Shoe Carnival Inc (SCVL) 2006 Q2 法說會逐字稿

Good afternoon and welcome to Shoe Carnival's second quarter earnings conference call. Today's call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors 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. Mr. Lemond, please begin.

Thank you for joining us on today's call. Joining me on the call this afternoon is Kerry Jackson our Chief Financial Officer and Cliff Sifford, our General Merchandise Manager. We are pleased to report higher earnings for the second quarter of 2006. Our seventh straight quarter of earnings increases on a year-over-year comparison. Net earnings for the second quarter rose 5.8% to 2.9 million from net earnings of 2.7 million in the second quarter of 2005. Diluted earnings per share for the quarter increased to $0.21 from $0.20 per share last year.

There's a couple of issues that really affected our top line sales in the second quarter. During the last 24 months, our real estate strategy has consisted of two primary elements. Relegating new store openings to our existing geographic area and closing as many poorly performing stores as we deemed financially feasible to close. Since the end of the second quarter of 2005, we have closed 8 stores and opened 7 new stores. Therefore, at the end of the second quarter, we operated 265 stores, one less store than the 266 stores we operated at the end of the second quarter of 2005.

Also, as most of you are aware, the second quarter represented a challenging period for the athletic footwear industry. Our comparable store sales loss of 1% in the second quarter was the result of a 6% decline in adult athletic product sales. This decline in athletics was almost completely offset by a collective 2.4% increase in all of our other product categories. Because of these two factors, net sales for the quarter ended July 29, 2006 were 146.9 million compared with net sales of 148.7 million in the second quarter of last year.

To better explain our earnings prospects in the third quarter, I want to review some timing issues with regard to the back to school period, which is the key sales period in the third quarter. As I mentioned in this morning's release, we continued to see the customer shop later and later in the back to school season. And sales have moved from July to August in a year-over-year comparison. It was exacerbated this year by one state moving its sales tax free holiday from July to August. As a consequence, the sales drop in the very last week of July represented just over 75% of the comp store loss for the entire second quarter. Our business in August has rebounded nicely.

Stores that are in areas where schools have reconvened are collectively showing very nice comp store increases. The reverse is true for stores in area where schools are not yet back in session. Consequently our overall comparable store sales thus far in August are positive. This is the same early back to school sales trend we saw last year when our comp store sales momentum kept building as we worked our way through August and into September.

We continue to see better merchandise gross margins than last year. In fact, the merchandise gross margins for the second quarter rose by 0.3% of sales. However, offsetting this was an increase of 0.4% of sales in buying, distribution, and occupancy costs due to slightly higher actual distribution costs and deleveraging effect of the comp store sales loss. Consequently, despite the lower sales for the quarter, the net mar -- net gross margin declined by only one tenth of a percent of sales.

Selling, general, and administrative expenses for the second quarter declined by 0.1% as a percentage of sales. This was due primarily to lower advertising and incentive compensation costs offset partially by higher health care costs. Consequently, our operating margin for the second quarter remained unchanged at 3% of sales compared to last year's second quarter.

We benefited considerably from eliminating debt from the balance sheet as we recorded net interest income of $260,000 in the quarter versus interest expense of, excuse me 128,000 in the second quarter of 2005. Importantly, the steps we have taken to improve our women's and men's dress and casual business continued to yield enhanced results. This is evidenced by 2.9% second quarter comp store sales increase in women's nonathletic and a 6.2% increase in men's nonathletic product for the quarter.

Additionally, our children's product, both athletic and nonathletic is currently recording some really nice gains in the early back to school period. I will let Cliff provide more merchandise details in a few minutes. But the continued improvements in the dress and casual categories bode well for the upcoming fall and winter seasons. We are experiencing higher merchandise margins than last year and we expect that trend to continue.

Turning to store openings and closings. We will continue to add new stores on an opportunistic basis, focusing our efforts on existing markets in geographic areas. This year, we expect to open a total of 14 or 15 new stores and only one of these new stores is in a state we are not currently in. Four stores were opened in the second quarter. Looking ahead to 2007, we plan to open 20 to 25 new stores. So far, we have identified 20 specific store locations, signed six leases and have sent out LOIs for the remainder. At least 16 of these stores will fill in existing marketplaces.

We have also been closing unproductive stores as leases expire or when we are able to take advantage of lease kickout provisions or assignments. For fiscal 2006, we expect to close a total of 7 stores. Two stores are closed in the -- two stores were closed in the second quarter and three stores will close in the third quarter. As I mentioned earlier, we have closed eight stores over the last four quarters. Those eight stores averaged 1.7 million in sales and collectively recorded four wall operating losses of $500,000 in their last year of operation.

Our financial position continues to strengthen. Our merchants continued to do a good job controlling inventories. On a per store basis, inventories at the end of the second quarter were down almost 1% and the inventory is more current going into the back to school season than it was at this time last year. We have no outstanding borrowings under our line of credit. And we ended the quarter with a net cash position of over 25 million.

