Shoe Carnival Inc (SCVL) 2005 Q4 法說會逐字稿

Thank you for standing by. We are about to begin. We do thank you for standing by, and welcome to today's Shoe Carnival fourth-quarter earnings conference call. Today's conference is being recorded and is also being broadcast via the 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 these risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference.

Now at this time I would like to turn the conference over to Mark Lemond, President and Chief Executive Officer. Mr. Lemond, please go ahead.

Welcome to Shoe Carnival's 2005 fourth-quarter and year-end earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer; Cliff Sifford, General Merchandise Manager, and Tim Baker, Executive VP of Operations.

Shoe Carnival's record-setting fourth-quarter results contributed to the highest annual sales and earnings performance in the Company's history. We set Company records in sales, comparable store sales, net earnings and earnings per share for both the quarter and full year. We believe the changes we have made to our business model over the last 18 months allowed us to take advantage of improving trends in the footwear industry this past year, particularly in the third and fourth quarters. We also believe these positive industry trends will continue into our 2006 fiscal year.

Net sales for the fourth quarter rose 13.7% to 163.6 million from sales of 143.9 million in the same period last year. The comparable store sales increase of 11.7% for the quarter was the largest quarterly comp store sales increase ever recorded at Shoe Carnival. Net earnings were 3 million or $0.22 per diluted share in the fourth quarter, which was an increase of 154% over net earnings of 1.2 million or $0.09 per diluted share in the fourth quarter of 2004. Our fourth-quarter 2005 earnings were net of a charge of approximately $0.03 per share for three stores we plan to close in fiscal 2006.

In our third-quarter earnings call, we spoke to you about our ability to sufficiently replenish core inventories following the 21.2% comp store increase in October and the resulting third-quarter comp store increase of 8.3%, which was a company record at that time. Our merchants did a great job with that replenishment issue. We followed our third-quarter performance with increases of 12.8% in November -- excuse me, 10.6% in December and 11.8% in January.

Importantly, our gross profit margin also improved by 130 basis points over the fourth quarter of 2004. With the increase in sales we were able to leverage buying distribution and occupancy costs by 80 basis points, and we also realized a 50 basis improvement in the merchandise margin.

Selling, general and administrative expenses as a percentage of sales declined in the fourth quarter of 2005 to 25.6% from 26.1% in the fourth quarter of 2004. While we incurred higher health care costs, higher performance-based compensation costs and an increase in store closing costs and charges, we were able to leverage overall SG&A expenses due to the increase in comp store sales. Net sales for the full-year 2005 rose 11.1% to 655.6 million from sales of 590.2 million in fiscal 2004. Our annual comp store sales increase of 6.9% also set a company record.

Operating earnings for fiscal 2005 grew by almost 48% to $30.8 million or 4.7% of sales from $20.9 million or 3.5% of sales in 2004. The increase in the operating margin was attributable to 6/10% of sales increase in the gross profit margin and 6/10% of sales decrease in SG&A expenses.

The expansion of our operating margin is the key focal point of our executive management group. Despite the fact that we will incur some startup cost in 2006 for certain infrastructure initiatives, we firmly believe we can continue to improve that margin this coming year. Net earnings for fiscal 2005 were an all-time record of 18.8 million or $1.40 per diluted share compared to net earnings of 12.5 million or $0.96 per diluted share for the full-year 2004. This was a 50% increase in the annual net earnings.

In our fourth-quarter conference call last year, we spoke to you about certain business model changes we initiated in 2004 that we believe positively impacted our business in 2005. Because we expect to continue to see a positive effect in 2006, I would like to reiterate those initiatives.

First, early in the spring of 2004, we recognize that our nonathletic product mix was not as fashion forward as it needed to be. This was particularly true of our women's product and to a lesser extent our men's product. As a result, we put a major emphasis on our women's and men's dress and casual fashion business. Part of our long-term strategy for Shoe Carnival stores is to increase as a percent of total sales our women's nonathletic product to between 28 and 30% of our total business.

