Shoe Carnival Inc (SCVL) 2004 Q3 法說會逐字稿

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

This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the Company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. The Company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release to reflect future events or developments.

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

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

Sales for the third quarter rose 6.8 percent to 162.7 million from sales of 152.4 million in the same period last year. Comp store sales for the quarter increased 0.4 percent.

Net earnings for the quarter were 4.9 million, or 38 cents per diluted share, compared to net earnings of 5.5 million, or 42 cents per share, in the third quarter of 2003. Although we are disappointed that earnings were below last year's third quarter, earnings per share of 38 cents still represents the second-highest third-quarter earnings level in the Company's history.

The best way to describe the sales pattern we saw in the third quarter is that of a roller coaster ride. On our second quarter earnings call in August, we reported a difficult start to the back-to-school season. Subsequently, our business turned around nicely, and we recorded mid to high single-digit weekly comp store sales increases through the second week of September. Obviously, this reflects a continuing trend of the consumer shopping later and later in a major sales period.

Our customer then went to sleep for a 3-week period. We rebounded with mid single-digit comp store sales increases in the first 2 weeks of October before business fell off again late in the month.

As Cliff will discuss in a few minutes, our sales in the third quarter were driven by our athletic business, particularly during the warmer periods within the quarter. Our sales of boots and other fall or water products significantly lagged warmer-weather product until the last couple weeks in October.

The other trend we saw in the third quarter was that, with the exception of a few weeks when sales were very good in the back-to-school period, our store traffic counts were down year over year, but our conversion ratios were up. This is a continuation of a trend we saw in the first 6 months.

I believe certain of the changes we made to our marketing plan late in the first half of this year started to take hold in the third quarter, but our overall results did not meet our expectations. Consequently, we recently made further changes with respect to our marketing efforts.

First, we are pleased to announce that Myrna Reiss has joined the Shoe Carnival team in October as Vice President of Marketing, a position that had been vacant since February. Myrna has extensive retail industry experience, most recently with the Value City department store group, and we are looking forward to her leadership in this critical area of our business.

Additionally, we just named St. Louis-based Adamson Advertising as agency of record for Shoe Carnival, effective for fiscal year 2005. Throughout the interview process, we were particularly impressed with Adams' attention to detail and their creative capabilities. They will provide a complete brand development program for the Company, including all advertising and creative work, media planning and broadcast buying, point-of-sale displays, and other in-store marketing elements.

We're anxious to start testing the 2005 creative direction we have preliminarily developed with Myrna and the folks from Adamson. Certainly, we believe these marketing efforts will drive comparable traffic counts back into positive territory as they take hold in 2005.

Right now I would like to reiterate certain initiatives that we have undertaken that, though they may be somewhat painful in the short-term, are expected to yield long-term benefits. First, we continue to reduce the number of weeks of buy one, get one at half-price promotions. Even though the marketplace remains very competitive and promotional, we were able to accomplish this in the third quarter, and we expect to do so again in the fourth quarter and into 2005. Having said that, we fully intended to continue to react to the promotional cadence of our competition.

We expect to reduce the number of new store openings in 2005 to approximately 15 stores. This is reduced from the 22 new stores we have or will open this year. Again, all store openings next year will fill in existing markets or follow a strategy of opening a single, dominant store in smaller markets. Our current plans are to close approximately 4 underperforming stores in each of 2004 and 2005.

As most of you know, about 2 years ago we created a new store format which highlights our women's nonathletic product and is designed for better customer flow from department to department. During 2004, 6 stores have been or will be remodeled utilizing that new store design. For 2005 we have pegged 8 to 10 stores for a complete remodel to this new design. Another 28 stores are scheduled for a partial remodel that will incorporate certain of the new design elements, with particular focus on highlighting the women's nonathletic product.

As we have said numerous times before, while we remain totally committed to maintaining the best athletic business in the family footwear sector, we believe the rejuvenation of our women's department is vital for improving results in the future. Thus, our capital outlay for new stores and relocations will decline from about 9.2 million in 2004 to about 5.2 million in 2005, while our capital needs for remodels goes from about $1 million in 2004 to approximately 3.3 million in 2005. These numbers would not include amounts to be expended on in-store visuals necessary to support new creative advertising campaigns.

