Shoe Carnival Inc (SCVL) 2004 Q4 法說會逐字稿

Good afternoon and welcome to Shoe Carnival's fourth-quarter earnings conference call. Today's call is being recorded and is also being broadcast via website. 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 continued 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 go ahead.

Good afternoon, and welcome to Shoe Carnival's 2004 fourth-quarter and year-end earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer, and Cliff Sifford, our General Merchandise Manager and Executive VP.

The financial results we will talk about today have been adjusted by the effects of the change in the accounting for leasing transactions. Kerry will discuss that change in more detail all little bit later in this call.

We're pleased to report higher sales and substantially higher earnings for the fourth quarter of 2004. Net sales for the fourth quarter rose 7.2 percent to 143.9 million from sales of 134.2 million in the same period last year. Comp store sales for the quarter increased 1.4 percent. Net earnings were 1.2 million or 9 cents per diluted share in the fourth quarter compared to net earnings of 111,000 or 1 penny diluted share in the fourth quarter 2003.

The earnings improvement for the fourth quarter was driven primarily by a gross profit margin increase of about 90 basis points. We attribute this to a continued tight control of inventories and the better fashion content in our product mix. Consequently, operating earnings for the quarter increased by over 200 percent versus the last quarter of 2003.

Our business on a comp store basis got progressively better as we moved through the fourth quarter. November's comp loss of 1.7 percent was followed by a comp store gain in December of 1.1 percent, which in turn was followed by a comp store increase of 6.8 percent in January. Importantly, these gains were not driven by clearance sales as we saw our merchandise gross margins on a relative basis get stronger as the quarter progressed.

Net sales for the full year 2004 rose 5.8 percent to 590.2 million from sales of 557.9 million in fiscal 2003. Same-store sales for the year declined by 0.8 percent. Net earnings for fiscal 2004 were 12.5 million or 96 cents per diluted share compared to net earnings of 12 million or 92 cents per diluted share for the full year of 2003. The increase in earnings for the year was the result of the operating improvements in the fourth quarter and tight control over administrative expenses.

We initiated certain changes to our business in 2004 that we believe positively impacted our business in the last half of 2004 and thus far in 2005.

First, from a store opening perspective, we elected to concentrate our new store openings in existing markets or smaller one-store markets within our current geographic footprint. This strategy had the effect of reducing the amount of new stores we opened. And as we have said before, we will continue this strategy in 2005 as well. For 2004, we opened 22 new stores and closed 4 stores for a net store gain of 18 stores, and thus ended the fiscal year with 255 stores in operation. For 2005, we expect to open about 12 new stores and close an additional 4 stores.

Second, as we have discussed before, part of our long-term strategy for Shoe Carnival stores is to significantly increase as a percent of total sales our women's non-athletic product. For 2004 this category represented about 24 percent of total sales. Over time we would like to drive this category back to 28 to 30 percent of our total business. As part of this strategy, in late 2002 we developed a new design for Shoe Carnival stores. This design, in addition to updating the color scheme, changed the placement of product on the sales floor, allowing us to place more emphasis on our women's non-athletic product. All of the 2003 and 2004 new stores were opened with that design, and another 7 stores were remodeled in 2004. Currently we have about 80 stores with that design.

And it looks like that strategy is working to improve our women's business. For 2004 our women's non-athletic sales in the new design stores increased by 3 percent of total sales versus stores without the new design. Consequently, we have initiated a four-year plan to remodel our existing store base to incorporate most of the new design elements. For 2005, we intend to fully remodel 10 stores and partially remodel another 30 stores. Additionally, we are going to roll out a new graphics package to all stores this year that will tie in to our new advertising campaign. For remodels and the enhanced graphics package we intend to spend approximately $5 million this year.

Third, early in the spring of 2004 we recognized that our non-athletic product mix was not as fashion forward as it needed to be. This was particularly true in our women's category, and to a lesser extent our men's non-athletic category. As a result, we put a major emphasis on our women's and men's dress and fashion casual business for the fall season and beyond. I will let Cliff speak more to this issue, but I want to say that I'm impressed with the changes that have been made in a very short period of time. Judging from our results in December, January and February, I think we're starting to see the results of those changes.

And fourth, in late 2004, we initiated a number of changes in our marketing program, including the hiring of Myrna Reiss, our Vice President of Marketing, and a new advertising agency. A new TV and radio advertising campaign began running yesterday with a fresh, creative message that highlights the fashion and value of our improved women's product mix. Its primary intent, aside from the product message, is to brand the Shoe Carnival stored in an understated but humorous way. I believe my IS people told me right before the conference call that that commercial has been put on our website, or will be put on our website very shortly this afternoon.