I'm impressed with the changes our merchants have made in a very short period of time. In 2004 this category represented about 23.4% of total sales. In 2005 we increased this business by 200 basis points to 25.4% of total sales. For 2005 both our women's and men's nonathletic businesses recorded double-digit comparable store sales increases. Importantly, our athletic business in both children's and adult sizes was positive as well, recording a comp store sales increase of over 3% last year.

Second, in late 2004 we initiated a number of changes in our marketing program, including the hiring of a new advertising agency. A new TV and radio advertising campaign began running in the spring of 2005 with a fresh creative message that highlights the fashion and value of our improved women's product mix. We dubbed it the Red Nose Campaign. Its primary intent, aside from the product message, is to brand the Shoe Carnival stores in an understated but humorous way. That creative campaign evolved through the back to school and holiday seasons, and we expect it to evolve further throughout 2006. We definitely attribute a good part of our traffic increases to this fresh new advertising. The first Easter TV ads will begin running March 29 of 2006. At that time we will put the newest commercial on our website, ShoeCarnival.com.

We also wrote out to all stores last year a new visual graphic package that complements our new advertising campaign. This focus on enhanced in-store visual graphics will continue into 2006.

Third, 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. In 2005 we opened 15 new stores and closed seven for a net gain of eight stores. We thus ended the fiscal year with 263 stores in operation. We will continue this strategy in 2006 as well. We expect to open between 13 and 15 new stores and close five stores this year.

We also initiated a store remodeling program last year to incorporate our new store design into all of our stores over a four-year period. However, to date we have been unable to see a definitive difference in the performance of newly remodeled stores as compared to stores in which we simply updated the visual graphics. Consequently we have suspended the remodeling program and have elected instead to remodel stores as they come up for lease renewal. If, however, we begin to see a definitive upward trend in the remodeled stores, we may very quickly reinstitute this remodeling program.

From a balance sheet perspective, we continued improving our financial position in the fourth quarter. We generated sufficient cash flow to reduce borrowings under our line of credit to zero at year-end. Thus, we ended the year with a positive cash position of about $20 million and no bank debt. Total inventories increased by 3.4 million from the end of 2004; however, on a per store basis, inventories actually declined by 1.2%. We expect inventories on a per store basis to be flat or decline very slightly throughout all of 2006.

The increase in cash and cash equivalents of 15.4 million year-over-year was the principal reason for the $16.3 million increase in working capital, which rose to 131.8 million from 115.5 million at the end of 2004.

We are planning three major infrastructure initiatives for 2006 and early 2007. First, we are currently in the process of incorporating markdown optimization software into our merchandise system. We will turn the system on in April. Not only will this assist our merchants in taking more timely markdowns, it will give us the platform upon which to build its own pricing model. We fully expect this system to significantly increase gross profit margins on a long-term basis.

Secondly, we will deploy a wide area network, or WAN communication system, in the first half of 2006. This will enable a number of operational benefits, including significantly improving the authorization of credit, check and gift card transactions, reducing authorization costs and enhancing our customer loyalty program. But probably the biggest benefit we will see over the long-term will be the implementation of an online store inventory locator system which will allow store employees to search our chainwide merchandise system for available product and sizes not already in their store, and they will be able to do this online.

And lastly, we have already announced two building projects that will allow us to continue and even accelerate the growth of Shoe Carnival in the future. We are in the process of designing a 60,000 square foot corporate headquarters facility which we plan to locate in our current home town of Evansville, Indiana. This project is scheduled for completion in very early 2007, and we have already begun construction on a 410,000 square foot distribution center located just a few miles from our existing DC. This project is expected to be completed and fully operational by the end of fiscal 2006. Both the corporate headquarters and DC will be leased on a triple-net basis. We do expect, however, to incur capital expenditures of approximately 18 to $19 million this year in DC equipment and office fixturing.

