Shoe Carnival Inc (SCVL) 2006 Q4 法說會逐字稿

Good afternoon, and welcome to Shoe Carnival's fourth quarter earnings conference call. Today's call is being recorded and it's also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the Company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. The Company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release to reflect future events or developments. I will now turn the call over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival, for opening comments. Mr. Lemond, please go ahead.

Thank you. Welcome to Shoe Carnival's 2006 fourth quarter and year-end earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer, Cliff Sifford, General Merchandise Manager, and Tim Baker, Executive VP of operations. For the second year in a row Shoe Carnival's record-setting fourth quarter performance resulted in the highest annual sales and earnings in the Company's history. We set Company records in sales, net earnings and earnings per share for both the quarter and the full year. I want to congratulate our management group on achieving these outstanding results despite undertaking the most comprehensive, time consuming and expensive set of infrastructure initiatives in our history. I will speak about the cost and expected benefits of certain of those projects in a few moments.

Our management group also did a phenomenal job of leveraging a small sales increase for the fourth quarter and fiscal year into significant increases in operating income for each respective period, especially after the record-setting performance in the prior year. For the fourth quarter of 2006 net sales rose 8.3% to $177.2 million from sales of $163.6 million in the same period last year. The fourth quarter of 2006 was comprised of 14 weeks as compared to 13 weeks in Q4 of 2005. That extra week accounted for about $11.5 million in net sales. While comparable store sales declined by 0.9% on a 13 week basis, that decline was measured against the largest quarterly comparable store sales increase ever recorded at Shoe Carnival, 11.7% in the fourth quarter of 2005. Net earnings were $5.1 million, or $0.37 per diluted share in the fourth quarter of 2006, which was an increase of 70% over net earnings of $3 million or $0.22 per diluted share in the fourth quarter of 2005.

While our merchandise margin, as a percentage of sales, increased by 30 basis points in the fourth quarter, our distribution costs also increased primarily as a result of opening and operating our new distribution center. Consequently, our gross profit margin for the fourth quarter declined by 0.5% of sales to 28.1% in 2006 from 28.6% in 2005. Kerry will discuss it more fully a little later on the call, but we expect to incur some additional incremental DC conversion costs in the first quarter of 2007. Selling, general and administrative expenses as a percentage of sales declined in the fourth quarter of 2006 to 23.6% from 25.6% in the fourth quarter of 2005. We incurred lower healthcare cost, incentive compensation cost and store closing costs. We also estimate that the extra week sales in Q4 of 2006 resulted in about 60 basis points in expense leverage. Our operating income for the fourth quarter increased by almost 63% to $7.9 million from $4.9 million last year. We estimate that the extra weak accounted for about $1.2 million of that $3 million increase.

Also, because we were completely debt free for the entire fiscal year, we recorded an increase in net interest income in the fourth quarter of about $320,000 over the fourth quarter of 2005. Turning to the full year, net sales for the year of 2006, which was comprised of 53 weeks, rose 4% to $681.7 million from sales of $655.6 million in fiscal 2005. Our annual comp store sales increase of 1.5% was on top of a Company record 6.9% comp store sales increase we recorded in 2005. I will let Cliff speak in more detail about the merchandise a little later, but for 2006 we recorded single digit comp store sales increases in our women's, men's and children's non-athletic businesses. Our total athletic business, including both children's and adults sizes, recorded a low single-digit comp store sales decline last year. Operating earnings for fiscal 2006 grew by 22% to $37.6 million, or 5.5% of sales from $30.8 million or 4.7% of sales in 2005. The increase in the operating margin was attributable to [0.2%] of sales increase in the gross profit margin and a [0.6%] of sales decrease in SG&A expenses.

Net earnings for fiscal 2006 were an all time record $23.8 million, or $1.73 per diluted share, compared to net earnings of $18.8 million, or $1.40 per diluted share for the full fiscal year 2005. This represents a 27% increase in annual net earnings. In 2006 we opened 14 new stores and closed six stores for a net gain of eight. We thus ended the fiscal year with 271 stores in operation. We elected to concentrate our new store openings in existing markets or smaller one store markets within our current geographic footprint. Only two stores were opened in new markets, Pittsburgh, Pennsylvania, and Fort Myers, Florida. The stores opened during 2006 averaged 8900 square feet, slightly smaller than our chain average of 11,400 square feet. In our efforts to improve the productivity in new stores, we have attempted to more finitely define the population base of the retail market any particular store is expected to serve. Whenever possible we are rationalizing the size of the store to the size of that population base.