We have changed our grand opening promotion for the 2005 new store openings, again highlighting the women's side of the business and targeting a female consumer better than we did in prior years. This has worked very well in the three grand openings we have had this year.

As you can tell from my comments, we're very focused on the women's non-athletic piece of the business. As we have said before, we remain totally committed to maintaining the best athletic business in the family footwear sector, but we also consider the rejuvenation of our women's dress and casual business to be the foundation of our future success.

Turning to the financial side of the business, our financial position improved fairly significantly in 2004. Although we opened a net of 18 new stores, our year end working capital of approximately 117 million remained virtually unchanged from the end of 2003. Additionally, we paid down debt by about 14.8 million from the end of 2003 to the end of 2004.

Inventories remained tightly controlled, rising by about 1.7 percent on a per-store basis at the end of 2004 compared to last year. And that increase resulted from an increased merchandise in transit due to an earlier Easter selling season in 2005. For the remainder of the year in 2005 we expect inventories to maintain on a per store basis about flat to slightly higher than 2005 inventory levels.

I want to talk just a second about February before I turn the call over to Cliff for more detailed comments about the product. I just want to say that we're happy with the current excitement about footwear and accessories and the overall uplifted footwear retail environment in February. We're also enthused about the customer's reaction to our spring product in our warmer in the South, and we got off to a great month in February. But that's February and the two largest months of the quarter are still to come, and a lot depends on the weather as the industry transitions customers to opened-up spring footwear.

With that I will turn it over to Cliff for a discussion about the product before Kerry Jackson gets into the financial aspect.

As Mark stated, we experienced a 1.4 percent comp increase for the quarter. I will take the next few moments and walk you through the merchandise results to give you some insight on key categories for fourth quarter and for February.

The non-athletic business start the quarter down, but each month gained momentum. Women's non-athletic finished the quarter with flat comps and men's non-athletic finished the quarter down low- single-digits.

In women's we saw continued strength in dress shoes with pumps and dress slacks. In addition to this, anything with a little bling, or jewelry, or any kind of ornamentation at all, sold through at really great rates. We also saw growth in the smart casual classification with clogs and low-profile, or as you would know them girl casuals, selling well.

One of the most encouraging facts is our junior and urban fashion business began to come back this quarter. Junior and urban dress shoes and urban casuals all showed very strong increases. In February, our women's non-athletic business was up low- single-digits on a comparable basis. Women's sales increases were much higher in our southern region due to warmer weather, which helped produce strong sandalized footwear sales. We enjoyed double-digit comparable store sales increases in both the sandal and dress shoe categories in that region of the country. The dress shoe increase was indicative of the total Company's performance as well. Our junior and fashion urban categories were also up double-digit company-wide, on a comparable basis with strong increases continuing with the bling and low-profile.

In men's non-athletic we saw tremendous growth in our men's fashion dress category. These shoes are mainly Italian dress shoes with updated last and toe characteristics. This is a category that we believe will be strong for the next several seasons. Another fashion category that we saw strong growth in is the low-profile Euro casual category. This category is finally making it to the Midwest, and we believe with tapered jeans coming into fashion that these items will continue to grow.

For February our men's business was up low- double-digits on a comparable store basis as our newest fashion merchandise in both dress and casual continued to sell through at great rates. It is good to see this department start to respond to the changes we have made in our merchandise assortment. As you all know, this has been an area of concern for quite some time.

In athletic, our sales for the quarter were up low- single-digits. Fashion tennis and skate in both men's and women's showed very strong gains, as did retro basketball for women. In addition to this, men's and boy's athletics had very strong growth in the running category. We also experienced, as we did in the non-athletic department, increasing momentum as the quarter progressed, moving from low- single-digits comparable store declines in November to very a high single-digits increase in January.

For February we continue to see continuing momentum in the athletic area as we experienced double-digit comparable store increases for the month. Many of the same categories that drove our business during the fourth quarter continue to be important as we move through February.

One category that I did not mention for the quarter which began to gain momentum as the quarter progressed and then showed terrific increases for February was the walking category. This represents the addition of several styles we delivered late in the year that our customers are definitely voting yes on.

As we stated in our last conference call, our accessory business has improved dramatically this year. For the quarter we experienced high- single-digit increases on a comparable store basis. We saw solid increases in our handbag category, as well as our sport bag and backpack program. We are aggressively looking for new categories and items to drive this high-margin department. Last year we established an initiative to pick up market share with our total business in this department and we're very happy to see these solid results.

In closing, we have talked quite a bit over the past year about stepping up the selection of fashion-right product in both women's and men's non-athletic. It is critical that all the information available to our customers today through magazines and the Internet that Shoe Carnival represent these trends for our customers. Our merchants' mission was to put together a strong selection of spring product that shouts the newest in toe characteristics, heel shapes, heel heights and color. I believe that the gaining momentum as we move through the fourth quarter, as well as the results of February, is an indication that we have delivered on that mission.