And lastly, as we have demonstrated in the past, we intend to remain fiscally conservative in our 2005 execution, especially if we continue to see a difficult economy for the lower- to middle-income consumer. Besides opening only 15 new stores, we will continue to tightly control inventories. At the end of the quarter, inventories on a per-store basis declined by about 2.7 percent. While we don't expect to continue to see declining inventories, we won't let inventory levels escalate while sales are sluggish. Again, this is sometimes painful in the short-term, but we feel it is absolutely necessary for long-term profitability.

And we will continue to utilize cash flow generated from operations to pay down debt. During the last 12 months, we reduced the outstanding balance of our credit line by almost $12 million. We will continue that focus.

Finally, we will continue to conservatively manage expenses. While advertising expenses rose during the third quarter as we tried a new direction, our administrative expenses actually decreased by about 0.6 percent of sales. Although I don't expect this level of constriction going forward, it does speak to our commitment to tightly control the expenses not directly related to sales generation.

And for a little bit further explanation on our product and merchandising efforts, I would like to turn it over to Cliff Sifford at this point in time.

Thank you, Mark. As Mark stated, we experienced a 0.4 percent comp increase for the quarter. I want to take the next few moments and walk you through the merchandise and shed some light on these results.

The third quarter was the ninth consecutive third quarter that we posted a comparable store increase. The children's and athletic categories drive the industry during the third quarter. Shoe Carnival's strength in these categories has been and continues to be the driver in these consecutive increases.

Our athletic business for the quarter was up mid single digits on a comparable store basis. We experienced solid increases in both the children's and the athletic categories. We were very pleased with the performance of Skate for all genders and the classic Chuck Taylors in all genders. We also saw emerging trends in classic product, in color, and in color trims.

Merchandise margins for the quarter in athletic came in lower than planned, due to increased promotions on underperforming categories such as fashion classics in both men's and women's, fashion running in women's, and classic running in men's. In addition to the underperforming categories, we found that the quarter was more promotional and that all sectors of retail used a value product, normally the primary product for our channel, to drive their off-price business.

Promotional (ph) department stores continued their onslaught of entire categories and multi-pair promotions throughout the quarter. And mall-based and sporting goods retailers used the midtier product to drive value customers into their stores.

Athletic vendors have not done a good job of differentiating product peers by channel of retail. We continue to try and differentiate ourselves from the pack by developing exclusive product with key brands, but it will take the willingness of our key vendors to truly separate retailers by technology, endorsers, and price points.

In the nonathletic departments, we have been talking for some time about the fashion shift toward dress. We continued to see that trend this quarter. Women's dress product increased double-digit on a comparable store basis. Unfortunately, this increase was not enough to overcome the losses in the casual and boot categories. The losses in these 2 categories were driven mainly in the August and September time period. We began to see a real turn in both categories in October and a continuation of this turn during the first 2 weeks of November.

We saw during October solid increases in our boot department, hikers and fashion weather (ph) boot categories. Additionally, we have experienced a solid increase in October in our total junior business.

Our dress business also showed increases on a comparable store basis for the quarter. Again, this increase was not enough to overcome the losses in casual or boots. This department has been a challenge for the past 18 to 24 months. It is a combination of economic conditions and lack of new and exciting product. We are continuing to push our vendor community on new product, and we hope to see improved economic conditions, which should help this business improve.

We don't speak to it often, but it is important to report that our accessories business has improved dramatically this year. For the quarter, we experienced high single-digit increase on a comparable store basis of accessories. Our matching bag program is not only facilitating the sale of dress shoes, but also driving price points that are significantly higher than the rest of our handbag program. In addition to handbags, our backpack and sport bag program experienced double-digit growth for the quarter. Last year, we established an initiative to pickup marketshare within our business in this high-margin department, and we're seeing solid results.

In closing, total inventories for the Company were down 2.7 percent on a per-door basis at the end of the quarter. The Company maintained an increase in both the women's and men's dress category, while the largest decreases were in the women's and men's casual and boot category. Children's athletic was down low single-digit, while adult athletic was up slightly. I believe the merchants have done a good job managing the inventory in the underperforming categories.

Now I would like to turn the call over to Kerry Jackson.