In February 2006, we sold our existing combined distribution center and headquarters facility, and we are currently operating in this building under a lease agreement with the buyer. With lease extensions we're not required to vacate the premise until January of 2008, so we have plenty of time to complete the new facilities. We may, however, cancel this lease early at such time that we vacate this building and make the transition to the new DC and new office building. Both of these building projects are necessary for the continued growth of Shoe Carnival, and we're excited about the accelerated growth these projects will allow in 2007 and future years.

Now I would like to turn the call over to Cliff Sifford for a more detailed discussion of merchandise.

Thank you, Mark. As Mark stated, we finished the quarter with an 11.7% comparable store increase. We achieved increases in every major department with women's and men's nonathletic and women's athletic all driving double-digit comparable store gains. Over the next several minutes, I will walk you through each department to help shed some insight on our business.

As I said, our women's nonathletic comparable store sales were up double-digits for the quarter and high-teens for the year. The fourth-quarter business was driven by our boot and dress shoe categories with both showing healthy double-digit gains.

In boots we're very pleased with the performance of our stretch, fur-lined and Western classification. In addition to this, we saw healthy double-digit increases in our Junior business for the quarter with dress shoes, casuals and boots all performing well. We continue to be very encouraged about the performance of our women's nonathletic business. As most of you who have been following our company know, we have set a goal of growing our women's nonathletic business to 28 to 30% of our total sales. This past year we made very good progress toward achieving that goal. We saw a 200 basis point improvement in our penetration of women's nonathletic business to the total, achieving 25.4% of sales in this department.

Our buyers have done a good job of offering our customers up-to-date, trend-right fashion product, and our customers are reacting positively to that direction. Our men's nonathletic business also experienced double-digit growth for the quarter and year on a comparable store basis. Growth for the quarter came primarily out of the fashion and young men's category. Sport fusion, along with fashion dress and casuals, all showed solid growth. We were not pleased with the performance of our men's basic boot business as hikers and sport boots in general did not perform. I believe this is primarily due to the fact that our lighter sport fusion and fashion dress shoes became the style of choice for casual attire.

On the other hand, we did enjoy growth in the fashion boot business in our urban and Hispanic markets.

In children's shoes we achieved comparable store increases of mid single digits for the quarter and low single digits for the year. The fourth-quarter increase came from both the athletic and nonathletic businesses. Growth in children's nonathletic came primarily due to a higher average price per pair from both genders in the casual and boot classification. Boys' casuals, girls’ sport fusion, along with both fashion and winter boots, all sustained strong sales.

In children's athletics we're disappointed in the performance of boys basketball and both girls and boys slip-on and fashion classic. However, the running classification had positive double-digit growth. In adult athletic we finished the quarter up high single digits on a comparable basis and up low single digits for the year. For the quarter our women's athletic business was up double-digits and our men's up low single digits. In women's athletic our business was driven with fashion classic, mules and performance. The men's athletic business showed solid growth in performance products, along with the skate category.

We continue to see weakness in the men's basketball, fashion classic and walking classification. I believe most of this weakness in these categories has to do with weak product offerings from our major brands, as well as a transfer of sales to our nonathletic departments into low-profile.

Our accessories business was up on a comparable basis mid single digits for the quarter and low single digits for the year. We are very excited about our handbag business which was up high double-digit for the quarter. We have put quite a bit of emphasis behind our handbag business in making sure that we have the trend right fashion bags that our customers are looking for. We're very pleased with the progress our merchants are making here as our average price per bag and margin are all showing improvement.

In closing, our inventories at the end of the year are down slightly on a per door basis. Inventories in fall and winter product are down significantly. I am very proud of the job our buyers have done in not only raising the bar from a fashion standpoint but the emphasis and follow-through to make sure that our inventories were clean and ready for new spring arrivals.

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

Thanks. Mark and Cliff have discussed quite a bit of the financial results of the quarter and the year, so I will try not to repeat what they have said, but let me add some details to some of these items discussed.