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

Let me start out by addressing the restatement we announced this morning. We, along with most retailers, reviewed our lease accounting practices after the SEC issued a letter on February 7th commenting on the appropriate handling of certain lease transactions. As the position has been clarified over the past few weeks on lease accounting, we realized that we, along with most retailers, weren't in compliance with when the rent expense should begin. Historically, we typically began expensing rent on of the first day the store was open. We will now be expensing rent from the date of possession. In consultation with our independent registered public accounting firm, the Company decided to change its accounting practices in this area and to restate its historical financial statements.

Based on the Company's preliminary review, the correction of lease accounting is expected to decrease net earnings by approximately 150,000 or approximately 1 cent per share in fiscal 2004 and 300,000 or approximately 2 cents per share in fiscal 2003. There was virtually no impact to net income from the change in lease accounting in the fourth quarters of 2004 or 2003.

The change in accounting for lease transactions will not affect historical or future net cash flows or the timing or amounts of payments under related leases. The financial information discussed during this call includes the adjustment related to these changes in lease accounting.

Our net sales for the fourth quarter increased 7.2 percent to $143.9 million compared to $134.2 million for the fourth quarter of 2003. The increase in sales is primarily due to the opening of a net of 31 new stores since September 2003, and to a lesser extent the comparable store sales increase of 1.4 percent for the quarter.

Gross margins for the fourth quarter of 2004 increased 90 basis points to 27.3 percent compared to 26.4 percent in the same period last year. The merchandise margin increased 130 basis points. The increase was primarily due to two items.

First, we sold less clearance merchandise during the first quarter, and the clearance merchandise we did sell we sold at a better margin than last year. This was particularly true in our women's boots. Last year in Q4 we had to get very promotional to clear our women's boots, especially the junior boots, which drove our margins down significantly. This year we did not have to get as promotional with boots and our margin in Q4 on women's boots improved significantly.

And second, we transitioned our inventories in the South much faster than we typically have, and the customer has responded by buying more spring product in Q4 than a year ago.

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

SG&A expense as a percentage of sales increased 10 basis points to 26.1 percent for the fourth quarter compared to 26.0.

Preopening expenses in Q4 this year increased $361,000 from $267,000 last Q4. As a percentage of sales, preopening expenses were even with last year at 0.2 percent. We opened 3 new stores during the fourth quarter this year compared to 2 stores opened in the fourth quarter last year. 3 stores were closed in the fourth quarter this year and last.

Interest expense for the fourth quarter decreased $62,000 to $149,000 from 212,000 in the fourth quarter last year. The decrease resulted from lower average borrowings in the quarter and higher interest income.

Prior to the fourth quarter, the estimated effective income tax rate was 39 percent. The effective income tax rate for the full year is now expected to be the same as last year at 38 percent. A year-to-date adjustment was included in the fourth-quarter income tax expense reducing the effective income tax rate for the fourth quarter to 26.4 percent. The effective income tax rate for last year's fourth quarter was 66.7 percent due to a fourth-quarter adjustment to raise the effective income tax rate for the year. The effective income tax rate for 2005 is expected to be between 38.5 percent and 39.0 percent.

Net income increased tenfold in the fourth quarter to $1.2 million from $111,000 for the fourth quarter last year. Diluted earnings per share increased to 9 cents per share from 1 cent per share last year. For the year, net sales increased 5.8 percent to $590.2 million compared to $557.9 million last year. Same-store sales fell 0.8 percent for the year.

Gross margins for 2004 decreased 10 basis points to 28.3 percent compared to 28.4 percent last year. The merchandise margin increased 40 basis points, but was offset by a 50 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 24.8 percent.

Preopening expenses in 2004 were 1.7 million compared to 2.5 million in 2003. In 2004, we opened 22 stores versus opening 37 stores last year.

Net income for 2004 was $12.5 million or 96 cents per diluted share compared with net income of $12 million or 92 cents per diluted share last year.

We have cash flowed our business very well during the past year by controlling growth in our inventories and capital expenditures. Free cash flow in 2004 was $15 million compared with a negative free cash flow last year of $9 million. We have used this free cash flow to pay down debt. Long-term debt, including the current portion, has decreased $14.8 million in 2004 to end the year at $7.4 million. Long-term debt to total capital at the end of 2004 was a modest 4.4 percent.

Depreciation expense for the fourth quarter and full year of 2004 was 3.6 million and 14.4 million respectively. For the full year of 2005, we expect depreciation expense to be about $14.6 million.