Thanks, Cliff. Our net sales for the third quarter increased 6.8 percent to $162.7 million compared to $152.4 million for the third quarter of 2003. The increase in sales was primarily due to the opening of a net of 33 new stores since July 2003 and, to a lesser extent, the comparable store sales increase of 0.4 percent for the quarter.

Comparable store sales by months during the quarter were as follows. August was up 1.5 percent. September was down 1.9 percent. And October was up 1 percent.

Gross margins for the third quarter of 2004 decreased 70 basis points to 29.1 percent compared to 29.8 percent in the same period last year. The merchandise margin decreased 30 basis points, primarily due to lower margins realized on athletic footwear. As Cliff mentioned earlier, this was a very promotional category during back to school.

Buying, distribution, and occupancy costs increased 40 basis points due to lack of sales leverage and occupancy cost.

SG&A expense as a percentage of sales increased 20 basis points to 24.1 percent for the third quarter compared to 23.9 percent last year, primarily due to higher advertising expense during the quarter.

In September, we announced the closing of 2 stores. A charge of $425,000, or 2 cents per share, was incurred in the third quarter to cover the closing costs. One of the stores was closed in the third quarter, and the other will close in late November.

2 additional stores were closed during the fourth quarter, but we will not incur any material cost to close the stores. In the third quarter of last year, we closed 2 stores and relocated a third, incurring store closing and impairment costs of $330,000.

New store preopening costs incurred in the third quarter were $456,000, or 0.3 percent of sales, compared with $646,000, or 0.4 percent of sales last year. We opened 6 new stores during the third quarter this year, compared to 11 stores opened in third quarter last year.

Interest expense for the quarter was $138,000 compared with $160,000 in the third quarter last year. This decrease was due to lower average borrowings during the quarter.

The effective income tax rate for the third quarter of 2004 increased to 39 percent from 37.5 percent in third quarter of 2003, due to higher state income taxes. We expect for the full year our effective income tax rate to be about 39 percent.

Net income decreased $565,000 to 4.9 million for the fourth quarter from 5.5 million last year. Diluted earnings per share decreased to 38 cents per share from 42 cents per share last year.

For the first 9 months, net sales increased 5.3 percent to $446.3 million, compared to $423.7 million last year. Same-store sales fell 1.5 percent for the first 9 months of 2004.

Gross margins for the first nine months decreased 40 basis points to 28.7 percent compared to 29.1 percent last year. The merchandise margin increased 20 basis points, but was offset by a 60-basis-point increase in buying, distribution, and occupancy costs as a percentage of sales. SG&A expenses as a percentage of sales were even with last year at 28.4 percent.

Preopening expenses for the first 9 months in 2004 were $1.3 million compared to $2.25 million in the first 9 months of 2003. For the first 9 months of the year, we have opened 19 new stores versus 35 new stores last year during the same time period.

Net income for the first nine months of 2004 was $11.4 million, or 88 cents per diluted share, compared with net income of $12.1 million, or 93 cents per diluted share last year.

We were in solid financial condition as of October 30, 2004. At the end of the quarter, we operated 7 percent more stores than at the end of the third quarter last year, but our total inventories only increased 4.2 percent to $172.4 million.

Depreciation expense for the third quarter and first 9 months of 2004 was 3.6 million and $10.8 million, respectively. For the full year, we expect depreciation expense to be about $14.4 million.

Capital expenditures for the first 9 months of 2004, net of lease incentives, were $11.1 million, detailed as follows. 2004 new stores were $6.7 million. The remodeling and relocation of stores cost $1.8 million. All other additions were $2.6 million. Capital expenditures for the full year are expected to be between 13 and $14 million.

Now I would like to discuss Q4 expectations. We expect total sales in Q4 to increase year over year between 7 and 8 percent. This includes comparable store sales of flat to up 2 percent. Dilated earnings per share are expected to range from 1 to 4 cents in the fourth quarter. Last year in the fourth quarter, we earned 1 cent per diluted share.

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

(OPERATOR INSTRUCTIONS). Jeff Stein, KeyBanc Capital Markets.

