drive that traffic?

I think the real answer to your question is that if anybody got anything from that diatribe that I gave regarding early season sales is that it's a very mixed bag that what we're seeing is that stores that haven't gone back to school yet are performing early significantly worse than stores that have gone back to school. Because the stores that have gone back to school are performing above 0. So, you know, what we're saying is that we'd really like to, you know, get through the back-to-school during all the way through the back-to-school period into early September, before - - we will, anyway, before internally we make any drastic or take any drastic steps with regard to our strategy. Both from a merchandise and a promotion strategy into the fall season. You know, I think it's too early to predict EPS at this point in time because August is such a huge part of it. And August right now is such a mixed bag that I'm not willing to make that prediction. So, I'm certainly not willing to make a prediction about jumping out on a limb and changing promotional strategies in the third and fourth quarter.

All right. Thank you.

We'll go next to Kevin Foll with Next Generation Equity Research.

Hi, guys, a question for Cliff on some of the trends you're seeing out there for back-to-school. I know there's the preppy trend, obviously. And I just want to get your thoughts on some of the sporting goods guys, you're seeing kind of like move away from some of the athletic jerseys and athletic and kind of outerwear and wondering how that plays into your plans relative to inventories and the athletic product?

Well on a go-forward basis, obviously right now, as I stated the inventories in athletic products we go into back-to-school. So, we feel that - - we felt and we still do feel that through back-to-school we will see strong athletic sales throughout the month of August. Now, as you move past August into September, we do believe that the trend is going dressier and that as it gets dressier, we'll see more and more of a fashion shift into women's dress product and men's dress product. And we have made plans for that and made plans for that as - - with our inventory, as well. Bringing the inventories in athletics down and the inventory in dressier, more traditional product up. Because as you stated, there is a huge preppy move now, not only in the urban market, but moving across into the more traditional and junior market, as well.

Okay. And it also looks like your comparisons in the men's and women's athletic are the toughest in the third quarter, relative to the other categories?

That would be correct. We had a tremendous fall season in athletic last year. But on the other hand, we have a lot of opportunity in the brown side of the business. We had weak sales in men's brown last year, with the urban product and the fashion product never took off for us the way we expected. And our boot product and dress product did not perform as well. We see that changing completely this year with dressier product. Well, we've already seen momentum in dress product take off. And normally when you have a nice, dressy run the way we see it this fall that relates right down to the boots, as well.

Okay. And also, you guys have done a nice job increasing the merchandise margin over the last 2 1/2 years now. How much opportunity do you see going forward with the merchandise margin?

We - - you know, if - - with the shift of product out of athletic and into brown, there should be opportunity in the margin. We, I don't want to get too excited over that today. I'd like to see how the trends develop. But you know, historically you run higher margins in the brown shoe business than you do in the athletic business. So, there is opportunity there. It really depends on what happens with our competition. You know, if very to continue to sell product below our expected retail price to keep up with the competition. Then that will drive merchandise margins in certain categories down, which may override the margin increase I get in brown. So, I want to temper my excitement a little bit, although I do think there is opportunity.

Okay, and then lastly, what are your thoughts on, you know, some of the current weather trends? It's like barely getting 60 degrees here in the middle of August and, does that whet people's appetite for back-to-school a little earlier in the north? Or how does that typically play in?

I think appetite for back-to-school comes2, 3 days, regardless of what the weather is like, prior to back-to-school starting. Customers are buying much closer to need. So, school starts on Monday, they start shopping on Friday and Saturday. And we've seen that trend happen over the past 2 or three 3 and we've certainly seen that trend happen this year. Stores will just go crazy 2 to 3 days prior to opening, regardless of what, prior to school opening - - regardless of what weather is like. Now, if cool weather continues like we had in September and in the fall, I certainly don't know how that's going to play out. It will certainly play well for the fall shoe and boot business.

Cliff will be doing back flips if this weather continues into September and October.

That's the truth!

It really doesn't - - it shouldn't have much of an impact right now, back-to-school is driven by a need that's not related to the weather, for the most part. It's nice to have warmer weather, though when you're selling athletic product. But certainly as we get into September and October, if this kind of weather continues, which I don't think it's supposed to continue quite this cool, but if this continues in September and October, I know not just us, but a lot of retailers will be very excited about that.

Yeah, well we're still waiting for summer to start here in Chicago! [ Laughter ]

Well, Chicago is one of those areas that hasn't gone back to school yet.

