Shoe Carnival Inc (SCVL) 2006 Q3 法說會逐字稿

Good afternoon, and welcome to Shoe Carnival's third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date.

The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release to reflect future events or developments. I will now turn the call over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival for opening comments. Mr. Lemond, please begin.

Thank you. Welcome to Shoe Carnival's third quarter 2006 earnings conference call. Joining me on the call this afternoon is Kerry Jackson, Chief Financial Officer, and Tim Baker, Executive VP Store Operations. Cliff Sifford, our GMM, normally joins us on these calls, but he is traveling today.

We are pleased to report company record results for the third quarter of 2006. This represents our eighth straight quarter of earnings increases on a year-over-year comparison. Just like we saw in 2005, the back to school season started slowly, but our business improved significantly as we moved through August and into September. And October was a very solid month, especially with consideration given to the 21% comp store increase we recorded in October of 2005. Consequently, net sales for the quarter rose 3.5% to an all-time quarterly high of 189.1 million from sales of 182.7 million in the same period last year.

Comparable store sales for the quarter increased 2.9%. This was on top of the 8.3% comp store increase we achieved in last year's third quarter. More importantly, net earnings for the third quarter also set an all-time company record rising to 8.4 million or $0.61 per diluted share. This was a 17% increase over net earnings of 7.2 million or $0.53 per diluted share in the third quarter of 2005. Our earnings increase for the quarter was driven primarily by the comp store sales increase, a continuing increase in gross profit margin, and effective control over selling, general and administrative expenses.

As a result, our operating margin expanded to 7.1% of sales in the third quarter from 6.4% last year. The gross profit margin increased by 50 basis points to 30% of sales from 29.5% last year. Our merchants continue to show improvement in planning and execution with respect to inventory management and product assortment. SG&A expenses as a percentage of sales fell to 22.9% from 23.1% of sales in the third quarter of last year.

While we incurred higher store opening costs, store closing costs and advertising expenses, these increases were more than offset by a decrease in healthcare cost and the leveraging effect on various other expenses. Because we have eliminated debt from the balance sheet, we recorded net interest income of 320,000 in the third quarter of 2006, versus net interest expense of 100,000 in the third quarter of 2005.

Turning to store openings and closings, we opened eight stores in the third quarter and two additional stores in November for a total of 14 new stores in fiscal 2006. We also closed three stores in the third quarter and we plan to close one more store in the fourth quarter. Therefore, we expect to end the fiscal year with 271 stores in operation. Next year, we currently plan to open approximately 25 new stores and close three stores. We are also encouraged by the continuing improvements in our merchandising execution, particularly in our women's dress and casual business.

As most of you know, our merchandise -- our major merchandise initiative has been to reinvigorate our women's non-athletic business by more fully developing the current season fashion assortments in our stores and it's working. Our women's dress and casual business posted a 10% comp store sales increase for the third quarter, despite the dominance of athletic product in the back to school period. It's important to note that this increase was on top of the 21% increase we experienced in this category in last year's third quarter.

We experienced strong increases in sport casuals, junior and fashion urban dress shoes in the women's category. Although boot sales were soft early in the quarter relative to last year, this category picked up nicely as we moved through October and into November. For the first nine months of the year, our women's business has grown to 26% of our total business from 24.6% last year. Our women's merchants are making tremendous strides towards our ultimate goals and we expect that trend to continue and even strengthen in the fourth quarter.

Our men's business increased in the low single digit range in the third quarter. This was driven primarily by young men's casuals, low profile and comfort dress product. For the second year in a row, we also saw a big increase in men's sandals early in the quarter. And we're very happy with our children's business for back to school and we ended the quarter with a high single digit comp store children's gain. Although our girl's fashion dress and both boy's and girl's low-profile product was good, our athletic product outperformed the non-athletic product in kid's sizes. This is expected during the back to school period.

Adult athletics, however, finished the quarter with a low single digit decline with the biggest hit coming out of a very tough comparison in October. The bright spots in athletic right now are running shoes from Nike, the Reacts and the Dual D, skate product and low-profile athletic casuals. Classic product continues to drive the largest decreases. Our inventories ended the quarter up 2.9% on a per store basis. All of this increase is in women's non-athletic product and inventory in transit. We feel good about both the content and the quality of our inventory as we head into the fourth quarter and the holiday season.

In closing, let me say that we are excited about the trends we're seeing in Shoe Carnival's business right now. We have recorded comparable store sales increases for the last eight out of nine quarters. We-- gross margins have improved in each of the last seven out of eight quarters when compared with the prior year quarter. SG&A expenses have decreased as a percentage of sales for the last seven quarters when compared to the prior year quarter.