I have got a couple questions for you and for Cliff. One is -- with respect to fashion direction, earlier in the year, your management team indicated that you felt that it was imperative that you increase the fashion content of the product. And I'm wondering if you have done so, and how that has been received by your customers

There is no question that we have done so. When you take a look at our dress shoe assortment this year versus last year, or even this year versus the spring season, Jeff, we really stepped it up not a notch, but probably 5 or 6 notches. And we're seeing great results in that in our women's dress business. It's up double-digit.

We also stepped up the assortment level in our boot assortment, and we did not see good results out of that for the first half of the quarter. But we are beginning to see positive results from the new product the last two weeks of October, and even into the first 2 weeks of November -- we are finally seeing some boot sales materialize.

And how would you describe dress shoe sales so far in November?

Dress shoe sales are up. They are not up as far as they were for the quarter, and I think some of that has to do with the fact that we have seen a shift into purchase habits in the boot and, actually, even into the casual business. You know, I mentioned on the conference call that our casual business was not good during the quarter. But as the weather gets cooler, we're seeing some movement toward casual. Dress shoe business is still up, though, high singles.

Do you guys feel like the customer, your customer, is beginning to come back? I mean, the economy, the election is behind us now. Gasoline prices seem to have topped out. Does it feel like customer traffic is beginning to lift in the stores?

You know, the answer to that is we have seen traffic patterns that have declined. And certainly, the traffic counts that we have seen on a comparable store bases have lagged our conversion rates. Or, I should say, have lagged the increase in our conversion rates.

So no; to a large extent, I still think it's very difficult for that lower- to middle-income consumer. Hopefully, we will see that alleviate as we move into 2005. And certainly, as more jobs continue to be created, that situation will alleviate. But I think we've got some strategies in place that will help those traffic counts, or help us get that consumer back, a big portion of which falls on the shoulders of Myrna Reiss and the advertising group that we just hired to develop a creative campaign for next year that I think is going to help in that respect.

So we're looking forward to this as we move into 2005 and start a new creative endeavor, if you will, for Shoe Carnival in the creative that, preliminarily, we have come up with. And I think that's going to help pretty significantly driving that customer back into our store -- though, as Cliff mentioned, we have made pretty dramatic changes in our women's nonathletic assortment from a fashion standpoint. And I don't think the consumer recognizes that as of yet. So, again, as we point towards 2005, I think that's going to happen.

Well, can you talk a little bit about the creative direction that you are planning to take next year?

It's new. I'm being a little facetious, Jeff. Obviously, we have not developed it yet. We just hired the advertising agency. They really even haven't started working for us yet, other than what they did preliminarily through the interview process and what sold us on this particular group from a creative strategy standpoint.

So I really can't speak to it right now. As we develop it more fully in 2005, we'll talk to it more.

And one last question, Mark. For some time, you have been cutting your average store inventories. And I am wondering -- at what point do you reach diminishing returns, where you start experiencing out-of-stock positions and just losing sales because you don't have a good size run?

Jeff, I think it's a very good question. What we look at -- we don't look at the total inventories, even though we report a decline or an increase in total inventory levels per store. What we look at is individual categories within that total inventory mix.

So when we report a 2.7 decline in comp store inventories or comparable store inventory levels, we're looking at increases in certain categories like, for instance, women's dress shoes, a pretty significant increase, and decreases in other categories.

So what we try to do with these declines is not only keep our inventories fresh, but moving towards the product that we think are going to be pertinent in the future and away from the categories that we've seen pressure. So it's a little more complicated than just raising or lower total inventories.

Virginia Genereux, Merrill Lynch.

A couple questions, maybe. Maybe first for Cliff -- can you talk a little bit about your athletic business? It's a big piece of the business. I think you said that vendors need to do a better job differentiating product among tiers, and that particularly fashion classics, you thought, was very promotional at back to school.

Do you think that -- well, 1, do you think the sort of greater promotional environment -- was the related to sort of specific events like, I don't know, maybe Foot Locker sort of integrating Footaction? Can you point to anything like that that might have passed or may not be an issue for you in spring?

And then secondly, if you could sort of reconcile your comments with what other retailers say are a little bit better differentiation by vendors?

Well, I think we have to look at, Virginia, 2 things. 1 -- I'm not going to tell you that the competition was any more or less promotional as we entered into this third quarter. I do know that there were more multi-pair promotions this quarter than I have seen in the past, or we have seen in the past, whether that is from the promotional department stores or from the mall-based retailers. There were multiple multiple-pair promotions out there all during the quarter -- not only during just the back-to-school season, but through September and early October, as well.