We believe this is one of the reasons that the stores we opened in 2006 are trending at approximately 90% of the chains average sales per square foot, a much higher efficiency than we've experienced in new stores in prior years. We currently expect to open about 25 new stores and close three stores in 2007. We will continue to fill in larger under penetrated markets when we are able to do so and to find good sites and we will also continue to focus on single store markets. Our financial condition, already strong, continued to improve as we ended the year with no debt and almost $35 million in cash, $14.5 million more than the prior year-end. On a per store basis inventories were up about 3.7% due totally to an increase in in-transit merchandise at year-end, as we brought in more goods early due at a slight shift in Easter, more store openings in the first quarter of 2007 and a shift in Chinese New Year. We expect inventories on a per store basis to be flat to down throughout all of 2006 as we are focused on increasing the inventory turnover. As I mentioned earlier, we initiated certain major infrastructure initiatives for 2006 and early 2007.

Number one. Oracle's retail price optimization solution, or ProfitLogic. We completed the implementation of this software system in May of 2006. Although most of the capital cost for this project was incurred in 2005, we recognized approximately $580,000 in incremental expenses in 2006 after implementation. Because our merchants spent a good portion of the last two quarters of the year acclimating themselves to this new system, we don't feel as if it generated a significant lift in gross profit margins yet. We expect to see some sizeable benefit, however, to gross profit in 2007. One of the expected benefits of ProfitLogic, in addition to analytical markdown management, is it provides it's own pricing platform, something new to Shoe Carnival. The implementation of zone pricing will allow us to price the same item differently in each zone based upon how the item is selling. Currently we are utilizing three geographic zones. Number two is the implementation of a Wide Area Network, or WAN. In the later part of fiscal 2006, our stores migrated from the existing dial-up modem to the Wide Area Network infrastructure.

This WAN provides the following benefits. Number one, our enhancements in the area of point-of-sale tendering by reducing the time required to authorize credit, check, gift cards and pin debit and also providing a reduction of the cost of bank transaction fees. Number two is the enhancement of the store to corporate to distribution center communication infrastructure to reduce existing data lag and support new applications like the Chronos Workforce Management system we began using in 2006 and an inventory locator system we expect to build in 2007 or 2008. During 2006, 271 stores were enhanced to provide the customer the ability to select debit as an alternative to credit payment. The payment device we selected was programmed to preference the customer to pay with debit to reduce the cost of bank authorization and transaction fees in addition to being programmed to support credit and gift card payment types. We completed this roll-out in November of 2006 and have already started to see some significant savings in card fees.

The capital cost incurred for this system's enhancement was about $530,000 in 2006 and we expect a pay back of less than one year. Number three is the new distribution center, which is 400,000 square feet with an attached 10,000 square foot administrative facility. Construction of the building began in 2006 and was completed in December with equipment installation occurring almost simultaneously with the last couple of months of construction. We have almost completed converting all processes from the old DC to the new one. I would like to congratulation Kerry Jackson, Tom Welden, our VP of Distribution, and Terry Clements, VP of Information Systems, along with the rest of the DC and IS management teams for this phenomenal accomplishment in such a short period of time. Kerry will add some more details regarding this project a little later. Number four is the construction of our new 60,000 square foot corporate headquarters, which began in July of 2006. We currently expect to move into this new facility in May of '07. For 2006 we incurred only soft costs for planning, design and furniture and fixture selections. All furnitures, fixtures and equipment will be purchased in fiscal 2007.

Before I turn the call over to Cliff, I would just like to congratulate our management group on a great effort in 2006 in terms of financial results, project implementation, systems enhancements and generally setting up Shoe Carnival for more rapid expansion in the future. We have our challenges in completing some key infrastructure initiatives in 2007, but we are excited about our potential as we move through 2007 and into 2008 and 2009. Cliff?