Operating margins have improved each quarter in the last six out of seven quarters when compared to the prior year quarter, with the exception quarter remaining flat. Earnings have increased in each of the last eight quarters when compared to the prior year quarter. Our DC and headquarters construction projects are progressing smoothly. Our key merchandising initiatives are either yielding results right now or will be very shortly. Those are the women's non-athletic product increases are ahead of schedule and we expect to start seeing benefits from the Oracle mark-down optimization system in the fourth quarter of this year or the first quarter of 2007.

Our wide-area network system is nearly fully installed. We are already seeing certain operational benefits and we expect to see many more financial benefits as we add applications in 2007. Our inventories are in great shape, both quantitatively and qualitatively, as we head into late fall and winter season and our balance sheet continues to be very strong. We ended the third quarter with a positive cash position of almost 20 million, versus a net debt position of just over 6 million at the end of last year's third quarter.

Summarily, we feel good about our business as we enter the fourth quarter of 2006 and the 2007 fiscal year. Right now I would like to turn it over to Kerry for a more detailed description of the financial results and after that we'll open it up to questions.

Thank you, Mark. Our net sales for the third quarter increased 3.5% to $189.1 million compared to $182.7 million for the third quarter 2005. Our same-store sales were up 2.9% for the quarter. Gross margins for the third quarter of 2006 increased 0.5% to 30.0%. This increase resulted from a 0.8% increase in our merchandise margin, partially offset by a 0.3% increase in our buying, distribution and occupancy costs.

The increase in buying, distribution, occupancy cost was partly due to an increase of 324,000 in store closing costs included in occupancy costs, costs associated with the profit logic software which was implemented this year, and higher occupancy and wage cost in our distribution center. SG&A expense as a percentage of sales decreased to 22.9% for the third quarter, compared to 23.1% in the same period last year. The decrease resulted primarily from the leveraging effect of comparable store sales gain and significantly lower healthcare costs for the quarter.

Partially offsetting these benefits were increases in advertising, preopening costs, and stock-based compensation. The primary reason for the decrease in healthcare cost was the expense for the third quarter of last year was extraordinarily high and the expense we incurred in Q3 this year was a little below our normal run rate. The increase in advertising expense for the quarter was primarily due to additional advertising during back to school.

Part of this increase was attributable to shifting some advertising that occurred in Q2 last year into Q3 this year to coincide with tax-free days and back-to-school date shifts. Preopening cost in the third quarter were 298,000, or 0.2% of sales, compared with 215,000 or 0.1% of sales in Q3 last year. The portion of store closing costs included in SG&A in Q3 were 232,000, compared with incurring 196,000 in store closing costs in Q3 last year. Stock-based compensation in Q3 was 301,000, compared with 72,000 in the third quarter last year.

The effective income tax rate for the third quarter 2006 increased to 39.2% from 38.4% in the third quarter 2005. The Q3 effective income tax rate reflects a year-to-date adjustment to raise the annual effective rate to 38.8%. For the first nine months, net sales increased 2.5% to $504.4 million, compared to $492.1 million in the first nine months of 2005. Same-store sales increased 2.3% for the first nine months of 2006. Gross margins for the first nine months of 2006 increased 0.4% to 29.5%.

The merchandise margin increased 0.6%, and buying distribution and occupancy costs as a percentage of sales increase 0.2% compared with last year. SG&A as a percentage of sales decreased to 23.7%, compared to 23.8% last year. Preopening expenses for the first nine months of 2006 were 460,000, compared to 704,000 in the first nine months of 2005. Store closing costs included in SG&A in the first nine months were 486,000 compared with store closing costs of 634,000 in the first nine months of 2005.

Stock based compensation costs for the first three quarters was 1.3 million, or 0.3% of sales, compared with 186,000 last year. This increase equates to about a $0.05 reduction in diluted EPS so far this year, compared with the first nine months of last year. Net income for the first nine months of 2006 was 18.6 million or $1.36 per diluted share, compared with net income of 15.8 million or $1.18 per diluted share last year.

Depreciation expense for the third quarter was 3.6 million and for the first three quarters it was 10.7 million. Capital expenditures for the first nine months of 2006 were 21.4 million, detailed as follows: 2006 new stores were $5.2 million; the remodel and relocation of stores cost $2.0 million; software and information technology cost $1.8 million; the distribution center and corporate headquarters expansion was $11.6 million; all other additions were 867,000. Also, we received 192,000 in cash lease incentives this year.