And I don't know that that's going to slow down. As Mark mentioned in his remarks about us walking away from the BOGO or beginning to eliminate weeks of BOGOs (ph), it is a tough pill to swallow. Once you have done that multi-pair promotion and you have increased your business, the next year, you have got to do it again. And it's a tough pill to swallow. And so I'm not going to tell you that for spring or even for next fall that that's going to diminish, because it takes a huge commitment from a company to walk away from those kind of promotions.

As far as differentiating the brands or the retailers, I think it's important. And we have been talking about this for some time. In fact, we spend a good bit of time as we work with the athletic vendors developing exclusive product for our stores and exclusive styles and colors for Shoe Carnival, so that we can differentiate ourselves from the marketplace. The problem I have is that, as you look at mall-based retailers and even sporting goods retailers, and they are playing from a price standpoint right there where we are traditionally playing, that makes it very difficult, even if we have exclusive items or styles to play with. And then you couple that with the multi-pair promotions from the other side of the fence -- it does make it very, very difficult to succeed. And I think one of the reasons that we do succeed is the fact that we are known, at least in our trade channel, as the destination shop for athletic and kids product.

Okay. That was helpful, Cliff. I guess when the specialty and sporting goods guys say that the environment is a little less promotional on the athletic footwear side -- from your perspective it sounds like they are coming down -- I mean, they are sort of getting a little more into your warehouse (ph) is the problem for you. Is that right?

The BOGO events -- the buy one, get one for half-price events -- are not happening as much on the sporting goods and mall-based retailers, with the exception of 2 guys. But that is not happening as it has in the past. So when they tell you they are less promotional from that aspect, they are absolutely right. That doesn't mean that the 2-for sales have gone away, and the 2-for sales usually are a product that are right in the strength of our product assortment.

Great. And then maybe on the merchandise margin side, maybe Mark or Kerry -- you guys have done a great job in the last couple of quarters of expanding merchandise margins even with weaker comps, with comps sort of below plan. In this quarter, you saw some merchandise margin weakness. Is that the compares sort of catching up with you? Or is it that athletic and boots, maybe, were particularly powerful (ph) --?

Virginia, I'm going to answer that question, if I can. It was definitely -- merchandise margin erosion was all out of athletic. And it was a combination of a couple of things. 1, we did have 3 categories of footwear in the athletic sector that did not perform as strongly as we hoped they would. And we had to get more promotional to keep the inventories in line on that product. And then, number 2, the promotional environment in which we were living required us to be a bit more promotional, as well.

And then, lastly, maybe, sales per square foot look to us -- Kerry, we need to get the exact square footage count from you off-line. But sales per square foot looks like it did not decline as much as comps this quarter, and that in prior periods it had been declining more. So that suggests to us that maybe some of the newer stores are doing a little better. Can you comment on how your newer doors --?

They are doing a little bit better than they were, Virginia, but we have still got challenges with respect to new stores. That's one of the reasons why, as you well know, we are slowing down the growth next year to include only existing markets and the small, one-store markets. So it's still a huge internal focus for the people at Shoe Carnival.

Great, Mark. And are you saying any sort of stabilization with the sort of market strategy? You're not opening any -- like you said, not opening doors in any new markets where you don't have a store, unless you think it's something you can dominate. Have you seen some sort of --

Again, we haven't seen any significant improvement. A leveling off is probably a better way to put it. But again, I think we have got some internal execution issues that we have to deal with, not the least of which is the efforts in our advertising and marketing plans. And we're dealing with those at the present time.

One thing I'm not afraid to do is make changes where I think changes are necessary. And the advertising and marketing effort is one of those changes that we felt was definitely necessary to change. So we are making those changes. Most of those changes from a creative standpoint or from a program development standpoint won't come into play until 2005. That's when the hiring of the new agency is effective. But, certainly, we have got internal execution issues as well. And we have been willing to make the personnel changes we think are necessary to effect those changes. So that's kind of where we stand with the marketing.

As you can tell -- me personally, I think that the biggest execution issue we have with new stores comes from the marketing effort in those new areas. And that's why I keep speaking so much to the changes in advertising and the marketing plans.