What I'd like to do now is just give a quick update on our four big initiatives for 2006. The new distribution center construction is right on plan. And we expect to test that facility in late November and run duplicate operations in December. We have a new headquarters ground breaking ceremony Tuesday of this week and we expect to move into that new building next March. The Profit Logic software has been implemented and our merchants are currently utilizing its zone pricing and markdown optimization functionalties. The new wide area network, or WAN, is currently installed in about 40 stores and is expected to be fully installed in all stores in October.

So with fresh inventories, a continued improvement in our nonathletic product sales and a good start to the back to school selling period, we are fairly optimistic about Shoe Carnival's financial prospects this fall and winter. What I'd like to do now is turn it over to Cliff Sifford, our General Merchandise Manager for some comments about the merchandise, and he will in turn turn the call over to Kerry Jackson our CFO. Thank you.

Thank you, Mark. As Mark stated we finished the quarter with a 1% comparable store decrease, this was a direct result of the emerging trend away from traditional athletic category. Over the next several minutes, I'll walk you through each department to help shed some insight on how our business broke out for the quarter.

Our women's nonathletic business was up low single digits on a comparable store basis for the quarter. Business was driven by our dress and Junior categories, which posted high single and double digit comparable store growth respectively. The major categories that fueled this growth were dress sandals, platforms, wedges, espidrills, and sport fusion.

We continue to be encouraged by the performance of our women's nonathletic business. As you all know, one of our key initiatives to grow this business over the next few years to 28 to 30% of our total. For the second quarter, our women's nonathletic percent to total grew to 27% of our total sales compared to 26% for the same time period last year.

Year-to-date our women's percent to total is also 27% compared to 25.7% of the total last year. This increase in percent to total is due both to selling more pairs and raising the average selling price. Our customer is responding well to our trend right product mix and our new exciting marketing aimed at capturing her attention.

In men's nonathletic business also experienced solid growth for the quarter with mid single digit increase on a comparable store basis. Average price and growth -- gross margin both experienced dramatic improvement. We generated double digit increases out of both the young men's casual category which is driven by sport fusion and thongs and the men's sandal department.

Again, just as in women's, we are seeing strong growth in all the Junior fashion categories. In children's shoes, sales were flat for the quarter. This trend was the same for both the athletic and nonathletic departments. We did see a shift from the girl sandal category to croc like foam clogs. In the boy's sandal department we saw healthy increases from the sport and thong sandal classes.

Additionally, we were very pleased with the performance for low profile for both girls and boys. In the children's athletic area we are seeing strong sales gains out of both the boys and girls running classifications. Currently as we move through the back to school selling season, our childrens business is very strong in both the athletic and nonathletic categories.

In nonathletics we finished the quarter down mid single digits on a comparable basis. Our women's athletic business was down high single digits while our men's athletic sales were down mid single digits on a comparable basis. As we all know, there's been a fashion shift from traditional athletic styles to sport fusion silhouettes. We classify those sport fusion silhouettes within our men's and women's nonathletic categories.

Therefore, we have allocated open to buy -- reallocated open to buy dollars out of athletic and into the nonathletic departments so that we can take full advantage of this trend. In addition to this move to lower profile product, we also experienced a loss in the traditionally urban categories of fashion classics and men's basketball.

Women's athletic, running, which is our strongest and most profitable category produced positive comparable growth for the quarter. This growth came primarily due to the very strong increases that we experienced in the performance running classification. We saw similar gains out of performance running and the men's athletic department along with skate and cross training.

These increases in men's and women's performance running continue to point out that our customer is looking to us for fashion performance product. Our performance trends are all producing increases for the year due to this trend. For instance, at the end of July, we introduced some new technology from Nike called Reacts. Early sales on this product have been truly outstanding.

This is the second back to school season that we have received new technology from our number one vendor and our customers have responded positively. It indicates to me that our -- that the customer is looking to buy athletic product if it is new, fresh, and exciting. I believe that they are tired of the sameness that has been pervasive over the past several season. Performance product offers our customers new constructions, great color pallets and fresh silhouettes. After all, it's still a fashion business.

In closing, I want to mention that inventories ended the quarter down slightly on a per door basis. Our merchants have done an outstanding job in keeping our inventories fresh and new. As a result margin and average price both showed healthy improvement. Also as mentioned earlier, we shifted open to buy dollars to categories that are currently driving our business and their early sales for back to school indicate that these shifts in dollars were correct.

As we have mentioned in previous conference calls, our ability to adjust our inventories with a change in fashion trends whether it be athletic to dress or dress to athletics is a competitive advantage over some of our competition that specialize on a single product category. Now I'd like to turn the call over to Kerry Jackson.