Accounting rules require all purchase assets to be included on the balance sheet, but if they are not paid for at the end of the quarter then they are not listed as purchases of property and equipment on the statement of cash flows. We had approximately $7 million of assets for the new distribution center not paid for at the end of the quarter and therefore were not included in the statement of cash flows. This issue occurs every quarter but is typically not material.

All other amounts that haven't been paid at the end of the quarter are being paid within their allowed payment terms. Capital expenditures for the full year are expected to be approximately $30 million. Of this amount, we expect to incur about $19 million in equipment and furniture for the new distribution center and corporate headquarters. As Mark mentioned earlier, our new distribution center is progressing well. The building is substantially complete and we are in the process of completing the sortation and conveyer systems. We still expect to go live in the new DC in December and closing the existing DC sometime shortly thereafter.

I would now like to provide some guidance for the fourth quarter of 2006. Earnings per diluted share in the fourth quarter are expected to range from $0.36 to $0.38. This is a 64% to 73% increase over the $0.22 earned in Q4 last year. This assumes that total sales increase approximately 11% to 12% and comparable store sales to be 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 is worth about $14 million in sales and increases diluted EPS by about $0.08 in Q4 this year.

Other items that effect 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 cost for converting to the new distribution center that I discussed earlier. The increase in distribution cost 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 margin to be flat with Q4 last year due to additional cost to convert to the 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 2006, earnings per diluted share are expected to range from $1.72 to $1.74. This represents a 23% to 24% 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 stock based compensation of almost $1 million or $0.045 per share.

My last comment is despite spending $19 million on the new headquarters and distribution center, we should have free cash flow this year. And at the end of the year we'll have about $30 million in cash and no debt. At the end of Q4 last year we had $20.3 million in cash and no debt. This concludes our financial review for the third quarter 2006. I'd now like to open up the call for questions.

[OPERATOR INSTRUCTIONS] Our first question will come from Angelique Dab of Nollenberger Capital.

Good afternoon. Could you talk about the expectations for athletic product going forward?

Well, this is Mark Lemond, Angelique. Heading into the fourth quarter athletic product becomes lesser in importance than it is in the third quarter anyway. We really have -- obviously the athletic industry has taken it on the chin in recent times and we don't see anything at this point in time, at least for the fourth quarter, to turn that around.

Now, having said that, we're seeing some nice things starting to happen for first quarter and second quarter of next year, particularly in the mid -- again differentiate the mid-tier channel which is what we operate in versus the mall based players, like a Finish Line or a Foot Locker. We are seeing some nice product being developed not only by Nike but some other vendors as well for the mid-tier. So we're pretty excited about the athletic business in the first quarter and second quarter of next year, but for the fourth quarter, we don't see a lot of things happening right now. Outside of the athletically inspired low-profile kinds of shoes from vendors like Sketcher and Puma. When you get into that category, the business is very good.

So Sport Fusion continues to be strong.

Sport Fusion continues to been very strong.

Second question is the sales growth for the fourth quarter, the 1% comp, is that a bit conservative?

Well we have got a big comp comparison -- big comp store increase that we had last year in the fourth quarter. We also had a big comparison in the third quarter of 8, almost 8.5% and we beat that by almost 3% in the third quarter.

So we have got a, I think, a 11% comp store increase to go against from last year. So yes, we are being a little bit conservative in the expectation for the fourth quarter because of that comp store number. Yes, we were able to beat a sizable comp in the third quarter, but again, I mean, we're going to plan our inventories and our expense structure around a much smaller comp and if the business does happen to explode again this fourth quarter, we'll be in a very good position to take advantage of it.

Okay. Thank you.

Our next question comes from John Shanley of Susquehanna Financial.

Good afternoon, guys. Mark, the woman's dress and casual shoe business continues to be really robust for you. It has had several consecutive quarters now of really nice sales increase and now over a quarter of your overall line. Can you give us an idea if the product margins are accelerating at the same degree as the sales results in that category? And can you also comment on what's the underlying drive factor that's causing more of your shoppers to have an interest in your dress and casual shoe product offering? Is it related to their apparel wardrobe needs or it is related to basically the way you guys have been able to merchandise your dress and casual shoe offerings?

Well, the answer is about two days worth of answers to that question. You know, John, we spent a lot of time and effort trying to reinvigorate our women's business. As we have spoken many times in the past couple of years, we think we let that business slide from a fashion standpoint and we spent a lot of effort in trying to put more fashionable product in our stores at very competitive prices. So I think that's number one is we put ourselves in a position to take advantage of answer number two which is-- it's obviously a changing fashion cycle that we have been in and currently continue to be in with respect to a move slightly away from the traditional athletic product to more dress and casual product.