Capital expenditures in 2004 were $14.2 million, detailed as follows -- 2004 new stores were $7.6 million; 2005 new stores were $1 million; the remodeling and relocation of stores cost $2.1 million; all other additions were $3.5 million.

We received $719,000 in cash allowance from landlords in 2004 to help offset the construction and fixturing costs of the stores. Capital expenditures for 2005 are expected between 13 and $14 million.

Now I'd like to discuss 2005 first-quarter and full-year earnings expectations.

In the first quarter of 2005, we expect total sales to increase between 7 and 10 percent, with comparable store sales increasing between 2 and 4 percent. With a moderate increase in the gross margin, and SG&A expenses as a percentage of sales flat to down slightly, we expect diluted earnings per share to between 40 and 44 cents in the first quarter. Last year in the first quarter we earned 35 cents per diluted share.

For the full-year of 2005 we expect to earn from $1.15 to $1.30 per diluted share. The earnings estimate is based on a sales increase of 6 to 8 percent with comparable store sales increasing 1.5 to 2.5 percent.

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

(OPERATOR INSTRUCTIONS) Jeff Stein, KeyBank Capital Markets.

I have a question about the 80 stores that you have reset in the new design. I'm just kind of curious in terms of the locations where you have been open more than a year, what was the comp store sales increase in those stores? And more importantly, can you also address the issue of profitability of those stores relative to the rest of the fleet?

We haven't broken the comp store sales out, Jeff. And to be honest with you, the profitability in those 2003 stores -- the stores we opened in 2003 is not very good. And the primary reason for that on a collective basis because it includes some of the larger markets that we opened up, like Denver, Houston, and some of those other markets that we haven't been able to penetrate very well. So we've been hung with those smaller-producing stores in the larger markets. So the profitability has lagged.

What we're seeing, though, is that the productivity in the stores that we opened up in 2004 was pretty significantly in excess of the productivity of those stores we opened up in 2003. So I think that not only is the design helping our women's business, but I believe that some of the changes that we've made from an operational basis is starting to help our new store effort as well.

If you were just to isolate those 2003 stores, though, Mark, did you see an improvement in 2004 versus 2003 in those locations?

Yes we did.

Mark, can you talk a little bit about your new advertising program in terms of what the message is focused around? It sounds like a lot of it is going be focused on your women's business. And I recall a year ago just in terms of your promotional strategy you guys were looking to reduce the level of buy one get one promotions, and that didn't seem to work so well. I'm kind of curious as to how you're approaching the new fiscal year from a promotional standpoint.

Let me talk about the promotional aspect first. And again, I'm going to throw out the caveat that we will be as promotional as our competition is in our sector of the footwear retail.

Having said that, we would still like to reduce the amount of weeks that we're under the buy one get one at half-price promotion. We fully intend to do that. But again, as we spoke to you at the end of last year's first quarter, we don't intend to do that as rapidly as what we had originally hoped that we could. So the intent is still there, but we're being more judicious about how many weeks that we cut out of the buy one get one half-price. And that primarily is in reaction to what the promotional cadence of the industry is, particularly our sector of the family footwear sector.

With regard to the advertising, you hit the nail on the head. What we are really shooting -- or I should say our target is that female consumer, and the targeted product is the more fashion-forward product that we're putting in our inventory. So the message that we're trying to convey is that we have the fashionable product that we didn't have before, and you should really come back to the Carnival and check us out because we do have that fashion product. So in a little bit of a humorous way we're trying to connect, or I should say brand, the Shoe Carnival name and the Shoe Carnival image, and connect that with the fashionable product.

Again, it's really very difficult to explain the commercials verbally. Go to our website later on this afternoon and you should be able to take a look at one.

Final question, Mark. The moderate consumer suffered a lot during 2004, and some retailers have taken the approach of trying to trade the customer up and try to focus on the slightly higher income consumer. I'm just kind of curious are you just kind of standing pat and staying in the middle, or are you inclined to try to trade up a little bit?

First of all, we look at our business on a more detailed basis than just saying we're going to trade the consumer up or trade the consumer down in terms of price point. I think -- well, I don't think -- what we're shooting for in 2005 and probably even the year after that is to maintain our average selling price. Where we expect to see growth in our comps and new store productivity is in terms of unit sales.

Now, what we've done, though, is analyze the business on a price point basis. We have stratifies the price points and look at how we sell product across the spectrum of price points. What we're doing is trying to rationalize those price points in the individual stores better than we have in the past. So in other words, tailor the product mix to individual stores in terms of whether it is higher-end product, lower-end product, more branded product versus private-label product, more athletic product versus fashion casual product and dress product than we have in the past. So that's really how we are looking at the business, not in terms of a generalized overall strategy of trading a customer up or trading a customer down in terms of price point.

John Shanley, Susquehanna Financial Group.

