Shoe Carnival Inc (SCVL) 2006 Q1 法說會逐字稿

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

This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the Company's SEC filings and today's press release.

Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. The Company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release to reflect future events or developments.

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

Thank you and welcome to Shoe Carnival's first-quarter 2006 earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer; Cliff Sifford, our General Merchandise Manager; and Tim Baker, our Executive Vice President of Store Operations.

Our record first-quarter 2006 performance resulted in our sixth consecutive quarter of higher sales and significantly improved earnings. Net sales for the quarter ended April 29, 2006, rose 4.8% to 168.5 million from sales of 160.7 million in the same period last year. Comparable store sales for the quarter increased 4.1%, and this was on top of a 5.5% increase in last year's first quarter.

After a difficult February comparison, we recorded a combined March and April comp store sales increase of almost 6%. Additionally, for the first quarter in a long time, the comp store sales increase was comprised of increases in both footwear units and average price.

Net earnings for the first quarter of 2006 were 7.4 million, which was a 25% increase over net earnings of 5.9 million last year. Diluted earnings per share increased 20% to $0.54 per share for the first quarter from $0.45 in the first quarter of 2005. This represented the highest quarterly earnings in the history of the Company.

We achieved these outstanding earnings results despite incurring $0.03 per share in expenses for stock-based compensation pursuant to the implementation of SFAS 123R in the first quarter and the compensation changes we made last year in anticipation of 123R. Without those expenses in Q1 2006, net income would have increased by almost 32%.

Following the trend we saw last year, our earnings increase for the quarter was driven primarily by an increase in comparable store sales and the continuing increase in gross profit margin. We recorded an increase in gross margin in each major footwear category -- women's, men's, children's and athletics. Expenses were also tightly controlled. Consequently, our operating margin for the first quarter expanded by 100 basis points to 7% of sales from 6% in the first quarter of 2005.

The SG&A impact of recording stock-based compensation in the first quarter of 2006 was an increase in expenses of 663,000, or 0.4% of sales.

We continue to benefit from the strategic changes we have made to our business in the last 24 months, especially the merchandising and advertising initiatives we've spoken about in the last few conference calls. The steps we have taken to improve our women's and men's dress and casual business continue to yield enhanced results. We also continue to evolve our Red Nose advertising campaign, resulting in fresh creating for each primary selling season. We are very excited about the direction this is taking for the back-to-school and fall seasons.

Due to these improved results, our financial condition continues to strengthen. Our merchants have done a great job of controlling inventories, and on a per-store basis, inventories at the end of the first quarter were actually down about 2.2% from the end of the first quarter of last year. Also, at the end of the first quarter of last year, we had a cash balance of $4.3 million and long-term debt of 13.5 million. At the end of the first quarter of 2006, we had a cash position of $32 million and no long-term debt.

We continue to add new stores in existing larger markets and new smaller one- or two-store markets. This year, we expect to open 13 to 15 new stores, including three in the second quarter, eight in the third quarter and two to four in the fourth quarter. No new stores were opened in the first quarter.

We also expect to close five stores this year, including two in the second quarter. The majority of the associated costs to close these stores were incurred in the fourth quarter of last year.

In closing, I would like to say we are very pleased with the positive start to the 2006 fiscal year. For a number of quarters now, we have seen record sales and record earnings. We have made many positive changes in our business and we are in the process of making many more.

We're currently in the implementation process of two strategic initiatives that should improve our operating model in the future. The Oracle markdown optimization software and installation of the wide area network will enhance both our merchandising functions and store operations.

After completion of our new distribution center, we expect to accelerate our store growth rate in the latter part of 2007 and into 2008. In short, we are very excited about the future of Shoe Carnival.

What I would like to do now is turn it over to Cliff Sifford, our General Merchandise Manager, for some more detailed comments about the merchandise and sales.

Thank you, Mark. As Mark stated, we finished the first quarter with a 4.1% comparable store increase. This increase was driven primarily through the non-athletic businesses. Over the next several minutes, I will walk you through each department to help shed some insight on how our business broke out for the quarter.

Our women's non-athletic business was up high single digits on a comparable store basis for the quarter. Business was driven by our sandal category, which posted double-digit comparable store growth, and juniors' shoes, which continued to post high double-digit gains. The major categories that fueled this growth were dress sandals, platforms, wedges, espadrilles and sport fusion.