Several more weeks.

Right, thanks, guys.

Once again, it is star 1 for questions. And we'll go next to Brendan [Nackanach] with Columbus Capital.

Hi, guys. I've got a question on the advertising. How do you guys, in your advertising expense, how much is TV and how much is radio? And then can you also talk about it being an Olympic year and an election year? What type of ad rate increases are you seeing and how's that going to affect what you do the advertising on?

We run roughly half of our advertising in TV. And consequently probably another 20% to 25% in radio. So, and you're right that being an election year and an Olympic year makes TV somewhat more important - - I mean more expensive. What we've tried to do to overcome that, and this is a low single digit increase for us, but what we did to overcome that is bought our TV and radio early in the year. And that's the reason Mark said we weren't as able to make as many changes to our advertising strategy in the second quarter as we were able to make in the third and fourth quarter. Because those TVs were bought far in advance in order to save us money against the politicals. And we had to be careful as we cut TV going into the third and fourth quarter that we didn't cut an ad during political time periods. So, it does make it a little more difficult. What I think is important to note that, however, since you brought up the Olympics, is that traditionally in an Olympic year, especially Summer Olympics year, that's traditionally a good time for athletics shoe business and the Olympics start in several weeks and we'll just see how that plays out. Of course, this year it coincides with the election, so, it may be overridden by that. But we've to save money on - - not to prolong the answer, but to save money on TV, we've did buy all of our TV and radio at the beginning of the year.

So, you aren't buying anything on the spot market?

We try not to, to buy on the spot. We buy all spot TV, don't get me wrong, but we don't buy any network. So - - but we buy it up front.

What kind of trend are you seeing in terms of pricing that you -- ?

Up low to mid-single digits.

Okay. All right. Thank you very much.

Uh-huh.

And we'll go next to Harry Ikenson with First Albany capital.

Good afternoon. Actually part of my question was just answered and I just want to follow it up a little further. What changes have you been able to make, though, for the second half in advertising? And then secondly, could you also talk, Cliff, a little bit about, you know, you've talked about the dressier category, not depending upon vendors and going to different sources, so, can you talk a little bit about what kind of shifts you need in the allocation to the dressier product and other categories as a result of getting better fashion merchandise information for the next 2 quarters? Thank you.

Again, Harry, this is Mark. In terms of the advertising, the biggest change that we made for second half relative to first half was going back to an individual market by market advertising plan. That will still involve some TV. It will still involve TV in certain marketplaces. It will also involve cancellation of TV in certain marketplaces where TV, we don't think, is as important as either radio or a combination of radio and print. It will also mean going back to - - it will also mean for most markets, going to a wider spread print campaign, both in terms of ROP and FSIs and much more reliance upon that media than television. So, we have canceled off some TV in the second half. But the biggest difference is going to, again, a more market by market specific and more market by market driven plan through a combination of radio, television and print. And the print being primarily ROP - - and primarily I should say ROP and FSIs a little bit of ad roll. But that's the biggest difference, a more market by market plan, not just a widespread television campaign that we utilized in the first quarter.

Thank you.

You remember the second question?

Yeah, Harry, to talk about how we planned our business on a go forward basis. You know, one of the things that we found to be a challenge this past spring was that the lack of color in the mid tier sector and the fact that our customer she came to shop our stores she didn't see anything new and exciting from a color standpoint, new heel heights, new silhouette to choose from. So, as I stated in the last conference call, we have given our buyers the tools to study the trends and study color and heel heights, silhouettes, toe characteristics and we feel that we're on plan - - or on trend as we go into fall. So, consequently what we did is if our customer doesn't own that product in her closet, then let's buy more of it and let's plan that business up. And as you know, we plan our business very conservatively here at Shoe Carnival so we can react to opportunities within season. But we did take to this dress business and we planned it up anywhere from mid-singles anywhere to high double digit increases for the fall season. We've taken the sports business however, not sports athletic, but casual sporty business and we planned that business slightly down. So total-total we planned our women's business up somewhat mid-single digit and the athletic business just slightly flat and the men's business flat.

Thank you.

And there are no further questions at this time. I would like to turn the call back over to Mr. Mark Lemond for any additional or closing remarks.

Thank you, I'd just like to say that we're looking forward to getting the first half past us and get back into the fall and winter seasons. Thank you for joining us today.

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