Mark, I know you were talking about -- this is it; I promise -- you were talking about previously that in the back half, you were sort of cutting some TV advertising. And you were changing your ad strategy that would sort of begin to impact the third quarter. And you alluded to that earlier, but that we might see some improvement in the fourth quarter sort of related to the marketing plan that you had put in place for this year. (multiple speakers)

It sounds like you are referencing these internal changes, that we should really look for your new team and the new agency to sort of -- we should look out to next year to sort of see that bear fruit?

Well, I am looking at it a little bit differently, actually. We did put into effect for the second half some changes with respect to where we were placing particularly media buys and the advertising spend, away from those larger new markets that we tried to advertise more heavily in in the first half, into more of our comp-store markets in the second half of the year. We did effect that for third quarter and fourth quarter. I didn't see the results that I anticipated to see.

Consequently, we have made additional changes to that advertising plan, not the least of which is the new creative piece for 2005. As you well know, we could not, from August to September, put in a significant new creative plan for the fourth quarter.

So the changes I keep referring to are really 2005 initiatives, but most of which were born out of, again, what I thought was a necessity to change, when some of the changes that we made for the back half did not take hold. So, again, that's kind of where we stand from the marketing standpoint.

We will continue with marketing to individual marketplace, or advertising in individual marketplaces with different media than other marketplaces -- in other words, hone the marketing strategy for each individual market that we have, and not homogenize it across the entire company. That will continue in 2005, because I think that's a necessity. But with respect to the television and print campaigns, it's going to be a whole new creative piece for 2005 than it has been or will be for 2004.

(OPERATOR INSTRUCTIONS). Kevin Foll, Next Generation Equity Research.

Just trying to get my hands around your guidance for the fourth quarter in terms of comp. It looks like what you have guided so far implies another deceleration in trends from what we saw in the third quarter. And given what you said -- you mentioned you saw some of the weaker categories improving so far in November -- I'm trying to reconcile that. And maybe helping me do that, you can kind of walk me through what your thoughts are in terms of comps for the different categories for the fourth quarter?

Kevin, we don't give comps by categories. But I'll let Kerry address the -- actually, we expect comps in the fourth quarter to accelerate a little bit from the third quarter. Kerry, I'll let you address it.

Implicit in our guidance was a comp increase of either flat to up 2 percent. So at the low end, we have had a slight deceleration (ph), but we are looking at up to 2 percent right now as our guidance.

Right, well, I am looking at 2-year and 3-year trends of comps, taking into effect the comparisons from the year over year. So that's why I look acceleration. And looking at those, it looks like you're -- relative to the 2-year trend, the 2-year trend is actually accelerating.

Well, it really gets back to the traffic pattern Mark has talked about previously. We're looking at comparisons to prior year, and looking at what we think, based on the traffic patterns we see thus far, what we can generate.

Kevin, let me add that one of the things that I mentioned, one of our initiatives for not only fourth -- you know, has been for this year, and will be for the fourth quarter, and will be as well for 2005 -- is to eliminate as many weeks as possible of buy one, get one at half-price promotions. That, in my opinion, in all of our opinions, is going to somewhat keep down the comp store sales increases that we have. Again, I think that is a necessary strategy for this Company on a go-forward bases. So we're going to continue to plan comp store sales on a conservative basis, particularly while we're trying to reduce the number of weeks of those BOGO promotions.

Okay. And then can you give me a sense of what you are thinking in terms of merchandise margin for the fourth quarter, in terms of what you're seeing now in promotional activity? Any sort of internal plans of what you're expecting for merchandise margin? I know you're up against a tough comparison there, as well.

Right now we're expecting merchandise margins to be up a little bit and to deleverage buying, distribution, and occupancy a little bit, and to come out at the mid range of those numbers. You will come out about flat on your margin.

John Shanley, Susquehanna Financial.

Mark, can you give us idea of where you stand in terms of the fill-in markets that you are planning in (ph) new store programs to give you the bulk in some of the markets that you may have an underrepresentation? And is the decision to pull back a little bit in your '05 real estate plans going to interfere with some of the guidance you gave us in the past, in terms of how long it is going to accomplish to get those markets filled in?