We continue to be encouraged by the performance of our women's non-athletic business. For the first quarter, our women's non-athletic business percent to total grew 140 basis points compared to the first quarter of 2005.

As you all know, one of our key initiatives is to grow this business over the next few years to 28 to 30% of our total. We made good headway on that initiative last year by increasing our percent to total by 200 basis points. Success to date has come primarily from our buyers doing a better job of offering our customers trend-right fashion. We are continually raising the bar with our product, which has allowed us to drive higher price points and higher margins.

Our marketing department has done their part by raising the level of our creative to attract the fashion consumer. If you have not seen this creative, you can see our latest spot by visiting our website.

Our men's non-athletic business also experienced solid growth for the quarter with a mid-single-digit increase on a comparable store basis. We generated nice double-digit increases out of the sandal, young men's casual and work boot categories. We continue to be very pleased with the performance of sport fusion product in the young men's and thongs in the men's sandal department. Again, just as in women's, we're seeing strong growth in all the junior fashion categories.

In children's shoes, we achieved comparable store increases of mid-single digits for the quarter. Our non-athletic business was up double digits, with children's athletic posting low-single-digit comparable store increase. The non-athletic increase was driven primarily out of the casual and sandal categories, with sport fusion, boys' thongs and girls' fashion sandals all selling through at strong rates.

In the children's athletic area, we're seeing strong result out of both the boys' and girls' running classifications. We continue, however, to be disappointed in the performance of our boys' basketball business.

In adult athletic, we finished the quarter just under flat on a comparable basis. Our women's athletic business was down very low single digits, while our men's athletic sales were flat. In women's athletic, we experienced double-digit comparable store increases in running, with performance running standing out as the strongest classification. However, classics, athletic mules and women's skate product have all experienced declines as we see women migrate from the traditional athletic looks to sport fusion.

In men's athletic, we experienced strong increases in skate and running, again with performance running as the driver. Basketball, fashion classic and walking all posted declines. Again, I believe there has been a shift from the more traditional athletic silhouettes to the European-inspired sport fusion product, which we classify in our non-athletic businesses.

We are pleased with the overall margin and the average unit retail that we were able to drive for the quarter. We finished 2005 very clean of fall seasonal product, which allowed us to be less promotional on clearance. With less fall clearance, women's non-athletic product that is trend-right and better technologies in athletic, we saw average retails and margin improvement in every department. Our buying staff has done a very good job of keeping inventories clean and fresh.

In closing, I mentioned in August last year that we had entered into a partnership with Oracle's Retail ProfitLogic Price Optimization solution. This solution will assist our buyers through technology in clearing seasonal merchandise earlier in the product lifecycle, which should help in driving higher price points, and of course, higher margins.

We have just completed the implementation process and we went live on May 1. I don't expect that we will see major results until the fall season, since we are already deep into this season. We are excited about the use of additional technology to help us manage our business.

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

Thanks, Cliff. Our net sales for the first quarter increased 4.8% to $168.5 million, compared to $160.7 million for the first quarter of 2005. Our same-store sales were up 4.1% for the quarter. This was within the range we expected for the quarter and was on top of a 5.5% comparable store sales increase in the first quarter of last year.

Gross margins for the first quarter of 2006 increased 0.9% to 30.5%, compared to 29.6% in the same period last year. This increase resulted from a 0.2% decrease in buying, distribution and occupancy costs and a 0.7% increase in our merchandise margin.

The decrease in the buying, distribution and occupancy cost was primarily due to leveraging occupancy cost as a percent of sales against the higher sales base. As Cliff said, the increase in the merchandise margin was due to better product assortment and entering the first quarter with cleaner inventories that required less promotional price reductions to clear.

SG&A expense as a percentage of sales decreased to 23.5% for the first quarter, compared to 23.6% in the same period last year. The decrease resulted primarily from leveraging our expenses against a larger sales base.

During the first quarter, we incurred lower new store preopening costs, but this decrease was more than offset by increases in incentive compensation due to higher earnings and higher health care costs. However, the biggest change year over year was in expensing $663,000 or 0.4% of sales in stock-based compensation. In the first quarter of last year, we did not incur any stock-based compensation expense.