One of our goals this year was to improve the productivity of our stores, particularly our newer stores. Our new stores for the past years have not opened as strong as they had in the past. Consequently our sales per square foot have fallen from $237 in fiscal 2001 to a low of $207 in fiscal 2004. By putting more fashion in our stores, changing our advertising and adding new stores in existing marketplaces or in smaller markets, we felt we could improve our store productivity and we did. With the record-setting sales performance we saw in 2005, our sales per square foot increased to $219. We saw increases in our older stores and our stores we opened the past few years. And most importantly, the stores opened in 2005 as a group are trending much better. In fact, the 2005 stores are trending just below the Company average -- well above what we had historically seen from new stores.

The increased productivity has helped to leverage our expense structure in a significant way -- something we struggled with in years where our comps and consequently our productivity was declining.

In the fourth quarter, our gross profit margin increased 1.3%. 0.8% of the increase came from leveraging or buying distribution occupancy costs. For the full year, buying distribution and occupancy costs decreased 0.4% as a percentage of sales.

For the fourth quarter 2005, our SG&A expense as a percentage of sales decreased 0.5%. Here again, higher sales and store productivity resulted in the leveraging of our expenses. However, this leveraging was partially offset by a 0.3% increase in employee health care and a 0.7% increase in incentive comps, both as a percentage of sales. New store opening costs incurred in the fourth quarter were 49,000 less than 0.1% of sales compared with 361,000 or 0.3% of sales last year. We opened one new store during the fourth quarter of 2005 compared to opening three stores in the fourth quarter last year.

Store closing costs included in SG&A in Q4 were 821,000 or 0.5% of sales. Last year in Q4 we incurred 114,000 net store closing costs or less then 0.1% of sales. The increase is primarily due to impairment charges recognized for three stores expected to close in 2006. For the full year, SG&A as a percentage of sales decreased 0.6% due to leveraging expense against a larger sales base. However, this leveraging was partially offset by 0.3% increase in employee health care and a 0.3% increase in incentive comps both as a percentage of sales. The increase in incentive compensation for the year was primarily the result of higher earnings, which is the major component of our performance-based incentive plans currently in place. Preopening expenses for the full year were 753,000 or 0.1% of sales compared to 1.7 million or 0.3% of sales in 2004.

Store closing costs for the year were 1.5 million or 0.2% of sales compared with store closing costs of 565,000 in 2004. This year-over-year increase is primarily attributable to impairment charges of three stores we expect to close in fiscal 2006. For most of the fourth quarter, we were investing rather than borrowing. This resulted in a net interest income of $7000 for the fourth quarter versus 150,000 in net interest expense last year.

For the full year, we incurred net interest expense of 354,000 versus 658,000 in 2004. The effective income tax rate for the fourth quarter of 2005 increased 38.3% from 26.4% in the fourth quarter 2004. The 38.3% effective rate is a true reflection of our historical income tax rate. The adoption of proposed FAS 109 rules relating to a contingency reserve for tax benefit can in the fourth quarter of 2004 resulted in abnormally low tax rate. For the full year of 2005, the effective income tax rate was 38.4%.

We are in solid financial condition with no long-term debt. Looking into 2006, we expect to be debt free for most if not all of 2006. Depreciation expense for the fourth quarter and the full 12 months of 2005 were 3.6 million and 14.8 million respectively. Capital expenditures for 2005 were 14.7 million detailed as follows. 2005 new stores were $4.2 million. The remodeling and relocation of stores cost $4 million. Software and information technology cost costing $3.3 million. All other additions were $3.2 million. Cash lease expenditure received this year totaled 874,000.

I would now like to provide some guidance for 2006. Earnings per diluted share in the first quarter of 2006 are expected to range from $0.52 to $0.54. This assumes a total sales increase between 5 to 6% and a comparable store sales increase ranging from 4 to 5%. Earnings per diluted share for the first quarter of 2005 were $0.45. For the full year of 2006, earnings per diluted share are expected to range from $1.65 to $1.75. This assumes total sales increasing 6 to 7% and comp store sales increasing 3 to 4%. We expect our gross profit margin to continue to increase but not quite as much as we saw this past year. The increase in the gross profit margin is expected to be an increase from the merchandise margin.