Well, John, as I have stated in the past, we will put new stores in new markets as quickly as those viable sites become available. And that's the key. When we look at Houston or Denver, for example, as 2 big markets that we need to fill in, we're accomplishing that, but not at a very fast rate. For 2004 and 2005, I think we have added or will add approximately 3 stores in the Denver marketplace, and a couple or 3 in the Houston marketplace.

So we have not been able to locate those viable sites or good sites as quickly as what we were led to believe by some people we were working with or as we thought we might be able to gain significant marketshare in those particular markets. But again, that's the whole focus in 2005, and possibly 2006, is to look to the existing marketplaces for fill-in stores, and limit or not do any large new markets until we gain a better foothold in those larger markets that we're already in.

So is it fair to think, then, that by the end of 2006, you will have accomplished that goal of filling in?

John, I wish I had a crystal ball as to which sites are going to become available in each of those particular markets, but unfortunately I really don't. As I said, as new sites become available and we are made aware of those sites, we're taking every opportunity we can to open good store sites. What we are passing on, however, is sites that we don't deem viable within those 2 marketplace as they become available.

Okay, fair enough. Cliff, the athletic business in the third quarter -- can you give us a rough idea of what percentage of revenue that athletic represented? And then I also wanted to see if I can get a little bit more clarity on the term "fashion classic." Is that different than classics, per se? I'm just trying to get a better handle on what you meant by that.

John, the athletic business year to date represents about just under 55 percent of our total business.

Okay. And what is classic? Is that -- maybe you can give us an example of brands so we can try to clarify what -- classic K-Swiss versus classic Skechers? Or what do you mean by that?

We normally don't talk in terms of brands. If I were to call it urban classic, would that help spell it out?

Yes, that spells it out real well. And then on the margin differential, you made a comment that margins were a little bit less on athletic. Has that historically been the case, or is that something that just occurred in the third quarter?

It has not historically been the case. We hit a bump in the road for third quarter, especially early, with the three categories that I mentioned earlier that did not perform -- note, John, the great part about back to school and the bad part about back to school is if you have something that works, it works really well. If you don't have something that works, if you don't take your markdowns during that time period, you carry that product for a while.

So as soon as we identified that these categories were not performing up to plan, we got aggressive and marked those -- got those products more aggressively priced so that we could move through it. And that's the reason or part of the reason for the decline in margins.

Super. Last question -- on the women's dress shoe side of the business, can you give us an idea of what that represented in the third quarter? And looking forward, do you see a continued growth in that component of your overall merchandise mix? Or are we going into the peak of it with the fourth-quarter dress shoes? I'm just not sure historically what Shoe Carnival has done in that particular product category.

Now, when you say dress shoes, I have taken just the dress shoes out of the total women's, because if you look at women's in total, it's pretty much flat. But if you look at dress shoes, we did pick up marketshare in dress shoes pretty significantly, and of course, lost marketshare within our building (ph) with casual and boots.

But we see the dress shoe continuing not only through the rest of this year but in the spring as well. I'm not prepared to tell you it's going to continue through fall of next year. But we do see increases in dress shoes continuing through that time period.

That's great. And is that being driven by a fashion apparel content, or is it just the styling of your particular dress shoe offerings?

I think it has to be both. A year ago, we were very disappointed with the way our dress shoe assortment looked. This year, we're very excited. There's a world of difference when you walk our walls today as compared to a year ago. And that's just with upgraded products, upgraded brands. And I think that it obviously has driven -- any dress shoe purchase or any purchase in the women's shoe business is driven first by apparel.

Harry Ikenson, First Albany Capital.

A couple of things. 1, earlier on the call -- I wasn't sure. Did you say that you also were not happy with the boots assortment?

No, no, no.

Okay, because I thought it was mostly weather --?

No, we were not happy with the boot performance for the first -- August and September of the quarter. The last 2 weeks of the quarter and the first 2 weeks of the new quarter, Harry, I have been very pleased with our boot progress.

Let me add, Harry, that the footwear industry kind of saw a lackluster boot season until late, and lately, it's been a very promotional boot season. So part of that sales pickup is not only due to the cooling off of the weather in most of the country, but promotionally, as well.