Despite these increases, we were able to leverage our SG&A by tightly controlling our other expenses. We incurred no new store preopening costs in the first quarter this year, compared with 193,000 or 0.1% of sales in the first quarter last year. We opened no new stores during the first quarter of 2006, compared to opening five stores in the first quarter last year.

Operating income for the first quarter increased 20.9% to $11.8 million, compared with $9.8 million in the same period last year. Our operating margin increased 7% in the first quarter, versus 6% in the first quarter last year.

For the quarter, we had net interest income of 176,000, compared to net interest expense of 133,000 in the same period last year. Due to our strong cash flow over the past several years, we paid off all long-term debt in fiscal 2005. During the first quarter, we had no borrowings under our line of credit and we are investing our excess cash. We ended the quarter with $32 million in cash and cash equivalents.

The effective income tax rate for the first quarter of 2006 was relatively stable at 38.3% for the first quarter, compared to 38.6% in the first quarter last year.

Net income increased 25% to $7.4 million for the first quarter, compared to $5.9 million last year. Diluted earnings per share rose 20% to $0.54 per share, compared to $0.45 per share last year.

Depreciation expenses, first quarter, were $3.6 million. Capital expenditures for the first quarter of 2006 were $2.2 million, detailed as follows -- 2006 new stores were $160,000; the remodeling and relocation of stores cost $760,000; software and information technology cost $577,000; and all other additions were $718,000. We received no cash lease incentives in Q1.

Capital expenditures for the full year are expected to be approximately $30 million. Of this amount, we expect to incur 18 to $19 million in equipment and furniture for the new distribution center and corporate headquarters.

I'd now like to provide some guidance for the second quarter of 2006. Earnings per diluted share in the second quarter of fiscal 2006 are expected to range between $0.23 to $0.25. This represents a 15 to 25% increase in EPS over the $0.20 earned in the second quarter of 2005.

Included in our EPS estimate is an increase in stock-based compensation for the second quarter of $0.01 per diluted share. Excluding the increase in stock-based compensation, EPS is expected to increase between 20 and 30%, which is on top of a 33% increase in Q2 last year.

Our earnings estimate for Q2 also assumes comparable store sales increasing 2 or 3%. Total sales will increase in line with the comparable store sales due to having about the same number of stores opened during the second quarter this year as last.

Our comparable store sales estimate reflects our concern over the uncertainty of the timing of the back-to-school sales at the end of Q2 versus the beginning of Q3. Over the past several years, we have seen a decline in sales at the end of the quarter due to back-to-school sales occurring closer to the school start date. In addition, tax-free days in certain states could affect the timing of sales between July and August.

For the full year 2006, we continue to expect earnings per diluted share to range from $1.65 to $1.75. This represents an 18 to 25% increase over EPS of the $1.40 earned in the full year of 2005. Stock-based compensation for the year is expected to be approximately $1.6 million. This is an increase of about $1 million or $0.05 per share over what was incurred for the full year last year.

This concludes our financial review for the first quarter. I'd now like to open up the call for questions.

(OPERATOR INSTRUCTIONS). John Shanley, Susquehanna.

Cliff, you gave us a good breakdown in terms of the merchandise category sales. I wonder if you could also give us the percentage of sales that each of those merchandising categories generated during the first quarter?

Sure can, John. In women's, for the first quarter, women's, we were very close to 27%; men's shoes were just under 15; in kids', right at 16; and in adult athletic, very close to -- well, 38.5%.

And your goal of getting to 28% in terms of the women's product categories seems pretty close at hand. Could you achieve that by the back half of this year, and could it be even a bigger component of that going forward?

John, I don't anticipate us getting there this year. The results for the first quarter were very much Easter-driven. You would drive a higher percent of women's product during the first quarter than you would, say, in the second quarter, which is the back-to-school quarter where you drive a higher percentage of athletic.

So the 27% that we drove in the first quarter will drop considerably in the second quarter as a percent to total. So the goal is to increase our percent total this year over last year totally by about 100 basis points.

Are the women's and non-athletic product categories still generating your highest product margins?

Absolutely. The non-athletic product categories in general are generating the higher margins.

And the women's specifically is the highest, is that correct?

No question about it, yes.