Thanks, Cliff. Our net sales for the second quarter were $146.9 million compared to $148.7 million for the second quarter of 2005. Our same store sales were down 1% for the quarter. Gross margins for the second quarter of 2006 decreased 0.1% to 27.8% compared to 27.9% in the same period last year.

SG&A expense decreased 559,000 for the quarter to 36.4 million this year from 37 million in Q2 last year. As a percentage of sales, SG&A decreased to 24.8% for the second quarter compared to 24.9% in the same period last year. The decrease resulted primarily from lower preopening costs, store closing costs, and remodeling costs, incentive, and advertising expense. These decreases were partially offset by higher equity compensation and health care costs during the quarter.

Preopening costs in the second quarter were 164,000 or 0.1% of sales compared with 296,000 or 0.2% of sales in Q2 last year. We opened four new stores during the quarter 2006 compared to opening seven stores in the second quarter of last year. Store closing costs included in SG&A in Q2 were 146,000 or 0.1% of sales. Last year in Q2, we incurred 284,000 in store closing costs or 0.2% of sales.

Equity compensation costs included in SG&A in Q2 were 303,000 or 0.2% of sales compared with 114,000 in equity compensation costs in Q2 last year. Our operating income as a percentage of sales was unchanged from Q2 last year at 3%. Operating income in dollars was 4.4 million in Q2 compared with 4.5 million the same period last year.

During the second quarter, interest income increased 278,000 and our interest expense decreased 110,000 for a net increase in income of 388,000 for Q2. This shift to a net interest income position resulting from the Company having no borrowings under our credit facility for the entire quarter and investing our excess cash. The effective income tax rate for the second quarter 2006 increased to 38.8% from 37.8% in the second quarter of 2005.

Net income increased 5.8% to 2.9 million for the second quarter compared to 2.7 million last year. Diluted earnings per share rose 5% to $0.21 per share compared to $0.20 per share last year. For the first six months, net sales increased 1.9% to 315.4 million compared to 309.4 million in the first half of 2005. Same store sales increased 1.8% for the first six months.

Gross margin for the first half of 2006 increased 0.5% to 29.3% compared to 28.8% last year. The merchandise margin increased 0.5% and buying, distribution, occupancy costs as a percentage of sales were flat with last year. SG&A as a percentage of sales decreased 0.1% to 24.1%. Preopening expense for the first six months in 2006 were 164,000 or 0.1% of sales compared to 489,000 or 0.2% of sales in the first half of 2005.

Store closing costs included in SG&A in the first half of 2006 or 259,000 compared with store closing costs of 437,000 in the first half of 2005. Equity compensation costs included in SG&A in the first half were 966,000 or 0.3% of sales compared with 114,000 in equity compensation in Q2 last year. This increase in equity compensation equates to about a $0.04 reduction in diluted EPS so far this year.

Net income for the first half of 2006 was 10.3 million or $0.75 per diluted share compared to net income of 8.6 million or $0.64 per diluted share last year. Depreciation expense for the second quarter was 3.6 million and for the first six months it was 7.1 million. Capital expenditures for the first six months of 2006 were 9.4 million detailed as follows.

The equipment costs for the new distribution center were 3.1 million 2006 new stores were 2.2 million. The remodeling and relocation stores were 1.8 million. Software and information technology were 1.2 million. All other additions were $1.1 million. Additionally, we received 127,000 in cash lease incentives so far this year.

Accounting rules require all purchase assets to be included in the balance sheet. But if they're not paid for at the end of the quarter, then they are not listed as purchase of property and equipment on the statement of cash flows. We had 3.6 million of assets purchased, not paid for at the end of the quarter and therefore were not included in the statement of cash flows. This occurs every quarter, but is typically not material.

All the amounts that haven't been paid for at the end of the quarter are being paid within the allowable payment terms. 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 on earnings for the rest of the year. Earnings per diluted share in the third quarter of 2006 are expected to range from $0.55 to $0.57. This assumes a total sales increase of approximately 2 to 3% and a comparable store sales increase of 1 to 2%.

We expect to increase our gross profit margin despite higher buying distribution occupancy costs as a percentage of sales. SG&A costs will be higher in dollars and as a percentage of sales in Q3 due to higher store closing costs, preopening costs, equity compensation, and advertising costs.

One note on sales for Q3. In Q3 last year, we had multiple hurricanes which affected our stores. We have taken into account in our comp store guidance, the positive effect of the increase in sales this year for days in which the stores were closed last year. Conversely, we had planned those same stores down in comps later in the quarter as those stores had significant increases in sales after they reopened last year.

For the fourth quarter, we're expecting diluted earnings per share of $0.35 to $0.38 cents. This is a 59 to 73% increase over the $0.22 earned in Q4 last year. This assumes that total sales increase of approximately 12 to 13% and a comparable store sales increase of flat to up 1%.