Mark, first question I have is on the stores that you have situated in close proximity to May department stores, are you seeing any noticeable difference in terms of the productivity and momentum that you're getting there versus the overall chain? And what's your outlook in terms of any positive or negative impact from the merger of May and Federated, if that deal does go through?

No, we haven't seen any impact so far. It's difficult for me to say from the outside looking in to that merger. I can conjecture all I want to, but I really don't have a good feeling for how much liquidation of product there's going to be at one chain or the other. I've got my personal opinion, but I don't think it's going to impact us. Let me say this -- I don't think it's going to impact us in the short run any more than liquidations of chains that have gone out of business have impacted us in prior years. And when I say that -- either gone out of business or have gone through a pretty significant liquidation of product. So if you look at the Just For Feet liquidations over the past few years, if you look at Payless trying to whittle their inventories down and being pretty aggressive in that standpoint, and some of the other chains, Footaction just comes to the top of my head, the family footwear sector has gone through some liquidation processes or have gone up against liquidation processes, if you will. So I don't know that the Federated/May consolidation is going to create any more of increased competition from that angle than anything else. I don't know if that answered your question.

It does. I was looking at it more in terms of potential benefit. Our latest research data point shows family footwear sector growing at a much more rapid clip than the department store footwear business. I just wondered whether you're stealing business away from the department stores and whether that trend could potentially accelerate going forward. So it wasn't a negative; it was more of a positive.

Yes, and from the standpoint of the business going forward, I think we're looking at it from two aspects. Number one is there are a lot of vendors that are very nervous about the consolidation. So from that aspect I think it will be good for Shoe Carnival and some of the other people in the family footwear sector.

From the other side of it, if you look at the business at the department store level, it was not a big athletic business. And I think that the family footwear side has enjoyed an increase in the athletic sales. I'm talking our business, I'm talking the Famous Footwear business, some of the other people in the family footwear side. So I think as the trends continue to go towards the athletic piece and athletic-inspired product, I think we will enjoy that same advantage on a go-forward basis because the department stores are just not that strong in the athletic side.

That sounds great. Mark, also on the store remodels and both the partial and the full remodels you mentioned in the press release, are those being targeted to specific markets? Or is it just based on the age of the units? In other words, are you trying to ramp up your performance in certain geographic markets more than you would in the overall chain?

No, it doesn't necessarily go to geographic markets. What we did is take a look at our store base that does not house the new design, and we said we're going to put the new design in stores that sell women's fashion product better than other women's, or other stores. And that's where we started to draw the line. Again, we took the chain of existing stores and split them into four basic four groups and said, here's what we're going to do in 2005; here's what we're going to do in 2006. And that was more based upon what product they sold and how they sold through women's fashion than any other consideration.

Either Cliff or Mark, can you give us a percentage breakdown in the merchandise categories, the major categories for fourth quarter, and also maybe comment if you're expecting any major shift in the merchandise mix for fiscal '05?

Our breakdown is as follows. Our women's brown shoe or non-athletic were at just north of 25 percent. Men's were just north of 18 for the quarter. And kid's were at 15.5 percent and athletic right at 47 percent. The accessory business was just south of 5. So I think that adds up to close to 100. That was for the quarter.

As far as this year is concerned, we continue to see an athletic run for the quarter. I think that with the product mix that we're getting from our major suppliers that athletic will continue to be a major player for us as we move into back-to-school, although I will tell you that as you look at the commercial this afternoon, and I hope you do, and you get into our stores you'll see a much improved selection in our women's and men's brown shoe area. And I believe that we have an opportunity to hold our own. I think the athletic percentage will pretty much stay the same, but we will hold our own in the women's and men's brown area.

In athletic, are you getting additional allocations of exclusive product, Cliff? And if so, is that trend likely to continue and is that helping business in the athletic sector?

We've been talking for several years about exclusive product here, and we've always referred to them as makeups. We are continuing to get that product and requesting more all the time. As competition gets rougher and tougher out there it behooves us to get exclusive product. So we're doing that not only in the athletic area, but in the brown sector as well.

Can you give us a rough idea of about what percentage would be --

(multiple speakers) never have.

Okay, just out of curiosity what brands feature retro women's basketball? That's the first time I've heard that term.

We are trying not to get too style specific, but that would be our version of the Air Force One.

Lastly, on ASPs, were they up in fourth quarter? And do you expect them to be up, flat, or down for overall fiscal (multiple speakers)

I think our ASPs in athletic will be up somewhat and we expect them to remain flat in the non-athletic sector.

Thanks a lot, guys. Appreciate it.

Sharon Zackfia, William Blair & Co.