We expect the leveraging of occupancy costs against a higher sales base will be offset by increases in buying and distribution costs in 2006. Included in our expected buying costs are additional costs for markdown optimization software we are implementing this year. Due to these costs, we expect our buying costs to be slightly -- to increase slightly as a percentage of sales in 2006.

Included in our distribution costs for 2006 are additional costs primarily in Q4 for converting to a new distribution center. We expect to begin limited processing of the new DC in November of this year while we continue to operate our existing facility. We expect to completely transition over to the new DC by the end of January 2007 and vacate the existing facility. The increased distribution cost expected in the fourth quarter of 2006 will decrease fourth quarter EPS by about $0.03.

The Company will incur an expense of approximately $1.5 million or $0.7 per share for equity-based compensation pursuant to the rules of FAS 123R accounting for stock compensation. During 2005, in anticipation of the adoption of FAS 123R, the Company began granting awards of restricted stock in lieu of stock option grants. In 2005 we incurred a cost of approximately 600,000 or $0.03 a share related to the grants of restricted stock.

Another factor to consider for earnings for the year in fiscal 2006 is fiscal 2006 has 53 weeks in the year. We are estimating that the extra week in the fourth quarter will generate an additional $14 million in sales and will increase EPS in the fourth quarter by $0.08.

One last comment on the new distribution center and corporate headquarters. As Mark said earlier, these facilities are the infrastructure necessary to accelerate our growth in future years. We expect in 2007 that these new facilities will increase our cost as a percentage of sales about 0.3%, but we expect to begin leveraging those costs in 2008.

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

(OPERATOR INSTRUCTIONS). John Shanley, Susquehanna Financial.

Congratulations on a really nice quarter. Mark, the suspension of the store remodeling effort, can you give us an idea of what the Company spent in store remodeling in fiscal '05, and what that may mean in terms of possible SG&A cost savings in fiscal '06 now that you have suspended that remodel effort?

You know the CapEx we spent for remodel?

The remodeling and relocation stores were about 4 million, and the majority of that was for the remodeling of stores. So it's a little bit less than $4 million to remodel all the stores we did.

Now all of the assumptions, John, are baked into our numbers that we gave as guidance. What we won't do is go in and remodel stores that either 1), are not coming up for lease or 2), don't need to be remodeled because of the shape that they are in. We will remodel those kinds of stores. But we're going to, like I said, suspend the remodeling of stores just for the sake of moving the women's product to the front and certain other changes that we made under the new look of the stores.

I don't expect that it will impact SG&A significantly in 2007. Obviously what it has the effect of doing is saving the cash that we spent on remodels plus impacting SG&A to some extent or another down the road as we will not incur the depreciation for the remodeling. But I do want you to understand we expect to remodel stores year after year. It is just that we are going to pull back in the number of the remodels that we're doing. We still expect to remodel about nine stores this coming year.

Okay. That was my real question. Fine, I understand that. The new DC center, Mark or Kerry, the expenditure, the 18 to $19 million, can you give us an idea of where in fiscal -- which quarters in fiscal '06 we are likely to see the greatest component of that 18 to $19 million spent?

It will be third and fourth quarter primarily.

And if I understood Kerry's explanation that you have got to run concurrent DCs from November to January of '07. So that is the only period as we get into fiscal '08 or '07 or other there would not be any increased costs for the current that is being run, is that correct?

That is correct under our current plans. Really the major part of the conversion is going to happen in December of '06. We really look at being -- cleaning out our existing distribution center of any shoes in our store in there and being in -- processing all of our shoes in the new distribution center. So January is really a closedown month of -- if we hit all of our targets of the old DC. And yes, you are correct that we will then vacate that premises, and we won't have any further lease costs.