The significant increase in sales for the fourth quarter is because we will have a 14 weeks in the fourth quarter versus 13 weeks in last year's Q4. The extra week of sales is about 14 million in sales and increases diluted EPS by about $0.08 in Q4 this year. Other items that affect earnings between the two periods are lower store closing costs this year and higher distribution costs in the new DC opening in Q4.

Last year in the fourth quarter, we incurred $821,000 in store closing and impairment charges for stores that were closed in 2006. This year, we expect to incur about $40,000 in store closing costs in Q4. The reduction in store closing costs in Q4 will be a benefit to EPS of approximately $0.04. Included in our distribution costs for Q4 this year are additional costs from converting to a new distribution center which Mark discussed in his comments. The increase in distribution costs will decrease fourth quarter EPS by about $0.03.

Summarizing these changes, we expect a significant benefit in sales in the extra week in the quarter. We expect our gross profit margin to decline a little in Q4 due to additional costs to convert to a new distribution center, and we expect our SG&A expenses to be significantly leveraged due to higher sales and a significant decrease in store closing costs.

For the full year of 2006, based on our earnings expectations for Q3 and 4, earnings per diluted share expected range from $1.65 to $1.70. This represents an 18 to 21% increase in EPS over the $1.40 earned last year. Also note that included in EPS guidance for this fiscal year is an increase in equity compensation of almost $1 million or $0.05 per share. This concludes our financial review for the second quarter. I'd now like to open up the call for questions.

Thank you, Mr. Jackson. [OPERATOR INSTRUCTIONS] We'll take our first question from John Shanley of Susquehanna Financial.

Thank you, and good afternoon, guys. Mark, you mentioned that in those locations where back to school has actually started, you have seen an improvement in business. Has that extended to athletic product sales, as well? Or are the kids coming back and just buying more of the sport fusion product and other casual shoe items?

John, it's primarily, exactly the latter. Sport fusion's become very hot. I will say that our children businesses and children's athletic business has rebounded very nicely. What it tells me is the younger children going back to school are still very much into that traditional athletic product and -- because that business has really shot up.

But our traditional, not traditional but our nonathletic children's business is recording some really nice gains at the same time. The adult athletic is still a little bit tougher than the nonathletic side of the business.

Okay, and this trend. Less demand for athletic, do you see this as a long-term factor extending not only into the back half of '06 but possibly into '07? Specifically as it relates to classic and basketball kind of products that you highlighted for us?

John, this is Cliff. I'd like to take that question. I see -- I think basketball is going to improve as we go into the fourth quarter due to some new introductions from our number one vendor.

I think that we may see some improvement in that classification. I don't see improvement coming at all in the classic product. I think classic product is going to continue to decline at least through first quarter and possibly second quarter of next year.

Okay. And Cliff, while I've got you. I'm wondering if you can comment on what your feeling is in terms of either the fashion trend from an apparel point of view or the lifestyle trend that's really the impetus behind this drive towards greater interest in nonathletic products or fusion products on the part of the consumer. What's really motivating them to have a greater interest in those kinds of products?

I think that a year ago, especially in the urban market, John, that the jeans were much baggier with very wide leg. And today jeans are much more form fitting with narrower leg or a shorter leg. That just doesn't work for classic product. What we're finding is that there's been a true shift right out of classic product into either low profile or more traditional product, be it dress shoes or wedges or tailored shoes for women. And in the men's area.

I can tell you almost -- actually more than pair for pair we're seeing that our low profile product is increasing at a faster rate parity wise, so our men's athletic product is decreasing. So it just lends credence to the fact that the new jean silhouette or the new apparel silhouettes are driving a sleeker look.

Are the product margins on those new products the fusion products significantly greater or different than the athletic products they're replacing?

Yes, they are.

Absolutely.

They're higher?

Yes, yes, they are.

Okay. Last question is for you, Mark. Talking about the store closings. Has Shoe Carnival exited any markets with the store closings that you just mentioned? And conversely with the store openings, are you going into new markets with new Shoe Carnival stores for the first time?

John, we've exited a couple of small markets by closing a couple of nonperforming stores in small markets. We anticipate that by the end of this year, any way. With respect to new stores, there is one store that we are opening up in a new narcotic. The rest of the stores are going to be in states that we exist in already. So it's within our geographic footprint.

Okay. So most of it's back filling?

Almost all of it is back filling for 2006. And in 2007, we anticipate back filling the new market that we're going into this year with stores in 2007 and a couple of small to mid-size new markets in 2007, as well.

Okay. And last question, also on real estate, are you entailing any substantial payments to landlords or accelerated depreciation allowances for build out or fixturing charges with these store closings?

We've included -- any accelerated depreciation and any kind of payoffs in terms of lease obligations to landlords included with -- we've included that in our store closing, not only the cost of closing with respect to fixed assets, but we've entailed our included those costs with our store closing costs that Kerry talked about earlier.

Okay. That's exactly what I was looking for. Thank you very much.

Next from Thomas Weisel we'll hear from Raj Shastri.