Well, that leads to what everybody was getting at, then, also in part (ph). So is it too late to have a strong enough pickup, since it so promotional again, to make much of the difference to the fourth quarter? And is boot the key product category for the fourth quarter in addition to athletics?

The second part of the question is difficult to answer, because that really is so dependent upon the weather. If you have a mild fourth quarter and a mild January, we have seen in the past, Harry, where our business is totally driven during that time period by athletic and casual product. But if the weather turns cool and we get snow and moisture, then it will be driven by boots. And the biggest portion of our boot business, the largest percentage of our boot business is still yet to come. November and December -- November/December/January represent the 3 largest months in boot sales.

November, December, and January?

Correct.

Okay, that's what I thought, just wanted to -- so, then, if we were looking for the variance in earnings guidance, that would probably be one of the keys as far as your range?

Yes, that would definitely be one of the keys, although -- and I have to say this again. If the weather is mild, then you'll see a pickup in athletic footwear as opposed to boots.

But that would be, as you're indicating, at a tougher margin if the environment stays the way it is now?

That's correct.

Okay. Secondly, in reference to 2 other items, have you learned anything or are you making any other refinements to the newest stores that you are remodeling or working on, things that are improving? I know your conversion ratio is greater than in other stores. Have you learned anything new that you can share with us? And then I have one more question.

Yes. The stores that we have remodeled, we've seen a pretty significant pickup in our women's business -- again, more specifically, in that women's dress shoe business. So as we have improved the product mix and the fashion mix within that women's category by moving it up front, which the new design does do, it has enhanced that women's sales, particularly, again, in the higher -- for a middle-income consumer, a higher-fashion women's product that we have put our stores.

Okay. That sort of maybe bridges to one thing that you might be thinking about or one question I have in reference to -- you indicated that right now, you are in a tough spot in reference to being known as a destination for athletics. What is your strategy on how to widen your demographic reach as a destination store and maybe including dress, or what are your other thoughts of how you're going to widen that reach?

Well, in a number of different ways. And that goes to the initiatives that we have set out. First of all, being in a tough spot with the athletic business -- I think Cliff made a tongue-in-cheek kind of comment. But we have very definitely been, in my opinion, the leader in that athletic business in the family footwear sector. And we fully intend to stay there. Margin issues notwithstanding, we are the leader in per-store -- the amount of sales that we generate per store in athletic products is much higher than our competitors in the family footwear sector. We intend to maintain that.

What we're trying to do from a store design standpoint, from a merchandise mix standpoint, from a marketing aspect, is to rejuvenate that women's nonathletic business back to the 30-to-32-percent percent-of-sales level that we used to enjoy 7 to 8 years ago. That, in conjunction with the higher margins that that product traditionally commands over the athletic business, is, again, what we consider the key to a very successful business here at Shoe Carnival. That's why we are so adamant about changing the look of our stores, moving the women's product up front, changing the visual elements within our store, matching the marketing effort to our store design effort, and making sure that all that is in sync to move that women's business forward.

And where is the women's business now, roughly, on a percent?

It's hovering around 26, 27 percent.

Jeff Stein, KeyBanc Capital Markets.

1 question. Where are your boot inventories, comp store basis? And how much risk is there in that inventory if the weather doesn't materialize?

Our boot inventory from a comp standpoint is down just high single digits. So there is no risk there. Basically, what we did -- well, there's not a lot of risk; let me qualify that.

What we did is we took a look at all the categories that performed for us last year and that had performed early in the season this year. And those are the categories that we are heavy in. And we feel pretty froggy (ph) about it. I think, again, with cooperation from the weather, we think we're going to have a pretty decent boot season.

And there are no further questions at this time. Mr. Lemond, I'll turn the conference back over to you for any closing remarks.

Thank you. Well, we are certainly not satisfied with our performance in the third quarter or the year-to-date period this year. But I feel we have made significant progress in our women's fashion merchandise. With the advertising personnel changes, I feel we are on the right track to effect a change in our traffic flow, and consequently, our business prospects in 2005. And with a slower growth rate, we can now focus more intently on existing stores and execution issues internally.

So we're looking forward to the remaining part of the fourth quarter and getting into 2005 with our new promotional campaign. Thank you for joining us.

That concludes today's teleconference. Thank you for your participation.