On the DC portion. We still may be occupying the administrative piece of our current facility.

Okay. Great. Cliff, you guys did really well in the quarter and the fiscal year on your nonathletic women's product line. Has that product maintained its historic high product margins for you as one of the better product margins contributors for you, and do you expect that to continue into '06?

It absolutely was. It did maintain its high margin contribution, and we do expect it to continue in '06. John, we expect to pick up as a penetration of business an additional percent this year as against the total in women's nonathletic. Bob is still maintaining increases in our athletic business. We are not putting our athletic business down.

Okay. What is driving the strong demand and strong margins on the women's nonathletic, Cliff? Is it a fashion factor? Is it something that you guys are doing different from your competition, or maybe you can give us some insight in terms of what is happening better?

Well, the Junior business is absolutely on fire, John. It was up high double digits for the year. That was driven primarily with dress shoes and in our, what we term our sports or our casual category with low-profile. But we sold flats with lots of bling, if you would. We sold, as I said, dress shoes and especially evening or evening dress, and we sold low-profile all in Juniors.

In the traditional women's business, we had a phenomenal year in, again, dress shoes and a phenomenal season in boots. Our boot business continued very well straight through December with double-digit increases in both November and in December. We did have a loss in the month of January for two reasons. One, the weather did get a little milder in the month of January, but we were at that time pretty much out of business in the fashion boots that we were selling.

The last question I have is for you, Kerry. I wonder if you can clarify a little bit on this option expense. I understood what you said in terms of $0.03 in fiscal '05. Of the guidance you are giving us of 1.65 to 1.75 in EPS results for fiscal '06, how much of that would be do you estimate option cost related, or how much of an impact would you have if we took out option expenses?

Well, what we're saying in '06 we're expecting about $1.5 million in expense for the incentive comp -- the equity-based compensation, which is about $0.07 a share in '06, and that is included in our estimate of $1.65 to $1.75.

Okay. You don't break that out by quarter. It is just somewhere in the fiscal year. Is that correct?

It is a little heavier in Q1, but it is spread across the year.

Jeff Stein, KeyBanc Capital Markets.

A couple of questions. First of all, capital spending for this year, am I understanding this correctly, the 18 to 19 million is just for distribution and logistics related, or is that your total CapEx budget?

No, that is just strictly for what we're going to have to put in the two new facilities. Our total CapEx budget for the year is going to be about $30 million.

Got it. Okay. And what do you estimate your depreciation and amortization to be this year?

About the same as we are incurring for this year, about $14.5 million.

Why would it be flat with the big ramp in CapEx?

Well, keep in mind that those items don't go online, so they don't go in productivity until the end of the year. So while they are incurred and they are in CapEx, there would be very little depreciation against them.

Okay. So the big ramp and the reason why you see SG&A going up as a percent of sales, at least from that component of it in 2007 is because of the ramp in depreciation? Would that be the biggest piece?

You are saying in Q4 of this year?

Yes.

Well, no --

[multiple speakers]. In calendar 2007 you had indicated that there would be about I think it was a 30 basis point increase in SG&A.

Yes, in '07 the primary issue of the expense structure increase is the depreciation.

Okay, that is what (multiple speakers)

When you say in SG&A, you're talking about distribution costs and SG&A expense. Do you understand that, Jeff?

Yes.

He is talking about the combination of both distribution and administrative costs.

Got it. So part of that will show up in your gross margin?

Exactly.

Okay. Now as far as 2007 is concerned, not to get too far ahead of the curve here, but can you talk a little bit about the point at which you guys will feel comfortable with reaccelerating the store expansion program and at what rate that might be?

Well, we anticipate opening somewhere in the neighborhood of 20 to 25 stores in 2007, again assuming we can find the appropriate real estate sites. And in 2008 and beyond, somewhere around the 12 to 15% store growth.