Hi guys. Good morning. I have couple of questions. First, your back to school sales are quite encouraging and quite busy out there.

Isn't the sales guidance of 1 to 2% comp store growth for the next quarter is kind of conservative? And also is it due to athletic segment? Or you mentioned something about the last year what happened to your stores because of the hurricane. So I just meant that--.

Well, there's a couple of things going on, obviously. Number one the comp store sales that we're seeing so far in the month of August -- ordinarily I wouldn't give a quarterly update except that the back to school period is such an important period for us, but the back to school sales that we've seen so far are in excess of what we planned for the quarter.

What we do anticipate, though, is when we get into the latter part of September and the early -- or in October, that we'll see some drag on some of the stores that had hurricanes last year because our stores in the hurricane area -- hurricane effected areas did very nicely after the hurricane came through. However, we've also included some upside in days that the stores were closed when they were directly impacted by the hurricane.

So there's a number of different issues going on, and yes, we've tried to be fairly conservative in our overall estimates with respect -- or given the decline in the athletic product sales that we've seen in the second quarter. So we do anticipate a tougher adult athletic period offset by increases in our nonathletic product and then we've got the issues regarding the hurricane store. It's become a very difficult projection process with respect to sales because there's so many different things going on that impact the sales in the third quarter.

Okay. That was helpful. On the store opening in 2007, can you give us some color of how aggressive you are going to get after 2006? Like how many stores close to 30 stores you plan to open in 2007 or?

No, what I said was, we would like to open between 20 and 25 new stores in 2007. And the majority of those stores are going to be fill-in locations in our existing geographic area.

Okay, so 8 plus 2, so 10 to 11 stores which you plan to open in the third quarter and fourth quarter and in the second half. Will it be the newer locations? Or will it be in the existing markets?

I'm sorry, I didn't understand.

All the stores that we're opening up for the fourth quarter or third and fourth quarter this year with the exception of one will be in existing markets.

Okay. Okay. And regarding your increase in the distribution costs, which you mentioned in the press release. So any particular reason for that? Or is it because of the freight cost going up because of the oil prices?

Well, some freight costs are going up, we also had a slight increase in our distribution center cost, primarily because of labor. But it's -- a big piece of it is increased cost of fuel.

Okay. So if I understand correctly, going forward your gross margins might be affected because of the higher distribution cost. Because you're also opening stores. The greater amount of leverage is going to come from SG&A and that is going to provide you an upside in operating margins. Is that correct? Is that a fair assumption?

I'm having a hard time--.

Raj, I missed part of that, can you repeat that question?

I'm sorry. What I said was, there can be increase in the distribution costs going forward and also -- because you're opening new stores and because of the freight costs going up. So your gross margins will remain flat. I'm talking of 2007 and your SG&A will provide the leverage, and that will actually increase your operating margin. Is that a fair assumption?

We haven't given any guidance for 2007, but we do anticipate. I don't know if you heard that. We haven't given any financial guidance for 2007, but we do anticipate that our merchandise gross margins will continue to increase and hopefully we'll see comp store sales that will continue to leverage that distribution and occupancy costs as we go forward.

Okay. Thanks. Thanks for taking the questions.

Operator, we're getting some feedback in this telephone if there's anything you can do about that.

I do apologize. We'll do what we can from this end. [OPERATOR INSTRUCTIONS] And we are now going to Harry Ikenson of Soleil Securities.

Hi there, can you hear me clearly?

Yes.

Okay, great. A couple things. Could someone review where you are on learning and dealing with Profit Logic and how -- when you expect to start seeing some benefits from that? And secondly, is there anything new that you are planning on different on marketing and advertising? And then third, looking forward with what Cliff and you, Mark, talked about on what's going on with the product. Could somebody address where you think average prices are going, AURs? Thank you very much.

Let me address the last question first and I'll let Cliff talk about the Profit Logic. We are intently focused on slightly increasing our average price out the door. And what I mean by that is, in our women's nonathletic prices, we are, we are trying very hard to increase those prices, understanding that we've got a very nicely developed and developing private label business. That's going to put, I'm not going say it's going to put downward pressure but it's not going to allow us to increase the price, the average realized price out the door.

As we experience less markdowns, which I'm looking at the table across to Cliff because of that profit logic software, that in essence is going to raise the average price that we see out the door. With respect to our athletic product, because we are getting much better product from a few of our vendors, particularly Nike, we're seeing athletic product prices rise on an out the door basis. So in our men's we see fairly stable to slightly increasing prices on average out the door. So you have to look at it on a category by category basis, Harry.

Okay.

Profit Logic, Harry. We have -- I believe we have already seen some benefit of this of the implementation of Profit Logic. Let me tell you, prior to Profit Logic, we were not, did not have the ability that goes on pricing and we think that the, in fact we don't think we're absolutely sure that zone pricing is going to be where we realize the most benefit.