Thank you, Mark. As Mark stated, I want to take the next few minutes and walk you through the merchandise trends as they unfolded during the quarter. The women's non-athletic, we finished the quarter up low single-digits for the year and mid single-digits on a -- both on a comparable store basis. We continue to see strength in our junior category with dress shoes and low profile product producing double-digit sales increases. In addition to junior footwear, we saw strong performances out of our leather, flat and vulcanized canvas categories. In women's boots, the first two months of the quarter we saw sales that were below expectation due to the unseasonably warm weather. Unit sales picked up considerably in January, once more seasonable weather patterns arrived, albeit at lower retails. Fortunately, the other categories in the department were strong enough that our overall women's margin and average unit retails both produced nice increases for the quarter.

We continue to be disappointed with the performance of our urban brands, as most finished down for the quarter and year. We have seen a shift in some markets from hip-hop to a more dressy and/or preppy fashion look. We absolutely see this trend continuing through the spring along with vulcanized canvas, flats, low profile and molded clogs and sandals. As you are aware, one of our key initiatives is the growth of our women's non-athletic business. Our goal over the next several years is to see this business achieve a percent to total of between 28% and 30%. This past year we continued our growth in this business with an increase to a total of 27%. Our [bars of focus] on fashion right product for our customers and we are well on the way to achieving our goal. In men's non-athletic we finished the quarter down mid single-digits and the year up low single-digits both on a comparable store sales. Women's boots -- excuse me, leather boots and hikers, along with urban boots and urban casuals, all played a part in this loss.

As in the women's non-athletic department, we saw declines in urban product as this customer continued to walk away from classic hip-hop fashion. In addition to this, in the prior year's fourth quarter we had a large closeout buy from one of our largest vendors, which proved to be successful. Most vendors are doing a much better job at controlling their inventories and as such, large quantities of closeouts are not readily available. This also played a part in our fourth quarter loss in men's shoes. Since there are no other large comparative closeout buys from any other vendor, I do not see this as an ongoing issue. Again, as in women's, traditional product has become the product of choice in men's shoes and, due to this, we saw double-digit increases in comfort dress, boat shoes and low profile and fashion boots. Looking towards spring, we see most of these trends continuing along with vulcanized canvas and thong sandals.

In children's we finished the quarter up low single-digit on a comparable store basis with athletic products slightly outperforming non-athletic. For the year we were up mid single-digits in both departments. We saw very strong growth in both girls and boys low profile, girls fashion boots, fashion athletics and boys skate. We were disappointed in the performance of our kids boot business, primarily due to weather boots, which ended the season down double-digits. Looking towards spring, the low profile business in children's is just starting to go grow and we expect increases in this area to last at least through back to school. In addition to this, we are expecting continued increases out of our skate and fashion athletics. Now adult athletics we experienced low single-digit declines on a comparable store basis. This -- men's athletic finished the quarter flat as women's athletic finished down mid single-digits. For the year our athletic business was down low single-digits. We continue to see declines in urban classic product. The urban athletic brands have been very slow to react to new trends and, as a consequence, we have experienced declines in these brands for the past 18 months.

This fashion customer continues to shop the men's non-athletic department for low profile dress shoes and vulcanized canvas. The same holds true in the women's business with the addition of flats. We have seen some very positive trends develop, such as performance running in both women's and men's, which continues to show double-digit increases. In addition to this, men's skate and the new basketball product Nike is providing to the family channel both performed well. We have also seen a recent turn in men's K-Swiss product, as they have introduced new lower profile shoes that the customer is reacting to favorably. Looking towards spring, we definitely see skate product maintaining its growth as it continues to gain acceptance in urban markets. In addition to this we have seen our traditional athletic brands step to the plate with more performance product. They are no longer conceding this business to Nike.

And lastly, fashion classics are also beginning to show some signs of a turnaround. These trends give us reason to be more optimistic about our athletic business as we move through 2007. Now I'd like to talk about a couple of key initiatives in the merchandise and marketing departments. We continue to focus on average unit retail and margin, both of which were up for 2006. These two metrics have been and continue to be our key initiatives as we continue to grow our overall business. As you know, we implemented Oracles ProfitLogic Markdown optimization solution during this past year. This solution has been instrumental in maximizing margin, while keeping our seasonal product clean and fresh. Aged inventory has always been a focus of this management team, which makes the fact that our aged inventory measured anything six months or older as down double-digit versus last year.