And looking at it in terms of the expectations for back-to-school, either you or maybe Kerry can clarify -- are you expecting a change in terms of the back-to-school selling season this year versus last year, an overall increase in back-to-school sales if you basically take out some of the shifts between second and third quarter -- basically, if we just looked at it in terms of what you are anticipating for overall back-to-school, would it be up over what you had done last year?

It is, John. And we are still in the very final process of looking at -- as you know, back-to-school last year came right on back-to-school dates or just after school went back. And we think we see that trend continuing. But overall, between July and August, we are looking for our business to increase.

And then lastly on the merchandising issue, are you seeing any indications of more willingness on the part of your vendors to let you have availability of product that maybe you had not had access to in the past?

We don't normally, as you know, talk about specific vendors, but yes, we are with our key athletic guys getting product that we have not been open to in the past. And you know, it is reflecting in our numbers -- I've talked about the fact that our performance running business was up double digits for the quarter. And that is primarily due to the fact that we have been open to new and additional technologies.

And is that driving up your athletic ASPs?

No question about it. And we see that continuing.

Super. Kerry, I had a question for you on the cash flow statement -- the notation of the 7.2 million asset sale, what was that?

That was, John, we'd talked about in the fourth-quarter conference call that we had sold our corporate headquarters and distribution center. And we are doing a sale leaseback on it. That 7.2 reflects the proceeds that we got from the sale of this building.

I knew you were planning on doing it; I didn't know whether that was the same asset sale.

That sale actually transpired in February of this year.

Jeff Stein, KeyBanc Capital Markets.

Good morning, Mark. Got a question for you with regard to the planned transition to the distribution center, and wondering if you could talk a little bit about timing, talk about some of the dual operating expenses that I would imagine you are going to run during that period, and the backup contingencies you have for making sure that your supply chain runs normally during that period of time.

Well, we have not changed our timing -- our expectations with respect to timing, Jeff. It is still the November/December timeframe, our November/December time period of 2006, with full implementation in January of 2007.

As far as costs, I will let Kerry Jackson address that. But we do expect some overlap of costs in the fourth quarter, which we have included in our guidance. Kerry can speak more specifically about that. So we expect in February/March time period of next year to be fully operational and operating one distribution center only.

Jeff, the costs we expect to run two DCs and the transition over from the DC will be about $0.03 in Q4.

But again, we have included that in our guidance to you guys previously.

Mark, one time when this Company many years ago was doing close to $3 million in sales per store, you guys at one time thought that you could earn a high-single-digit operating margin. And with kind of the revitalization of the business, I'm wondering if you have taken a look at your models, and do you think that that type of goal still might be achievable?

Well, Jeff, that is obviously what we're making a lot of these changes for. We're certainly not happy with low-single or mid-single-digit kind of operating margins. So the returns to higher operating margins is exactly why we're making these changes.

We think we've got a lot of room for improvement in the gross profit margin that we are generating from the product that we do buy and sell. So that is probably the way that we expect to improve those margins up into the high single digits.

But absolutely, that is our goal, is to significantly improve the operating earnings of the Company through the operating margin that we are recognizing. And again, the gross profit margin, and to a lesser extent, continued leverage of G&A costs is where we expect to generate it from.

If things run as you would expect them to with the rollout of your price optimization model, how much improvement in gross margin would you hope to realize over several years?

I think it is too early to quantify that, Jeff. But again, with the way we look at that that price optimization software is not only from an improvement in gross profit margin, but an improvement in top-line sales as well.

As we get into -- what that does allow us to do, it serves as a platform for geographic pricing or zone pricing. And we think that that will not only help our gross profit margin, but help our top-line sales and the liquidation of product as well. So we are looking at it from both a margin opportunity and a sales opportunity. But we haven't set specific goals, nor would I publish specific goals with respect to that piece of software.

And just out of curiosity, you mentioned earlier that your price point, your average unit retail on running shoes is up. And I know a couple of years ago, part of the strategy was to try to get better quality product in, drive your price points higher, and at one point, it seemed that you may have overshot the demographic for that reason. Are you concerned at all that perhaps that could be a risk factor? And again, where are your price points in athletic today versus a year ago?

Well, I'm not going to get into specific price points in athletic for competitive reasons, but no, I don't think we run a risk of alienating a customer base with higher price points in athletic. Most of the higher price points that we're seeing are being generated through, number one, better execution with respect to markdowns and inventory management, and number two, through the higher technology that some of our vendors are putting into the product.