It is also going to help us raise our overall on average price because as we are clearing through sandals, for instance in the north at a lower price, I'll be clearing through the same sandals in the south at a higher price. So instead of having to take markdowns companywide, and taking markdowns differently zone to zone if you understand what I'm saying.

I certainly do, but you haven't been able to start to do that yet, have you?

We have actually -- we began that in April and we have--.

In how many markets?

We have accelerated that as we've moved through our clearance season through July. We'll see full benefit out of that as we go through fall. So not only do I think Profit Logic helped us raise our margin, but I believe Profit Logic will also help us maintain a higher average out the door price in the long run.

From a marketing standpoint, we continue, you ask what changes in marketing. We continue to update our message to the consumer. We started a year ago, almost as a -- with our creative bin almost like a fashion show. And then we elevated that or changed it to a dance theme and then this back to school changed it even again. We'll continue to update that marketing to the consumer to keep Shoe Carnival top of mind.

What's the theme now?

Today it's a drum line theme.

That makes sense with back to school.

Yes, I don't think it's on our website, but I will see to it that it's on our website this afternoon.

Okay.

Harry, I want to make one thing clear, though. We are -- what we're doing is transforming the red nose idea or updating the red nose concept, if you will. It's a very integral piece of our whole marketing campaign, right now, that red nose.

Looks like it's been successful, I just wanted to see what you were adding to it in modification. So that point answers my question. Thank you very much, good luck in next quarter.

Thanks.

BB&T's David Turner is next.

Thanks, good afternoon, guys. Was curious about the merchandise margin differential by category or, without giving away trade secrets maybe just qualitatively talk about how the women's nonathletic compares to the athletic. As you grow that percentage of the business. And then maybe you could just give us a target or where you think the mix will be by the time you get to holiday for the women's versus athletic.

Traditionally, David, the margins in athletic run about 2 to 300 basis points, maybe 200 basis points lower than women's. And for the season, so for the spring season, that's pretty much held true. The men's nonathletic margin run anywhere from 100 to 150 basis points higher than athletics. As we, as the momentum continues to shift to the nonathletic sector, we should see improving margins overall.

Right. And where would, I mean I think you said it's around 27%, I'm sorry maybe 28% now of the mix. What are you -- how quickly would that accelerate? And I guess just glimpse six months into the future, where do you think that percent will be?

Harry, sorry, David.

Twice now.

Yes. It for the second quarter I believe Cliff said it was 27%.

Okay. I do have that, yes.

Percent mix of women's to the total. And I would suspect that that would increase very slight -- well, it will increase for the fourth quarter because athletic product does slow down in the fourth quarter. But for the year, I would suspect that it's going to be pretty close to that 27, 27.5%.

The reason for that is even though athletic has not been what we like it to be for back to school, it's still a huge part of our business. As a percent to total. It will drag the women's percent to total down for the second -- excuse me, for the third quarter, but women's will then rebound again for fourth quarter. So overall for the year, we should still be slightly above the 27%.

Great. And then lastly, just curious about the new store productivity. I guess it's been about a year now where you've been opening new stores in existing markets and how has that impacted existing stores.

My sense is there's not much cannibalization, but maybe just compare and contrast new product -- or new unit productivity versus historical trends and then how your existing stores are performing when the new stores come into that market?

Well, the stores we opened in 2005 are performing for the first year at a sales level that is about 200 to $300,000 higher than stores that we opened in the previous two years. So they're performing very nicely relative to what happened in 2003 and 2004. The stores that we're opening in 2006 are just now getting open, so it's too early to tell. We're also recording much better net financial -- four wall contribution out of the stores that opened in 2005 with one exception.

But 14 out of the 15 that we opened are recording some very nice gains for the initial 12 month period. So we're happier with the stores that we opened in 2005 than we were in years previous to that. But we've got some room to improve still and we're looking for ways to improve that initial year performance.

Fortunately the stores that we opened in 2003 and 2004 that we're now going back and back filling some of those markets, those stores are seeing some pretty nice comp store gains, and consequently four wall contribution in a number of those areas. Houston is one good example, San Antonio is another great example that we're opening stores in those marketplaces and the four wall contribution is going up pretty nicely.

So the back fill strategy is not only helping with new store productivity, it's also helping with the existing market productivity. We're pretty pleased with that.

Okay. Thanks. Dave will say good-bye for now.

Sorry, Harry.

From Next Generation Equity Research, we'll now hear from R.J. Hottovy.

Good afternoon, guys. First question I had has to do with the, I guess the back to school season in general. Now that you're seeing sales push back to the beginning or right before the school year starts, I was just wondering if you could tell if you're seeing any more extension of the back to school season. And then are you seeing it going later? Extending a couple weeks further into September? If you could just give us a little more color in that regard.

We noticed last year that, traditionally prior to last year or the year before, back to school is pretty much over by Labor Day. We noticed last year that back to school did push into about the second week of September. And we anticipate that to happen again this year.