Now that we are about to anniversary the implementation of project logic, we expect to see even more dramatic improvement for 2007. In addition to ProfitLogic, we are making major changes to the way we will be speaking to our customers through our marketing efforts. We are now building all print advertising to specific markets. This initiative will have a positive implication in two ways. First, and most obvious, we can place product in the add that directly relates to the consumer in a particular market. Second, it allows us to focus our buys closer to the customer profile for the specific market. This new effort should improve our sales and margins of these important advertising pieces. I want to thank you very much for listening and now I would like to turn the call over to Kerry Jackson.

Thank you, Cliff. Let me start by saying that we follow traditional retail calendar and periodically that will mean having an extra week of activity added to the fourth quarter. Fiscal 2006 was one of those years where we had 14 weeks of activity in the fourth quarter and 53 weeks in the full year. With the exception of comparable store sales, all numbers that I will discuss today will compare 14 weeks of sales and expenses in the fourth quarter against 13 weeks of sales and expenses in last year's fourth quarter. For the full fiscal year I will be comparing 53 weeks of activity in 2006 against 52 weeks in 2005. The extra week of activity increased sales by $11.5 million and diluted EPS by $0.05 per share. The extra week is not included in the comparable store sales calculation for the quarter. Our net sales for the fourth quarter increased 8.3% to $177.2 million, compared to $163.6 million for the fourth quarter of 2005. Our same store sales declined 0.9% for the quarter. Gross margins for the fourth quarter of 2006 decreased 0.5% to 28.1%, compared to 28.6% in the same period last year.

This decrease resulted from a 0.3% increase in our merchandise margin, offset by a 0.8% increase in our buying, distribution and occupancy cost. The increase in the buying, distribution and occupancy costs were primarily associated with the opening of our new distribution center during the fourth quarter of this year. SG&A expense, as a percentage of sales, decreased to 23.6% for the fourth quarter, compared to 25.6% in the same period last year. The decrease resulted primarily from lower store closing costs, lower bonus and equity compensation costs, and lower healthcare costs. Preopening costs in the fourth quarter were $34,000 compared with $49,000 in Q4 last year. The portion of store closing costs included in SG&A in Q4 were $135,000, compared with incurring $821,000 in store closing costs in Q4 last year. Last year in the fourth quarter we took a charge for stores that were closed in 2006. While we expect to close three stores in 2007, it was not necessary to record a charge in the fourth quarter in anticipation of those closings. However, the closing costs incurred in Q4 were for the store that closed during the quarter and an impairment charge for an underperforming store.

Stock-based compensation in Q4 decreased to $311,000 from $428,000 in the fourth quarter of last year. Operating income for the fourth quarter increased by 62.5% to $7.9 million from $4.9 million in the same period last year. Our operating margin increased to 4.5% in the fourth quarter from 3.0% in the fourth quarter last year. This operating margin for Q4 this year was the highest fourth quarter operating margin in the Company's history. The effective income tax rate for the fourth quarter of 2006 decreased to 37.9% from 38.3% in the fourth quarter of 2005. For the full year, net sales increased 4.0% to $681.7 million compared to $655.6 million in fiscal 2005. Same store sales for the comparable 52-week period ended January 27, 2007, increased 1.5%. Gross margin for fiscal 2006 increased 0.3% to 29.2% compared to 28.9% last year. The merchandise margin increased 0.5% and buying, distribution and occupancy costs, as a percent of sales, increased 0.2% compared with last year.

SG&A, as a percentage of sales, decreased 0.5% to 23.7% from 24.2% last year. The reduction, as a percent of sales, was due to lower store closing costs and impairment costs, lower healthcare cost, lower bonus expense and a leveraging effect of the extra week of sales in fiscal 2006. Higher equity compensation costs partially offset those decreases. Preopening expenses for fiscal 2006 were $494,000 compared to $753,000 last year. Store closing costs included in SG&A in fiscal 2006 were $621,000, compared with store closing costs of $1.5 million for fiscal 2005. Stock-based compensation costs for this year were $1.6 million, or 0.2% of sales, compared with $615,000 or 0.1% last year. Operating income for fiscal 2006 increased by 22% to $37.6 million from $30.8 million last year. Our operating margin increased 0.8% to 5.5% this year from 4.7% in fiscal 2005. The effective income tax rate for the year was 38.6% compared to 38.4% in fiscal 2005. Net income for fiscal 2006 increased 26.5% to $23.8 million, compared to net income of $18.8 million last year.