Obviously Sport Fusion and low-profile on the casual side but certainly heels, a lot of different types of uppers on many many many different tops of bottoms from a dress standpoint. I think the movement that we have made to a more fashionable product line in conjunction with changing fashion scene has allowed us to make significant strides towards that-- increasing our percent of women's non-athletic product to that -- you know, our goal is between that 28% to 30% of total sales kind of number. And we have made tremendous strides towards that.

With respect to the margins, yes, you are exactly correct. The women's non-athletic margins are higher to the tune of four or five basis points -- 400 or 500 basis points, I should say, than our athletic product. But we have seen in the third quarter increases in all of our categories with respect to gross margins. So not only are our margins in women's continuing to be high, they are increasing, and not only are our margins across the board increasing, but that women's margin is continuing to be about four or five basis points higher than the athletic margins. Did I answer all of those?

The other part of the equation, follow-up to the issues about athletic, are you getting the kind of sell-through rates that you originally had anticipated with offerings like the Reacts and Dual D products from Nike, are they achieving what you had hoped? And is that something that is going to continue to be an integral part of your athletic assortment going forward and into spring?

In the majority of the categories, where we have got Reacts and Dual D product, we couldn't get enough of that product. So the answer to the question is the sell-throughs far exceeded what we anticipated. Particularly in the back to school season and as we moved into September. Obviously, as you know, athletic products starts to slow down a little bit in the latter part of October and as you move through the fall and winter season.

We're not seeing the sell-through in basketball the way we're seeing in running product, but running product is still very, very, very good and we're excited about the, not only the results that we have seen with the Nike product in the mid-tier sector, but we're really excited about the product that we're seeing coming up for next year in that mid-tier classification of Nike. So really excited about the product that we're seeing from the Reacts and the Dual D. Wish basketball were a little bit stronger category than it is right now, but we'll see how that plays out as we move through the winter season.

Last question I have is can you give us some insight in terms of the current level of promotional activity in the family sector? Is it about what you expected? Can you compare it against this time last year and can you give us some insight in terms of what you think may be forthcoming in the important holiday selling season regarding promotional activities?

I don't see a lot whole of difference at this point in time relative to last year. All of retail really took off, as you well know, in September and the customer came out and shopped with a vengeance, so I -- in retailers, not only in the footwear sector took advantage of it but the apparel sector as well. We-- we-- so I don't-- I can't say that I have seen it that much more promotional. Maybe with the exception of the mall - the athletic specialty stores inside the mall. I think I have seen some additional promotional activity with some of the issues that they've had with the higher end athletic shoes. So I do see a little more promotional activity there. With respect to the holiday season, I'm really not anticipating a promotional season too much different from last year.

Again, so much of that is going to depend on what happens with the customer early. Do they come out and shop early or does retail have to spur the customer a little bit to come out and get them to shop in the latter part of the holiday season as you get towards Christmas and even after Christmas. One noticeable difference, I guess, is all the discussion around holiday hours. Are the hours that retailers are opening the day after Thanksgiving.

It seems to me they're -- they're -- while a lot of them are not even closing for Thanksgiving, but a lot are opening at midnight and having March madness sales and Thanksgiving, if you will. So that's probably the biggest difference is all the discussion around the hours that people are going to open on the Friday after Thanksgiving.

Are you planning on opening any more hours, Mark, than you had last year?

No, at this point in time, John. We have got a few stores in some outlet malls that open at midnight, but only because the mall hours are really dictating the hours that we open. We don't anticipate opening any stores early or significantly earlier than what we opened last year.

Great. Thank you very much appreciate it.

Okay.

And our next question comes from Jeff Stein with KeyBanc Capital Markets.

Good afternoon Mark. Wondering if you could talk a little bit about your real estate activities and with plan to open about 25 stores next year, is it going to be primarily a back-hill strategy and can you talk about what geographies you are planning to focus on?

Yes, Jeff, we opened 14 stores this year, as I said. And the stores we opened this year-- I would say this that we don't have a lot of good data yet on the stores, most of them opened in the third quarter as opposed to earlier in prior years. But what we have seen is the results -- or the sales results coming out of those, the trends that we have been able to identify in our new stores for 2006 are running about 95% to 96% of our overall store average, so we're pretty pleased with that.

What do you think accounts for that? Because that is much higher than you guys have done historically.

Let me say this, I'm still not happy with the result that we're seeing out of that. It is better than it has been in the prior years. We've still got a long way to go with respect to new stores. A lot of it has to do with where we're opening these stores and filling in existing marketplaces, there's no question. So that leads to your second question as we look into 2007, yes, the majority of the 25 stores that we're anticipating to open next year are fill-in markets or smaller markets within the same geographic footprint that we're in today. And that has really been our strategy for the past two or three years. There are three exceptions to that.