And the reason why I say that we are not alienating a customer base is that that product is the very reason why our athletic sales are doing as well as they are doing. And specifically, product from Nike, product from Adidas -- you know, that type of product is driving the gains that we are seeing. So no, I don't -- in fact, I think we're making inroads into a new customer base, if anything, rather than alienating a customer base at the lower end.

R.J. Hottovy, Next Generation.

The first thing I was wondering, given that you guys have the fairly healthy cash position right now, I was kind of wondering about plans to -- what kind of plans you have with that. And knowing that you obviously have a lot going into the distribution center transition, I also noticed that there was a small bit of common stock repurchase this quarter. So I was hoping you could give us a little more color on that.

Well, I'll start with your first question. On the cash, we are looking at substantial capital expenditure later this year, which we will be using some of our cash to pay for that. And in 2007, we had previously stated that we would want to accelerate our store growth. So we will be looking at using that cash to fund our store growth as we move forward.

On the small part -- the stock repurchase, that was part of a restricted stock grant that vested. And when those vest, taxes are due. It is very commonplace to allow our associates to either pay the taxes in cash or to return the equivalent of the stock, Shoe Carnival stock, to pay those taxes. And that repurchase is the technical requirement of describing that ability for our associates to return shares of stock in payment of the taxes.

I guess my next question has to do with the guidance. Previously, you had stated that the full-year comp guidance was 3 to 4%. Is that still intact?

It is. We are maintaining our annualized guidance.

Okay, so there's no changes?

No.

[Jim Morton, Morton Jennings].

I think my question has already been answered. It had to do with the decrease in the property and equipment. That was explained by the sale of the headquarters and whatnot. So I don't really have any questions.

Sam Poser, Mosaic Research.

I was wondering -- you spoke about, Cliff, you spoke about the results by category in the first quarter. Can you talk about, one, how those -- if you expect the same kind of trends to continue going forward, how you see them changing?

And also, as far as your inventory levels, which are in very good shape on the total, do those inventory levels reflect the current sales trends, or could there be any issues there?

I will address the second question first. The inventory levels by department are in terrific shape. Our seasonal product is pretty close to right where we want it. And so I don't foresee any major issues looming.

As far as the first question, Sam, we do see women's product, non-athletic product, continuing to gain a little market share as we move through the second and third quarter. I mentioned in my prepared remarks about the low profile -- European-inspired low profile product. That product continues to gain momentum, as well as the junior category in total. So with those two things, those two product categories, we believe that we will see increasing business out of our women's business as a percent to total.

We also are very pleased with what's going on with men's. And I think that the men's departmental will also pick up I guess a percent to total. But again, talking about the athletic and the performance running and the new technologies that we're getting for back-to-school, I'm somewhat excited about what we can run out of the running department, especially in the athletic area.

The only area of concern would be that our classic business, I mentioned in my prepared remarks, not good. And our basketball business in athletic is not good. So the percent total increase that we're going to see in women's and men's will probably come out of the athletic arena.

So basically, you don't think that the new technologies with running primarily can save the day on the athletic?

Well, I think it is going to keep us very close. I'm not telling you that we are going to have a loss of sales in athletic, I am saying that we will have the larger increases in the non-athletic areas. I don't know if that is answering your question.

Can you talk about any trend changes that you're seeing within the women's and men's non-athletic and what could help drive some better price points as well?

The trend changes, Sam, are what's happening to us right now -- what is going on in the first quarter. And that is the fact that our junior business and our young men's business is so strong. I see that continuing right through the rest of this season and into the next. There seems to be a huge shift with junior product, and we're getting our share of that, I believe.

(OPERATOR INSTRUCTIONS). David Turner, Branch Banking & Trust.

Just a couple of questions. First, was wondering what you are going to be taking shelf space away from as you grow the women's non-athletic business? If it hits the low end of the range, it's not going to be that much of a change. But at the high end, that might be a more meaningful change to the mix. So I was wondering if it is just piecemeal or is it any one category you are shrinking in favor of growing the women's?