Earnings per diluted share for this year increased 23.6% to $1.73, from $1.40 per diluted share last year. This year's per share earnings of $1.73 is the highest annual EPS in the Company's history. Depreciation expense for the fourth quarter was $3.8 million and for the full year it was $14.5 million. Capital expenditures for the year were $25 million, detailed as follows -- new stores were $5.8 million; the remodeling and relocation of stores cost $1.9 million; software and information technology cost $1.6 million; the new distribution center was $13.1 million; all other additions were $2.6 million. We also received $953,000 in cash lease incentives this year. During the fourth quarter the board of directors authorized a $50 million share repurchase program. However, we did not repurchase any shares during Q4.

I would now like to provide some guidance for fiscal 2007. Earnings per diluted share in the first quarter of fiscal 2007 are expected to range between $0.55 and $0.59. This assumes that total sales increase of between 4% to 6% and a comparable store sales increase of 1% to 3%. Included in our earnings guidance for Q1 are additional distribution costs and preopening costs. Even though we have moved into the new distribution center and are processing exclusively out of the new facility, we are still in a conversion mode. Currently, we are completing the installation of equipment and racking. And in addition are tuning the conveyors, the sortation equipment and computer systems. Included in our Q1 earnings guidance is an increase of approximately $800,000, or $0.04 per diluted share, in distribution costs for additional labor during this conversion and for higher fixed costs in the new DC.

While we expect to incur slightly higher fixed costs throughout the year, the conversion cost should be limited to Q1. Due to the acceleration of our growth in 2007 we will incur additional preopening costs. Last year we didn't open any stores in Q1, but expect to open seven or eight stores this year. Preopening costs are expected to be about $400,000 or $0.02 per share in Q1 this year, versus no preopening costs in Q1 last year. For the full year of fiscal 2007 earnings per diluted share expected to range from $1.90 to $2 per share. This represents a 10% to 16% increase in EPS over the $1.73 earned last year. Due to the acceleration of store openings in fiscal 2007, we expect preopening costs to increase to $1.2 million from the $494,000 for the full year incurred in fiscal 2006. One additional point on 2007 guidance. Due to the 53 week period in fiscal 2006, the fiscal 2007 quarterly calendar ends one week later than it did in 2006. While a shift effects every quarter during the year, it's most apparent in Q2 and Q3. Let me explain.

Last year our second quarter ended on July 29th and the very next week, the first week of our Q3, our back to school sales accelerated partly due to nine states having their tax-free weekends in that first week of August. Due to the calendar shift in 2007, our second quarter will end on August 4th, thereby pulling those sales for back to school and the Friday and Saturday of tax-free days into the second quarter this year. We expect this calendar shift will shift $13 to $14 million in sales reported in Q3 last year into Q2 this year. Capital expenditures for the full year are expected to range from $21 to $22 million. Of this amount, we expect to incur about $4.6 million in equipment for the new distribution center and approximately $2 million for furniture and fixtures for the corporate headquarters. Depreciation is expected to be about $16 million in fiscal 2007. My last comment is to note that despite spending $13 million on new distribution center and opening 14 stores in fiscal 2006, we had $11.5 million in free cash flow and ended the year with about $35 million in cash and no debt. In 2007, once again we expect to be able to fund our accelerated store growth and our other infrastructure initiatives and still have free cash flow. This concludes our financial review for the fourth quarter. I will now open up the call for questions.

[OPERATOR INSTRUCTIONS]. We will take our first question from Jeff Stein with KeyBanc.

Good morning, guys. A question regarding your expansion plan for the new year. Can you tell us roughly what your anticipated average store size is going to be this year given that it seems your focus -- focusing more on productivity than just your typical cookie cutter 11,000 square foot store?