And is it safe to say that most of the -- I think you're talking about it last year, as well it was mostly the southern markets where the schools are opening earlier and as the other markets the northern markets, I guess, were opening a little bit later?

That is absolutely correct. We are finding, however, that there are markets in the south that are pushing their back to schools until later in the month. But for the most part with our early schools, they are all southern markets. And it would be correct to say that the later schools are northern markets.

Just another little question with the tax free shopping days. You had talked about, the one notable state shifting their tax free day from July to August. I was just trying to get a sense for what you're seeing on a year-over-year basis in terms of the benefit from those tax free days.

Well, that one particular state was Georgia. And we estimate that about 0.5 million in sales transferred from the last week of July to the -- to the first week of August. And that was about half the loss that we saw in the last week of July on a comp store basis. Georgia on an overall basis, if you include the tax free days against tax free days last year did not do all that well.

We've had some states record very nice increases. We've had states that were not comp. And a couple of states record really nice increases. And some of the other states were just kind of okay. Texas, I think, Cliff, correct me if I'm wrong I think Texas was a little bit better last year, but not significantly. It's okay.

So more of a mixed picture across the--?

It really does, it's really mixed across the various states. Some states stores seem to take advantage of it much more than customers in other states.

And the other thing we're seeing is that if the state has tax free early in the month, but they move school opening until later in the month, it has had a negative effect on tax free. So -- they'll buy tax free, but the true frenzy comes directly before school opens or directly after.

Okay. And then, I guess, the last question I have -- I had has to do just the timing of next year's store openings and maybe it's a little too early to ask this, but I was just trying to get a sense if you think those 20 to 25 stores are going to be front-ended next year, or is it going to be spread out pretty evenly throughout the year?

As of right now, we're looking at spreading them out pretty evenly across the -- really the first 10 months of the year.

Thanks, again.

And now Jill Caruthers from Johnson Rice.

Good afternoon. Just a few quick questions. The advertising shift, it seemed as though you had lower advertising expense in the second quarter. You expect slightly higher in the third, can I relate that to just the shift in back to school?

Absolutely. We took, we did take money out of second quarter to help fuel the growth for back to school.

Okay. And maybe your comments on the urban customer. I've heard some different things out in the industry, maybe what percentage of your stores has more direct exposure to this urban fashion type customer and kind of what are the trends you're seeing there?

That's a terrific question. We have 129 stores that we consider to be at least 30% urban influenced, and we're seeing a true shift out of, and I said it in my prepared remarks out of the classic and basketball category for athletics and then two dressier silhouettes whether that be in the women's dress shoe area or whether it be even in the men's dress casual area.

We have not been able to tell at this point -- we're selling low profile very well in urban markets, but I can't tell you specifically that's going to the urban consumer. But we do know for a fact that the dressier silhouettes in both men's and women's are taking some of the slack that the classic product is leaving behind.

Okay. And then one last question on the inventory levels. You've done a very good job on controlling them, reducing them to store level. Kind of what's your thoughts on the back half inventory levels? Are you looking for further reductions or are you kind of satisfied with how the levels are at the store? And then kind of maybe tie in your conversation about more open to buy.

What we're looking to do is maintain very slightly down inventory levels overall. We'll take some inventory out of the athletic arena, put it and continue to fuel the men's brown shoe or nonathletic area and the women's nonathletic area. We -- although I don't anticipate seeing inventories on a per door basis climbing either one of those areas, I think they're going to be flat.

We believe we have room to increase turnover as we move through -- excuse me as we move through the fall season and that's the reason for that. I don't believe I answered the entire question. I apologize. What was the other question?

Just, you commented about open to buy positions you took, I guess a little bit more risk with the back to school and put some open to buys. It's proved to be successful for you.

Absolutely. What we did is we moved some open to buy out of the athletic arena into the Junior area. Right now our Junior business is very, very strong.

Especially the Junior dress shoe and the Junior sport area with the advent of -- with the continuing strength of low profile. And we're going to continue to fuel that Junior both in Junior and young men's area for both mens and womens. We think there's quite a bit of growth there as we go forward.

Thank you very much.

Yes.

And now on to Sam Poser with Mosaic Research.

Good afternoon. Can you talk, just a follow-up on Profit Logic for a second. Can you discuss how you're coordinating the advertising with the Profit Logic especially on the website and so on to be able to target the individual locations?

Sam, we've -- we don't -- Profit Logic really does not come into play in the overall advertising. If we buy products to go in an ad, we exempt that from Profit Logic's recommendation until the ad runs. And once the ad runs, then Profit Logic takes over the pricing.

So -- the only exception to that rule would be if we're running an ROP ad, a newspaper ad and we were using clearance product. And in those particular cases, we have the ability within our marketing department to actually create ads by market.

And very -- and in a very timely basis, as well?