No. I think part of the strength of Shoe Carnival is the fact that we are a total -- we play in every category. So as one category weakens, and I mentioned the fact that classic product weakened and the strength -- we saw strong growth in the European-inspired sport fusion product -- we were able to react to that. We did react to that. And we lowered our purchases and classic product and put it into sport fusion.

We will continue to do that. As product categories get hot, we fund that. And normally, other product categories have slowed down. And that's -- where there's not a strategic move to say, okay, we are going to take X amount of dollars out of athletic and put it into women's and grow our women's business that way -- we are funding the businesses that are hot, just like the junior business. We are funding it -- we are putting funding toward the junior business and taking it away, again, from the classic product that is not working or the basketball product in men's that is not working, if that makes sense.

And then, Mark, just curious if there is any substantial improvement in the newer stores -- maybe not first year, but maybe in their second year, as the marketing campaign has progressed, seems like you are getting some traction with that. Has the productivity at the newer class of stores been much better versus previous years?

In the first quarter, David, it increased about between 6 and $10 per square foot productivity over what it was -- over newer store productivity last year. So yes, we have seen some improvement on non-comp stores.

Additionally, in certain markets, and I'll give you one as an example, Houston, where we have been able to open additional stores, it has helped our sales in newly comp stores in that particular market. So even though all new stores are not performing up to our average, we have seen an improvement in new store productivity.

Edward Plank, Nollenberger.

This is Harry Ikenson on Ed's line. Congratulations. I had trouble getting on, so you might have talked about this, but I have a couple questions. One, could you talk in reference to the unit average sale and then traffic growth, transaction growth, just the metrics on that?

And then second, go over in a little bit more detail on the shift that you think you are seeing or how much is shifting because of possibly -- it sounds like the back-to-school, there will be more business in the third quarter than what maybe some of us might have anticipated before the call. And then I have a follow-up question after that.

Okay, follow-up question after those three? Well, let me see if I can remember the first one with respect to average unit prices and unit retail -- both were up low single digits. What was the second question?

Well, there was more on that. There was unit retail and average price?

The average unit price was up low single digits. And the unit sales were up low single digits. All of that combined to make a 4.1% comp for the quarter.

Okay. And then what is that conversion? Are you still seeing an improvement in conversion?

I don't have an answer on conversion off the top of my head. We saw a slight increase in traffic once we got past the February time period.

That was my next question.

In the March and April time period combined, our comps were about 6%, which was better than the 4% we recorded for the quarter. And yes, our traffic was better in the March and April time period. For February, yes, Kerry just showed me our conversion, and Harry, it was up slightly.

We did see an increase in traffic -- we did see a slight increase in traffic. We saw a slight increase in the conversion rate. We saw a slight increase in price, average price. We saw an increase in unit sales. So all were up somewhat.

And then also in reference to -- you have been talking about you have a new campaign that we can see on the Web -- I haven't seen it yet. When did that start, just the new advertisement, and have you seen a pickup in traffic from when that hit yet?

Well, the new advertising campaign actually started a year ago --

No, I don't mean that -- I thought you meant -- you said that something -- is there a new version of anything that was on the Web?

Yes, what we have done over the past few selling seasons is come out with new creative. So all we're doing there is revising, revitalizing and coming up with new creative to supplement the product message. We do anticipate doing that -- under that, the overall theme of the Red Nose campaign, at least through the end of this year.

So the last one that I have seen was I think a dancing one. Has there been another one since that? And then my next question was I wanted to talk a little bit about back-to-school this year versus last year, because it seems that the Street in general was probably expecting before the call a little bit more in Q2 versus Q3. And it just sounds like there's more of a shift with back-to-school and there will be more in Q3 than in Q2. So can you --

Well, again, they advertising campaign that you saw with respect to a dancing sort of creative -- we started a dancing creative in holiday of last year. We continued that -- we continued with a new spot in the early spring season and we just put a new one on on the airwaves this past week, I think. I think you can pick that up on our website.

Okay, I will take a look at that.

So with respect to the shift in back-to-school, what we have seen over the past few years is a continuing shift of the consumer to shop later and later in the very key selling periods. This is no different in back-to-school than it was for Easter and what we saw at holiday as well. And I think it is not specific to Shoe Carnival; I think it is in the retail industry overall, particularly the footwear industry.