We're opening one store in a small town in Ohio that's not really inside our footprint and we're opening two other mid-sized markets that are going to be new markets for us. Otherwise, they are going to be filling in larger markets that we have either been in or just entered this year. Or they are going to be the smaller, 100 to 250,000 person population basis where we have got existing stores in surrounding areas.

So it would sound to me like you could definitely leverage your advertising for next year?

No, we'll probably spend more advertising next year.

And why is that? Will it be up as a percent of sales or flat?

Right now we're expecting to increase slightly. What we want to do is we want to come out with some -- we want to continue with the creative [name] that we have developed over the past couple of years, that red nose campaign, and we have got some ideas that we're working on for 2007. Now that will -- we're anticipating a little more production cost than we have in the past, not significantly more, but a little more. So I don't expect to reduce the amount of advertising that we spending next year. We have also entered some markets that we'll probably investment spend a little bit. And I'll give you a good example, Houston, Texas.

We're able now to start putting some stores in that marketplace and we have driven the sales, the comp store sales and the profitability of Houston way up and I'm going to try to keep that momentum building in markets like that. We just entered the Pittsburgh marketplace with a very good store opening just recently. And as we add stores in the Pittsburgh marketplace we'll be spending some more advertising in that market. I'm going to take some markets and do some investment spending. That's really the reason why I don't anticipate advertising being leveraged against the higher sales base.

Okay. So for next year, again, without getting too far out here, what kind of comp might you need next year to leverage your SG&A with a 25 store expansion program?

That's a good question, Jeff. And I'm going to let Kerry Jackson talk about that.

Jeff, I would tell you, typically that we can leverage our SG&A on a low single-digit comp. We haven't put out any guidance for there, but just looking on historical purposes, yes, our preopening costs will be up on a year-over-year basis, but that won't be that significant when you look at the overall SG&A in order not to be able to leverage it on a small comp.

Jeff--

Any other major pressure points in SG&A? We have kind of gotten through this bubble now in terms of adding the new DC, I would presume as well that depreciation and amortization will ramp next year as well?

Yes, but keep in mind that our distribution costs are included in our gross margin as part of our buying, distribution, occupancy costs.

Okay.

But, yes, we will not be leveraging our distribution costs next year. In the new distribution center, because we're doubling the size of the distribution center, our depreciation costs will increase significantly. Where we'll see efficiencies out of new DC is in our labor cost because of the mechanization. But until we get to the fourth quarter, where we have these unusual duplicate costs in Q4 of '06, when we get to Q4 of '07, we should be able to leverage against those because those are unusual costs. But for the year we won't be able to leverage our distribution costs.

I see. And just one last question, Kerry, do you have a depreciation estimate for next year? And a capital spending estimate for next year?

Jeff, we haven't put out a capital spending for next year and I'll have to look up that number and I'll give it to you. Okay?

We'll get back to you with answers on those, Jeff.

Okay. Great. I'm all set. Thanks a lot, Mark.

Okay.

Our next question comes from Raj Shastri of Thomas Weisel.

Okay. Congratulations, guys. Can you just tell me about your gross margins, which you just said that there would be a duplication cost in the fourth quarter. Can we see the same thing happening in the first quarter as well or are you thinking gross margins would increase a little bit in the fourth quarter?

In the fourth quarter?

No, in the fourth quarter of '07?

Oh, in the first quarter of '07? Again--

Do you think there will be a duplication of costs?

I'm sorry.

Do you see that there will be a duplication of costs in the first quarter of '07 as well.

Oh, he's talking about distribution cost -- duplication of distribution cost.

No, we look to have-- we expect to be live in the new DC in December, and if everything goes as we have planned, we should be out of our existing DC by the end of January or in very early February. So we do not expect to have duplicate costs in the first quarter of '07, but we will have higher distribution costs as a percentage of sales in the first quarter of '06 because of the additional depreciation.

Okay. So do you think that your merchandise margins increase will actually be more than the increase in the distribution cost for '07?

Yes, we expect them to be -- we'd expect to have gross margin improvement in the first quarter of next year because the -- while we do have higher distribution costs as a percentage of sale, it's not as significant as what we're seeing in the fourth quarter where we're running two distribution centers.

Okay. And for 2007 will that be the same trend? Your merchandise margin will actually be -- the increase in the merchandise margin will actually be more than your increase in the distribution cost in terms of basis points as a percent of sales?

Well, we don't want to get too far into giving guidance on '07. We'll give guidance at our Q4 conference call. But having said that we do expect to continue to improve our gross margin through better execution of our merchandise strategy.