This is actually Tonya Sinan (ph) for Sharon. A question on the new store openings. Originally there were 15 with a close of 4, so netting out at 11. And now you're at about 8, I believe. Is that due to the sort of remodel push or a lack of sites or --?

As I said, the main strategy that we're operating under for this year and probably next year is to identify viable sites within our existing marketplaces or in those smaller one-store markets that we've done very well in. And that is inherently going to limit the amount of stores that we are able to do within our current geographic footprint. The 12, it's approximately 12; whether it's 12, 13, 14 or 15, it's too early to tell. We've got 12 or 13 solid deals at this point in time, so current projection is about 12 new stores and closing about 4.

And then on the media or the new advertising thing, is there a different break down between the radio and TV that you used in the past or no?

In terms of the breakdown in TV versus radio, it's going to be a little more TV; slightly more TV than it has been in the past and slightly less radio than it has been in the past. But the differences are not so significant.

What I think is probably significant is the daytime mix or the day part mix that we're utilizing for TV. We're going more to prime and prime access and drive time in terms of television and a little bit away from some of the day part mixes that we've had before that we kind of considered an effective. So we've analyzed those pretty detailed in the past three or four months with the new advertising agency and we've determined the shift in the day part mix to more prime and prime access. So that's probably more significant than where we put the advertising dollars in terms of radio or TV.

The other thing that we've done is we're going to devote a few more dollars to circulars and a few less dollars to ROP (ph) in our print mix. So that would be the other consideration.

Kevin Foll, Next Generation Equity Research.

With the fill-in strategy I suspect that you would realize slightly lower preopening costs, as well as maybe theoretically a little higher first year sales volume. I guess what is the pro forma first year sales volume that you're targeting for new stores in '05?

That's obviously going to depend upon the store and the size of the store and the market that we're opening in.

Just an average.

If we can get that new store productivity back up to the 200 to 225 range per foot, that would be good I think for the initial year.

And any change to the preopening for new stores expected in '05 versus '04?

Preopening costs are going to fall a little bit over what we incurred in the past year.

Okay.

We've got an increase in rent preopening.

Right. And I guess what sort of -- are you still seeing a continuation of the kind of trends you saw in February into March, realizing you're up against an easier comparison in March as well?

The real consideration for March is that the Easter period, Easter selling season, moves into March and out of April. So we do expect higher comparable store sales in March, and lower -- in fact, negative comparable store sales in April. But as I said, a lot of that depends on the weather patterns that we see. If we get warm weather the two weeks before Easter and we're able to sell a lot of opened-up footwear on the women side, then I expect sales will be very good. If we continue to see very cool weather, or unseasonably cool weather, then that's going to have the tendency to hold down sales of women's fashion and particular the opened-up footwear. That's not only for us; that would be industry-wide.

So much of it, when you have a transition from spring -- or excuse me, from winter to spring, and on the same hand if you have a transition from summer to fall, a lot of that depends upon the weather patterns during that immediate transition period. And when you're talking spring, if you have got warmer weather and sell opened-up footwear very well, then the season turns out to be pretty good and margins tend to be higher because you don't have to take the markdowns to get rid of product on the back-end. A lot of the March business is going to depend upon whether or not we get some little bit warmer temperatures than what we've got today.

Just a couple of other follow-up questions. On your guidance for '05, does that include any SG&A leverage at all based on your comp assumptions for '05?

Yes. At the high end it would be a slight decrease and a ratchet down on the lower end of the sale scale.

Okay. And what sort of interest expense are you looking for, and maybe depreciation and amortization given some of the changes that are taking place?

Interest expense should be about the same as what we saw this past year. We're going to be seeing -- we're anticipating continuing to see increasing interest rates, but our average borrowings are going to be dropping. We predicted -- depreciation expense for next year we're projecting out at 14.6 million.

Great. Thanks a lot.

Virginia Genereux, Merrill Lynch.

Let me ask you guys -- for April, you made the point about a big February, and that should get you basically all of the comp increase you're guiding to. And Mark, you said the sort of wild-card is weather. I know weather has not started off great here necessarily for March. But if I look back at the earnings trends over the past couple of years, you've been down in April for a couple of years. Are you spending more? I would still think that EPS would be a little better, is my point, for April. Are you spending -- are you investing maybe more behind these marketing initiatives? Anything going on in the April quarter spending-wise?

The 40 to 44 cents that we're projecting for the April time period, if that's what you're asking about, that that should be better given the February results.

Yes, given the February results --

You've got to remember, February is just that. It's February. In our plans it only represents about 27 percent of the full quarter sales. So we had a great February, as did the footwear industry in total. But I don't know that you can project that sort of increase to the remainder of the Easter and the very early beginning to the spring and summer season.