And that's not, definitely not unusual. In fact, we take our circular programs and we normally produce multiple, I don't want to give the number, but multiple circulars based on market areas. Not only for pricing, that's so that we can get the right product and the right market.

Okay. Great. And then you -- you've tested some of -- some new sort of more utility type boots of late. Can you talk a little bit about what kind of results you're seeing there in sort of the heavier kind of boot business, especially on the men's side?

You're going to have to help me out a little--?

I think you've tested some in Dickey's in Rockheap's in Georgia and things like that.

We currently have not taken delivery on Georgia boot. The Dickey's boot -- we normally don't talk about brands but Dickey's boots are selling very well in the stores.

And do you see that as a -- beyond Dickey's, do you see that that kind of a look is coming, you think that's going to gain some momentum? Sort of more utility driven product?

We've, it's funny you should say that, because as much as we've talked about low profile, we are seeing some of the utility looks come back. It's too early for me to get too excited about it, Sam, but we are seeing some utility looks begin to sell both in the men's and women's area.

Okay. Great. And then just one last question. I'm not sure, you might have said this already. The differential in men's and women's athletic as far as sort of strength or weakness and sort of where you think they are on the pendulum?

Difference between men's and women's athletic.

The women's athletic business is down much more than the men'sathletic. And that definitely is truly a shift. Not only to low profile, but the dressier product. We're seeing our Junior dress shoe business last year for 2005 was up high double digit. And right now year-to-date, we are up double -- high double digit again. And we're seeing that come, we believe -- we truly believe that that's coming -- some of that increase is coming directly out of the athletic business.

And do you think that the men's is going to follow suit there?

With larger decreases? No. I think the men's athletic business will rebound actually quicker than the women's athletic business for us. Because our largest vendor -- I mentioned it in the prepared remarks. It's given us -- better performance product, which is working very well at retail. And they're going to continue to do that.

They're introducing new product performance product for us for fourth quarter and as we go into first quarter. And we think that that's going to have an impact on the way our athletic business both men's and women's, but especially in our men's department perform. Thank you very much.

All right.

Now, on to Slater Capital's Steven Martin.

Hi guys, most of my questions have been answered, but I was wondering, Mark. This year you're going to get through the heavy CapEx requirements to the Company? You sold the old distribution center. You're starting to build cash and I expect that next year you'll build a lot of cash. Have you given any thought to what to do with it and or whether your major shareholder would sell stock back to the Company instead of selling it into the market?

Steve, we look at a lot of different things with respect to the equity section of the balance sheet, obviously, and the cash position. We want to get through this year and pay the equipment down that -- pay for the equipment and the fixturing of our new corporate headquarters. Yet we do expect to generate cash next year.

But we are going to start opening more stores. So I mean, we're, we are looking at different options, but we haven't arrived at any definitive conclusion.

All right. Thank you very much.

And now a follow-up question from Harry Ikenson.

Hi. Thank you. You can call me David to get even for David. Okay. Couple of things. Just want to check and see if there's any change on the plans on what the target date is for you to go to 1DC? Because you're doing that very judiciously on operating 2 DC's in the beginning, I think it was supposed to be for about 3 months.

We expect -- the game plan right now is to move all of our warehoused product from one DC to the new DC in January, maybe the early part of February. So at that point in time, we should be operating on one distribution center.

Okay. Great. And then a couple of other things. These are for Cliff, basically, but I'll take -- two within these markets, you have two that are different. Where do you believe we're in this fashion cycle relating to shoes? What inning are w in the 5th inning, 7th inning?

How long do you think it will last. And then second, related to that, you were talking a little bit about boots before. I think boots were strong last year. And I think on the last call somebody mentioned that the outlook for boots was again good for this year. Is that still the case? and if so what are the signs you're seeing? Why do you think boots will be strong?

I, as far as innings concerned I'm not really sure. I personally believe that fashion trends are fashion -- fashion trends last about three years and we've been on this one for women's dress shoes and for about a year. So I believe we're early in the game and we have a lot of momentum, a lot of growth that we can have in our nonathletic and business both men's and women's.

As far as boots are concerned, we are not seeing great early results to date on boots. We do believe, however, that boots are going to be strong. This time last year, the Shearling boots or fur lined boots were very strong even for back to school. We are not seeing that this year nor did we expect to see it.

Where we felt our growth was going to come was out of stretch boots and out of low shafted boots. And some utilitarian boots, but not necessarily fashion Shearling type boots. So we expected that growth and planned for that growth to come beginning in September, October, November. And I still feel, Harry as good about the boot business as we go through fall as I did in the last call.

Thank you very much. Good luck, guys.

[OPERATOR INSTRUCTIONS] Mr. Lemond, there appear to be no further questions. I'll turn the call back to you for your closing remarks.

I would just like to say thank you for joining us and we'll talk to you next quarter. Thank you.

That does conclude today's conference call. Thank you all for joining us today.