Okay. Thank you.

Our next question comes from Heather Boksen of Sidoti and Company.

Good afternoon, guys. Most of my questions have been answered, just one last one. You mentioned inventories were up almost 3% on a per-store basis. You mentioned briefly that it was women's non-athletic and I think inventory that was in transit. Can you touch any more on that? Is this build for holiday, and if so what kind of-- what are you looking for for holiday in terms of women's non-athletic fills, maybe?

Let me start that answer by saying that the -- of the three-- of the 2.9% increase on a per-store basis, about half of that was the women's non-athletic product, dress and casual product. And we came out of the third quarter with a 10% comp store increase in that category. So I don't feel like the inventories in that category are out of whack at all. In fact I think they are probably conservative.

The inventory in transit is a timing issue more than anything else, but obviously that inventory is dedicated to fourth quarter selling, so yes, it is a build up of inventory for the fourth quarter. But again, I want to reiterate that the inventory in transit is really a timing issue more than anything else. So inventories are in great shape from a quantitative standpoint as we go into the fourth quarter. They are also in great shape from a qualitative standpoint.

Like I mentioned, the concern for most footwear retailers in the fourth quarter is how well do boots sell and boots didn't sell that well early in the third quarter, but again, we had a 40% increase in -- 40% comp store increase in boots last year in the third quarter so we were going against tremendous increases in boot product sales. Boots didn't comp in the third quarter, but towards the end of October and now into November, they are exceeding our plans.

So we really feel that our boot inventories are in great shape as well. So of that 2.9%, like I said summarizing, our women's product is about half of that on a per-store basis up, and we're seeing sales increases well in excess of that. So we feel that we are in great shape from an inventory standpoint.

So it sounds like you are happy with what you have and how much of it you have?

Exactly.

Okay. Well, thanks, guys.

Okay.

Our next question comes from RJ Hottovy of Next Generation.

The first question I had had to do with the positive 2.9% comp number. I was hoping we could get a little more color as to what was driving that? Whether it be on the pricing side better, being more efficient with mark-downs, or if it was an increase in traffic or just the number of units sold? Just hoping to get a little bit better clarity on that.

More so than traffic, the units of footwear sold were up about 1% for the quarter.

Yes.

And price was up about 2%. So more so than traffic it was an increase in units and an increase in price, increase in both. Consequently margins were up across the categories.

On the pricing side was that actually price increases or was just that better -- less mark-downs, I should say?

Well, we keep our records from an accounting standpoint on a cost basis, so we don't have traditional retail mark-down history. But I will tell you that it's going to be fewer mark-downs and just better inventory management was resulting in that higher price point. The gross margins increased more than that -- more than the increase in sales price, so consequently, it wasn't an increase in cost offset by a higher selling price. It was an increase in selling price driven by fewer mark-downs.

Okay. That was helpful. The next question I had, as you guys know there have been a number of new e-commerce footwear sites that have emerged over the past quarter. I was wondering if you guys have approached any of your major suppliers about possibly adding an additional sales channel or possibly even looked into the e-commerce segment as a possible extension of growth going forward here? Or if basically, you are still going to be using the -- your online site as more of a presell type marketing tool.

For the time being we haven't announced any initiatives with respect to e-commerce or online sales and we're utilizing our internet capabilities right now for promotional activities as well as defining our in-store promotional capabilities. So we haven't done any of that. Have we approached some of our major vendors about potential e-commerce, yes, we have, and we'll continue to do that, but we haven't -- none of that as come to fruition as of right now.

Okay. And lastly, I just wanted to see if you could give me some comments on the savings club rewards program that you guys have in place. Are you seeing an average number, or higher sales ticket coming off the customers that are enrolled in that program? Or just a little bit more color on that particular program.

No, we have not. And I will tell you that I'm not-- we're not happy with our regards program the way it sits right now. Two initiatives with respect to the last question and this current question, we are getting ready to spend some money, not a tremendous amount, but we are getting ready to revamp our internet website and revamping that awards program. It is going to be part of that transition. So we're not happy with it. We don't generate the activity that we think we should be generating from it and we're changing it. How we're changing it at this point in time, I can't tell you.

All right. Thank you, and good job on the quarter there.

Thanks.

Our next question comes from Jill Caruthers of Johnson Rice.

Good afternoon, just a few quick follow-ups. No comment on accessories, and I know that has been a weak category for you guys in the past few quarters, if you could maybe comment on that.

Which category, Jill? I'm sorry.

I'm sorry. Accessories.