I hear you, Mark, although 27 percent of 13 and change is almost 4. That is what I was saying -- it almost gets you to your comp. My point more so was that I would think even with a comp of 3 that you would get more leverage the given that you're going against two years of pretty big margin pressure in April. And were you spending -- are you doing more on the marketing side?

We are doing a little bit more on the marketing side in the first quarter because of the new campaign, but it's not substantial. And we are -- from the positive side we're expecting the fashion content of our inventory mix with the color that we've introduced this year versus the lack of color that we' had in prior year is going to yield the kind of comp that we're looking for. But I guess I'm just a little bit more cautious about the expectation given that March and April represents such a big piece of the quarter, and it is very much subject to what the consumer reacts to in terms of weather, particularly in our northern stores.

Again, from the positive side we've seen where we've had warmer weather in the South in Florida and Texas and some of the southern states react very well when they have had warm weather to our women's fashion mix. So that's got us pretty excited. But again, projecting that through the full quarter I guess we're kind of taking a stance of let's wait and see what happens.

Is it fair to say -- our work shows that weather hasn't been great the first 10 days into March. Or is it just too early to say?

I think it's probably been a little bit worse where you're at versus where I'm at. But it has not been a great weather pattern throughout the Midwest and South.

Thanks. Secondly, Mark, if you looked at your -- would you say that any of the stores are performing differently by geography? You mentioned that you opened -- in 2003 you opened some stores in more expensive markets effectively that even with the better remodels weren't necessarily great performers. As you look at the mix now, is there a great variability of profitability per store sort of by geography? And do you need to -- and if so, do you need to take any steps, whether that's closing stores or anything like that?

We look at it not in terms of geographic regions, but particular markets that we're in certainly. And there very definitely is a wide disparity between certain of our markets and the profitability in those markets as opposed to certain of the new larger markets that we entered into. I've given Denver as an example. I've given Houston as an example. There's certain others that we're not happy at all with the performance in those particular markets. We have been unable up to this point in time to penetrate those markets with sufficient number of stores.

Having said that, what we're trying to do in those particular markets is move the product along, or I should say tailor the product to those markets, better than what we have in the past. And I think we're going to see some pretty significant improvement in those markets strictly by the product that we're putting in those markets this year. Will that be enough to generate sufficient productivity to make me happy? Probably not. But again, we're going to try to continue to increase the number of stores in most of those markets.

We are taking a look at certain markets for closure. If it make sense then certainly we will review that in more detail or give it a more scrutinious look after the first quarter than we are right now.

That is helpful. Lastly, maybe for you and Cliff. Can you -- if women's sort of fashion product, women's non-athletic, is going to go to 30, and I know that's over time -- if that's your objective to get it to 30, where does that come from? I would think it would come from athletic over time. Again, that is sort of part one.

Part two, can you tell us what sort of brands when you say women's fashion product? Is it sort of the usual suspects? And then what brands also, Cliff, in junior -- when you say the junior and urban fashion categories have worked for you with the kind of bling-bling and low-profile stuff, if you could just tell us what you're talking about?

Let me take first part in terms of the product -- or the sales mix. Certainly we don't expect to increase our sales of women's. And I'm talking in terms of total sales -- of women's product at the sake of declining sales in athletic. So we're trying to maintain our athletic focus in terms of total sales. But where we expect increases to come from more rapidly than the athletic side is our women's non-athletic side.

So yes, you're exactly correct. In terms of the percent mix of sales, I would expect that the athletic over time -- and it's not going to happen this year, I don't think -- well, certainly not to that extent, because the athletic industry is on a pretty good run right now from a fashion trend standpoint. But I think over time that as we improve our fashion mix in both the men's and women's category and the junior category outside of athletics that it is certainly going to come from the athletic side in terms of percent.

Understood, Mark.

From a junior and urban standpoint, I think what you're -- from a branding standpoint it's not necessarily nationally known brands that are driving this business. It's more or less pseudo-brands that are indicative of our trade channel that we're getting the fashion from for prices that we can -- for retails that we can run for under $30 that's driving our business. So I can't tell you that it's the department store brands that are driving that junior and urban business.

And you guys are probably doing some of it on the private side too, right?

Some private, but mainly just pseudo-brands and brands you probably would not be familiar with because you would not see them in department stores.

Thank you all.

Jeremy Rob (ph), Jefferies Asset Management.

Just wondering if you could talk a little bit -- I know you've talked about this in the past -- your traffic and how it's been down I think at least in the third quarter, and maybe over the year what you kind of saw in the fourth quarter, if that is stabilizing some, and if you're seeing an impact due to the change you're having in the marketing there.

I don't think it's attributable to the change that we have just initiated in our marketing, because really that campaign didn't start until yesterday. So certainly didn't that had zero impact. And we just started the new grand opening promotions about a month ago, so that really didn't impact traffic we saw, certainly not on a comp store basis anyway.