Okay. So you think you can kind of get back to where you were before you really slowed things down?

Well, we probably won't get into the 20 and 25% increases in stores that we did a few years. But yes, we would like to maintain somewhere around that 15% growth in terms of number of stores per year.

Okay. And final question for Cliff, Cliff I was wondering if you could talk a little bit about the athletic business and what may be in store for 2006? Last year you guys got helped by the fact that the mall-based chains moved their price points up, and it looks to us like as May Department Stores have shut down and reopened as Macy's, their price points are probably going up. It would seem to me that this is a good thing for you. Can you talk about where you plan to take your athletic product and strategy in 2006?

We also plan on taking our athletic price up as well. You know, there has been a strong resurgence in performance product, performance running and other categories as well. But not near -- the other categories are not near as strong as performance running. And with that, that will drive higher price points. Our top two increasing vendors happened to also be the two vendors that also drive the higher price points out the door.

So the direction we are taking is we're going to improve our selection of performance product within our stores, thus driving higher price points and higher margins out the door.

But roughly what percentage increase would you expect in price points on average in athletics?

It would be low to mid single digits.

Okay. And final question for you, Cliff. It just seems that the stars have just lined up correctly for the industry for certainly the last 12 months plus. Where -- are there any weak spots that you're seeing right now in any of the categories?

That is a great question. We have been a little concerned about our kids’ nonathletic business. Although I will tell you beginning with the fourth quarter, it turned and showed, as I stated in my statements, a high single digit increase. So we just -- we did not have a good spring season with kids’ nonathletic. And I'm very interested to see what happens with this spring season with that department.

Other than that, I'm very excited about what is going on in women's, and I think that if we continue the fashion trends that we have started and we continue on with that, we will be good to go for women's.

Moving into athletic, we need basketball product. Our vendors have not given us decent basketball product for I guess about a year to 18 months. We see that possibility changing for fourth quarter with our number one vendor giving us new, exciting, fresh merchandise for fourth quarter. So hopefully we can see a change in basketball product as we go into the fourth quarter.

[Harry Ikenson], [Mellenberger Capital].

Good afternoon. Congratulations. A lot of my questions were asked already. I just wondered if you could sort of follow-up a little bit more forward-looking on you talked about how strong the trend had been in dress and in women's. But could you touch on going forward in relation to what is going on in softgoods, the fashion trend changes are away from the bling-bling, much more neutral colors, much more muted. So how is that -- is that relating to footwear yet, or is footwear lagging that? What trend changes do you see in fashion, and could you just elaborate on what you expect there?

I don't think there is any question that the footwear industry is following that very very closely. Tailored product, for instance, right now is very very strong, and we will continue to see that through the fall. And that is going to be interpreted right down into flats and into the boot category with more muted colors, brown tones being strong; wedges we think you're going to continue. So there will be less bling-bling, and more tailored, more muted, more burnished leathers, if you would, as we move forward into spring. Excuse me, in the fall.

So yes, to answer your question, we do see the footwear business following that very closely, and see that as an opportunity for us as well.

Okay. When you say that is an opportunity, does that have any difference on price points with the change in the product the way it is going at all?

Higher heel dress shoes and wedges will demand a little higher price than flats. And that is -- when we were selling bling at great rates last year, it was mainly in the flat casual category. So there would be slight improvement between those two categories a slight improvement in average price.

[Jill Cruthers], Johnson Rice.

I was wondering if you could talk about the ProfitLogic Markdown software. I know you mentioned you would start to see gross margin benefits in the second quarter. Is there any way you could quantify some of the benefits you are expecting maybe near-term or long-term?

We are going to wait until we start moving. First of all, we're not going to see much of a benefit if any in the second quarter. We will just have implemented that ProfitLogic software at the beginning -- actually at the end of the first quarter and the beginning of the second quarter. So we are going to feel our way along there. We're not internally trying to quantify that benefit on a near-term basis, but over the next 18 months, we certainly think that we can squeeze out some points in gross margins due to that. But we're going to walk with this software before we run with it.