Accessories continues to be a little weak. We saw a little bit of a decline in the third quarter primarily related to handbags. A little bit-- part of the handbag issue was a little bit cheaper price points in some of the backpacks that we were carrying. To say that we have got some sort of major initiative to improve our accessories business would really be a stretch, because we don't. We're trying to do a better job with executing the handbag piece of it.

Socks have been a little bit disappointing, but it's a very small piece of the business and very small declines. So, I'm concerned with it from the overall direction of bags, but we have got bigger fish to fry than the accessories category. So we are concerned with it. We're taking a look at how we can change some things, but major initiatives for us come on the footwear side.

Understood. And maybe just to dwell on it ta little bit more on your Houston market. I know you said profitability has improved there. It looks like you added two stores in that Houston market in the quarter. I don't know if it is too early to tell, but could you tell if those new stores actually ramped up faster versus earlier stores in the Houston market? If your are being able to see a list given previous exposure in the new markets?

Jill, I'm going to let Tim Baker talk a little bit about some of the things that we're seeing and in particularly the Houston market in advertising with respect to the Houston market.

Jill, we actually opened-- added three stores in the Houston market this year. We increased our ad spend as a result of that about 30% over last year. I'm talking on a comp basis. We're seeing mid 20% comp store increases coming out of our Houston stores. We're seeing increases in the neighborhood of 225% in terms of store contribution out of those three comp Houston stores. So the answer is yes, as we continue to backfill our major markets, we expect to increase advertising expenditure, and as a result see better top-line sales growth and store contribution growth.

Okay. And any insight on like what the potential build out of the Houston market could be?

Jill, I don't have that offhand. I can tell you that it is going to be in the mid-teens.

Okay. All right. Thank you very much.

You're welcome.

And our next question comes from Harry Ikenson of Soleil Securities.

Good afternoon. It's Soleil Securities. I just have a couple of follow-ups, most of my questions have been answered by now. Congratulations on the quarter, great job.

Thanks, Harry.

On the 25 stores, it's going to be 22 net stores, two things, one, what is the average size of the store going to be on the new stores? And then two, what will that work out to on a percent square footage growth basis for the next year? And then I have a follow-up question on boots after we talk about square footage.

The average size is going to be about 9200 on those 25 stores.

9200?

9200 square feet, so I haven't extrapolated that out to a percentage based on square footage this year.

What about the three stores you are closing? What are the rough size of those obviously [INAUDIBLE]?

They are going to be let's see, let me do a real quick math, here, about 31,000 square feet total.

Okay. Thank you. And then on boots, you were talking about how you were up against a very difficult comparison in the current quarter. I think it's 40%.

In the third quarter.

In the third quarter. Sorry. What about the fourth quarter? Is it as difficult as it was in the third quarter? Or is it less difficult? What was it last year?

I'm going to have-- I'll have to get that number for you, because I don't know that number off the top of my head.

Okay. Finally with most of your strategies really seem to be working, do you -- who would you think you might be starting to take share from or -- from a competitive point of view?

Oh, that's a big-- that's a big question. You know-- that's a tough question, Harry, because there's so many things going into that. Obviously with the decline in the athletic business over all, some of that business has, and I'm not going to say we're taking share from the Foot Lockers and the Finish Lines, but with declining sales in the athletic side going to some of the more dress and casual business, I think it's more of a shift in where the footwear business is trending right now, more so than taking share.

Yes.

You know -- and again, 3% comp is a good comp for Shoe Carnival, it's not a tremendous, in terms of taking share from any particular category. We don't-- we're not really looking at the business that way. We're looking at the business as -- if we can achieve some unit growth, not tremendous unit growth, if we can achieve price point growth, which we are achieving right now, and consequently, that leads to higher gross margins, which as you know, has been a goal for us all along. That's the way that we're trying to run the business right now.

You know, from a women's standpoint only, if you cut the business into sections, then I would say ,certainly, we're trying to take some share from the lower end department stores or the middle department stores and I think we'll being successful at that. But to say that we're taking it from any one particular retailer, I'm not sure how to really quantify that.

Actually you gave me the answer that I was looking for

Okay.

Thank you very much, congratulations.

Our next question comes from Sam Poser of FTM Investment.

Good afternoon. Congratulations on a good quarter. Mark, you mentioned, going back to the athletic shoes, that you were somewhat excited about 2007 and mentioned some of the Nike product. Beyond Nike is that going to be enough to carry you? Are there other brands that are doing things that you are enthused about as well?

Well, we're just starting to hear a little bit about some of the Reebok product. I don't want to get too excited about Reebok just yet, but we're just starting to hear some things coming out of that building that may be good for 2007. We're not really relying upon that as a strategy right now. Obviously, Nike is where we're trying to put our purchasing dollars towards. But as you look at the low profile, I see that product continuing very strong into 2007. So, in terms of vendors that we're looking at. Skechers obviously is doing a really nice job with that kind of product.