We did see a pattern of increasing traffic as we moved through the quarter. I'm not going to say that it exactly mirrored our comps. But trend certainly mirrored that increase in comps. As we moved from November December got better, January got much better and February got much better than that. So we didn't sell that many more pairs to each individual customer, so certainly our traffic was much better. Transaction size increased a little bit and the average price per pair as we moved through the quarter got better.

Got you.

But not so significantly that we are expecting big increases on a per pair basis. Most of our anticipated growth in sales and comp store sales is going to come from increasing the number of pairs we sell, and that's going to be to more customers. That's the obvious intent of this new advertising campaign, is to tell that female customer, "look, we've got the fashion you're looking for; we not only have black and brown shoes now, we've got red and green and orange and the colors of the rainbow for spring, and we're much more fashion forward than we used to be; come back to see us." So that's pretty much the message of the advertising campaign.

Great. In terms of your inventory, I don't know if this is new or not, but you mentioned doing -- changing the regional allocations some more quickly in the South than maybe you've done in the past. I didn't know if that's something new and you're just starting it and where you see the opportunity there, because it sounds like it worked well. If you might just talk about that a little bit?

Not sure if you were on the conference call last spring when we were talking about the fact that the department stores transition much earlier to spring than the mid-tier or family footwear channel. Our vendor structure just completely missed the trend to color, as we did. So we made a concerted effort to put color and more style and fashion into our assortment. And it just made sense to transition that from our furthest South stores north. And that's exactly what we did. The customer has responded very positively to it. And consequently, what happened is as we've moved through January and February, our comps in the most southern stores were up double-digit. As we moved further north with the fall product and fall winter weather, the comps went to flat. So we saw great response to this new spring product as we brought it in. Florida gets obviously -- there's not a lot of snow the further south you go, so they were looking for opened-up footwear and it worked real well.

And then one quick question on your gross margins. I was just curious what type of comp do you need to leverage your buying and occupancy expense we look into the next year?

For this year we can get a comp around 1.5 points. We should be able to have flat buying, distribution and occupancy costs. Anything north of 1.5 points would create some leverage.

Great. Do you have your ending square footage?

Yes. Bear with me just one moment.

I think it was 2.9 million square feet.

Thank you very much.

2 million 935.

That's all the questions I have. Thank you.

Stephen Martin, Slater Capital Management.

Most of my questions have been answered, but when you look at athletic and, call it classic, retro, whatever you want, however you want to classify it, there have been a number of occasions over the last two or three years where someone -- where people -- not you -- have attempted to call within (ph). When you look out to back-to-school, what are you seeing in athletic and do you think the trend is yet to change?

We're seeing pretty good response today and as we go forward, as we move into March, even with retro, classic retro. But we believe, and we're seeing it happened at retail as we speak, that low-profile is going to gain in momentum for that consumer and for the urban consumer and for the traditional consumer.

Is that at the expense of classic? Or is that at the expense of more of your sort of every day mid-price, call it, basic every day athletic, like a $45 or $50 Nike, Reebok, Adidas?

I think that it would come maybe at the expense of that. I'll tell you what's happening, and the reason I hesitate a little is fashion is changing a little bit, especially with jeanswear. And the leg is becoming more tapered, and as that becomes more tapered the heavy classic product is going to become less important. And the athletic guys see that, including the classic -- the guys that are very strong in classic product. And they are making more low-profile shoes. And as we deliver those low-profile euro casual looks they are selling through at greater rates. In fact, I guess the number one or number two manufacturer of classic product delivered our first low-profile shoe this past spring, and that blew out at double-digit rates every single week. And we see that actually gaining in momentum as well.

In your men's casual, is there anything on the brown side? Is the anything new higher priced doing well?

What we're seeing in men's is Italian dress shoes or fashion dress shoes with new toe characteristics --

It's not Prada and Gucci, right?

Exactly. And their (indiscernible) shoes are selling very well. We're seeing low-profile shoes. You'd probably equate them to Madden, but low profile shoes that are selling through in our casual department very, very well. And we see that gaining real momentum as we move into back-to-school.

Thank you very much.

(OPERATOR INSTRUCTIONS) Sam Poser, Mosaic Research.

My questions have been answered. Thank you.

There are no further questions. At this time I'd like to turn the call back to Mr. Lemond for any additional or closing remarks.

I would just like to say we're excited about the upward trend in footwear that we saw over the past couple of months. Again, as I stated before, we're a little more cautious for March and April. But if we continue to see the excitement in the footwear industry, then we're really looking for good things in the first half of this year. Thank you for joining us today.

That concludes today's conference call. Thank you for your participation and you may now disconnect.