Okay. I know you have talk somewhat sometimes about zone pricing. Does this software help in that metric? Is this is that something you're still looking at as a possibility?

Well, as I mentioned in my prepared remarks, that gives us a platform that we can do a zone pricing model or build a zone pricing model upon. That won't be our initial emphasis with respect to ProfitLogic. We will get the markdown optimization piece in place and get our people used to that system with that Markdown Optimization piece first, and then we will talk about zone pricing models after that. So it's a longer-term initiative.

Okay. And I guess on the women's nonathletic business, are you seeing more opportunity expansion in the private-label or possibly the second-tier brands like The Villager by Liz Claiborne or things of that metric? Where are you seeing the biggest growth potential?

You called them the second-tier brands I believe? We are seeing tremendous growth out of our private-label program and out of what we would term as second-tier brands, nondepartment store brands.

And if I can add to that, I think the reason for that is when you -- when we look at the main tier brands, they don't sell us -- they don't offer us in the mid tier the same fashion forward product that they would offer department stores or even put in their own stores. So if we do our homework correctly from a fashion standpoint and a styling standpoint, we can actually do more from a fashion standpoint with the second-tier and our private-label. So that is why we see the growth there.

(OPERATOR INSTRUCTIONS). Sam Poser, Mosaic Research.

Congratulations. Can you talk a little bit about -- a lot of talk about the women's business. I just want to go into that a little bit more. A lot of people have been saying that the heel heights are really taking off now on the dress side and even on the Junior side. You talked about wedges. Is this all about height that is going on there, because that was the impression I got?

I'm not going to tell you it is all about height. I think you're going to see -- I think you are in some items you're going to see higher heels and even platforms in some cases, especially in the Junior business. But heel heights from 14/8 to 16/8 to 18/8 are all going to be important. It is not -- if I gave the impression it was all higher heels, that is the wrong impression.

You know, the excitement comes from the fact that the materials that will be used in the product, the ornamentations that are going to be used in the product, whether it is studs or buckles, I think I have already said materials. But and then the different toe characters. You take that and you apply the different heel heights and wedges and the whole bit to it, it is going leave for a very exciting season.

But as well, some of the evolution of the shoes that we saw or the trends that we saw last year, for example, the Moroccan looks and one of our dress shoes in the inventory this past year was a little skimmer Moroccan look. As that evolves, it seems like it is moving up in height. So it creates a different looking face and a different looking bottom. And we have said before that one of the exciting things about the shoe industry today is there are so many different bottoms and so many different faces being put on those bottom, round toes, pointed toes, square toes, platforms, wedges, there is so much going on, there is no one big fashion trend in the footwear industry today outside of a few items.

And then how does that all relate on the men's side? Are you going to see it go to more boots and ornamentations and heavier looks over there on the nonathletic side?

Well, I think what we have seen in the men's business is a move not only to low-profile because that -- low-profile is truly working in that department, but also in European or European dress shoes. We have seen dress shoes being worn now with jeans and with casualwear more so than anytime in the past, and that has really lit a fire under what we call our fashion dress category.

So I believe that we are going to see dress continuing to increase. I think we've got at least another couple of seasons or excuse me, at least through back to school and probably into early fall on low-profile, and we're going to see some nice increases out of both of those two classes.

Great. And I did not know if you answered this or not earlier, what percent of your business is private label right now in the men's and women's side?

Well, it would be different between the two. We are under 20%, somewhere around 18% in men's, and we're just over that in women's, about 22 to 24%. I would have to get back with you on the exact percentages, but I believe I'm pretty close.

Great. Congratulations, again. Thanks.

And with that, there are no further questions. I would like to turn the conference back to Mark Lemond for closing remarks.

Well, I just want to thank everyone for joining us on the call this afternoon, and we look forward to giving you updates on both our earnings and the infrastructure initiatives that we have going on for 2006. Thank you very much.