We're starting to do some business now with Puma in the Midwest, where that's been a struggle for mid-tier retail in the mid-est. Puma is doing a really nice job in that Sport Fusion category. You know, Asics with respect to running continues to be a very strong business for us in terms of increases that we're seeing. I don't normally talk about vendors on the conference call, but we're seeing some increases in those particular vendors and we'll really looking for the Adida/Reebok group to break out of their dull drums, if you will, and start producing some product.

So just a quick follow-up on that. In the first half of next year as you are seeing it, then really, we're talking about Nike and Puma and the continuation of Asics and beyond that is where you maybe let's say more optimistic because you know less at the moment?

That's a pretty good summary. Like I said it's -- the Adida/Reebok group has yet to prove that they can -- that they are going to produce the product that people want with the changing fashion direction. But from what my buyers are telling me, we're starting to see some things starting to happen there. I don't want to get any more specific than that, because I haven't see the product personally. But my buyers are saying don't count these guys out yet, there's some stuff coming here.

Fair enough. And then just as over the last couple of months as the Macy's has taken over the May locations in markets where there were old May Company stores under the Macy's transition. Have you seen any traffic change as it relates to that with their price points going up and less promotional activity going on in those stores now.

I have no details whatsoever to support any of that right, so I can't really speak intelligently to that.

And then just one last thing, you were talking about the margin improvements? How much of the margin improvement was mix moving out-- you mentioned a little bit of it moving out of athletic and into non-athletic product and what are you all doing to continue that into the fourth quarter and even into next year to continue this margin improvement?

Some of it was mix, but less important than the mix of product was the way that the merchants are executing their business today. I think the comments that I made earlier about fewer mark-downs resulting in higher price points as well as higher margins is really the answer to your question. We saw increases in gross margins across all the categories, all of the broad categories, men's, women's children's athletic product. So we're seeing increases across the buying groups, if you will. And that to me tells me that we're seeing a better execution on behalf of the merchants.

I don't think that we're seeing big improvements yet from our profit logic or the mark-down optimization solutions that we put in place. I think that is yet to come. We're looking at 2007 as really being the start of seeing some big improvements in margins from that standpoint. So, we are kind of seeing a better execution strategy right now, and I think in 2007 I expect to see that from our merchants as well. But I think they'll have the added tool of that mark-down optimization program to aid that and I think we will see some benefits there.

Great. Thanks again, Mark.

Okay.

Our next question come is from Steven Martin with Slater Capital.

Hi there. Kerry, and obviously I could do a simple calculation. You have guided to a low 0 to 1 comp. By your own internal guesstimate, what would 1 point of comp generate in EPS? How do you look at that?

Well, we gave-- we gave guidance as far as EPS.

No, no. I'm saying in incremental if you generated a 2 comp or a 3 comp, how would that -- how do you look at the incremental comp passing through to EPS?

Steve, there are so many factors in there, I would hate to go on record and give you a flow-through on that. It depends on the time of year. It depends on -- even within the quarter it would depend dramatically on are we getting that incremental sales early in the quarter or later in the quarter when we are in clearance period. There are just way too many factors to really give you a good answer on that.

Okay. Mark, a bigger picture question, you're-- and we have talked about some of this before. You don't -- after you get this DC up and running, you don't really have a big single project use of cash, and you're -- you can self-fund store openings. When you look out next year and the cash balances that will accrue by, I guess, January 31st, when we next see it, what are you thinking about?

The Bahamas.

Red or black?

I'm teasing, obviously. Obviously, Steve, you are alluding to some sort of change in the equity structure. And we'll give you the same answer I give somebody every time they ask me on a conference call, is that we do review potential of stock buybacks with the board. We talk about it at every board meeting. I'm not going to commit at this point in time that at the next board meeting we'll come away with a buyback program in place or that we won't come away with a buyback program in place. We don't discuss that until, obviously, after we put those programs in place. But those options are discussed at every board meetings.

But in terms of my statement up front, you don't see another major use of cash and you do believe you are self-funding going forward on your current vision of new store openings?

Corrected.

All right. Thanks and of course--

At least--

I'm sorry.

At lease through 2007, that is correct.

All right. Thank you very much.

There are no further questions in the queue. I will turn it back to you.

Thank you for joining us. We look for another good quarter in the fourth quarter and hope to have good things to announce the next time we talk. Thank you very much.

This does conclude today's conference. You may disconnect at this time.