So we do anticipate a continued shift of from the very late stages of the second quarter into the third quarter. That is one of the reasons why our comp store guidance in the second quarter is a little bit lower than what we would have originally intended or expounded for the second quarter versus the third quarter. We do anticipate there to be a continued shift.

Additionally, I think there are some states whose tax-free days fall into the third quarter -- in August this year, as opposed to the second quarter of last year. And we are still trying to determine the specific impact of that. But we understand that there are some states, at least one that I am aware of, that is shifting from July into August.

As you well know, a lot of schools are going back to school later. This is a phenomenon that is occurring year after year. But schools, particularly in the South, are going back later, in August or even early September as opposed to the late stages of July. And that contributes to the phenomenon that we have seen of sales shifting from Q2 into Q3.

And really, basically, in a lot of cases, what you're talking about is a one-week shift or a two-week shift of sales from the very last week of July into the first couple weeks of August.

That means they're just getting [moralized up] there, up in the Northeast. It's [Pittsburgh, the calendar.] But I was saying that tongue-in-cheek. Okay, so then, is there -- so then basically, you're just talking about a shift in more volume, and there's nothing else fundamentally behind any of the changes. Okay, great, I think that does it for me. Congratulations and thanks for taking my call.

Jill Caruthers, Johnson Rice.

Another quick question about back-to-school outlook. How much does the classic athletic make up of that component? Wondering if maybe this kind of fashion shift away from the classic is making you a little bit more cautious on back to school, if that has anything to do with it?

I think if anything were going to make us cautious, it wouldn't be the shift from classic athletic or from athletic into non-athletic product. It would be rising interest rates, rising gas prices and more of the more micro, or excuse me, macroeconomic factors.

When we talk about shifts from classic to other types of products, again, we are talking shifts from a couple of vendors to some other vendors. And we look at it as a shift from high heels to low heels, or a shift from red shoes to blue shoes. We buy the categories that we expect to be hot during any particular season.

So what we are seeing with the athletic product that we're selling very well is that it is -- and again, recognize that we're selling in the middle price points here, but a higher technology platform than what we have had in the past. And that is driving the athletic sales that we're seeing. So there is a shift from the classic product, but it is towards that higher technical product or more technical product, as well as Cliff talked about the sport fusion or low profile kind of product.

And then maybe any risk with having inventory levels so lean at the store levels? You think that that is hindering any sales growth? I know you mentioned that you're pretty pleased with the levels.

No, it is our intent over a period of time, and we're not trying to drastically improve inventory turns, but there is a definite push in this Company or I should say a definite initiative in this Company to improve our inventory turns and consequently improve the return on capital. So I would love to see a 4.1% comp store increase per quarter with a 2.5% decline in inventory. That is part of what we're trying to do.

And then just last question -- if you could give any overall comments on the competitive environment, if you've seen any changes in the promotional activity or--?

I will let Cliff address it in a second, but I don't really notice too much more promotions in the marketplace, maybe with the exception of some of the mall-based people. They seem to have gotten very aggressive. And I think some of the athletic retailers in the mall have not done as well, as well as people that have a more prominent position with non-athletic-type footwear.

So I think maybe they've gotten a little more promotional. It seems to me that certain of those retailers have cut some prices and relied upon more two-four kind of promotions. But outside the mall, I mean, it has been very competitive and we expect it to be very competitive from a pricing and promotions standpoint. And we're running our business according to that.

Steven Martin, Slater Capital.

There aren't many left, but Kerry, you talked about the sales assumptions that are going into the second quarter. Can you comments on margin, SG&A and other assumptions built into second-quarter guidance?

What we're looking at is gross margin to be flat to slightly up and SG&A to be leveraged.

When you say gross margin, that is total gross margin or product margin versus occupancy?

Total gross margin.

Can you give me the breakdown of product margin versus occupancy?

Not on a perspective basis.

Okay. And SG&A?

Like I said, we expect that to be leveraged.

On the 2 to 3% comp.

Correct.

An on the interest line, what are you currently getting on that, as long as you are going to sit with it for a couple of quarters?

You mean, what our way --

What are you getting paid on it?

4, 4.5%.

It appears that we have no further questions at this time. I'd like to turn the conference back to Mr. Mark Lemond for any closing or additional remarks.

I would just like to thank you all for joining us on the conference call. Have a nice day.

That concludes today's conference call. Thank you for your participation and have a great day.