Yes, Jeff, the stores that we have identified so far, which have -- which are 23 out of 25 that we anticipate opening, are averaging right around 10,000 square feet. What [drug] the average down slightly last year, besides opening a couple of smaller stores in fill-in markets, we also opened a couple of outlet stores in the Texas market area at around 6,000 or 6,500 square feet and that -- that brought the average down to about 8900 square feet.

Got it. Got it. Mark, wondering if you could possibly quantify the increased fixed costs that we are going to see in the P&L from operating the expanded -- your new distribution center.

It probably is going to look to be about $0.01 a share in the first and second quarter. Well, and the fourth quarter, but keep in mind that we be wrapping around those conversion costs that we incurred in the fourth quarter, so you will see those costs drop in the fourth quarter because of the fourth quarter conversion costs in '06.

So for the first three quarters, then, we should see kind of the incremental build of fixed cost, correct?

I'm sorry, say that again, Jeff.

Well, in other words, you're operating the DC this year. You weren't operating it last year. You have incremental costs that are imbedded in your SG&A. How much is that on an annual run rate basis?

$0.04 to $0.05.

For the full year.

For the full year.

Okay. And wondering if you guys have taken a look at the model now and said, okay, we think that we could be a 7% or 8% or 9% operating margin Company. What are your thoughts in terms of where you can take the model?

Well, I mean, you hit the nail on the head, Jeff. We put a lot of these pieces of -- a lot of these new systems enhancements in place, particularly the ProfitLogic solution, to significantly enhance the gross profit margin of this Company. I think that's the most significant or the area where we can generate the most significant gain over our current operating margin -- model and that's in the area of gross profit margin enhancements. So that's where a lot of our focus lies, not only in the systems enhancements we put in place in 2006, but the -- the enhancements to the systems that we are going to put in place in future years that are hanging off of the projects that we initiated in 2006. And let me give you an example.

With the implementation of the WAN, we expect over the next couple of years to build an inventory locator system that will allow each store to identify in any other store in the chain where certain inventory exist and we will build a system on how to get that inventory from one store to another very quickly and efficiently. That, I think, is going to help with sizes at store level and, consequently, result in sales and increased gross profit margin. And that's just one example. So we are looking at a lot of enhancements that we can make into the future building off of the projects that we initiated in 2006 for that gross profit margin enhancement. We do think, and I've stated this before, that over the long-term, even though our operating margins are at 5.5% this past year, that we can eventually get up to between 7% and 8% in terms of operating margin with this Company.

And you think most of that leverage will come on the gross margin line?

I do. If you take a look at our cost structure, it's fairly low. Now, that doesn't mean that we can't leverage cost in the future with increases in top-line sales. But I don't expect, certainly not in 2007, with the addition of the new corporate headquarters and the additional capacity that we've got in both the distribution center and the corporate headquarters, initially, but when you look at the cost structure of the Company I think we will gain leverage through the top-line sales growth which will be generated by adding new stores. I think the -- and again, the way we are operating the Company, the way we are putting systems into place, is we are expecting increases in gross profit margin and, even further beyond that, we are expecting increases in cash flow due to inventory turnover increases. So we are really focused on the merchandise productivity to drive not only future operating earnings but to drive future cash flow as well.

Very good. Thanks, Mark.

Jeff, let me clarify one thing for you. When I said it was $0.04 to $0.05 in fixed cost, that did not include any of the conversion costs that I've spoke about and the $800,000 in the first quarter of this year, that was just purely the fixed cost from running the -- the difference in running the two DCs?

That's what I expected, right.

And we will take our next question from Chris Svezia with Susquehanna Financial Group.

Good afternoon, gentlemen, and congratulations on a very successful year. I guess, Cliff, I'll start with you, I have a couple of product related questions. I guess given the athletic product category and kind of the swings that we saw in '06, can you maybe give your thoughts as you look to '07? Are you looking to possibly take some of the open to buy from athletic, given what's going on with the urban consumer and just some of the softness you see in athletic, are you shifting into other categories, you talked about canvas and skate, and is low profile still as strong as it had been in 2006 and do you expect that to continue?

Chris, there's no question that we have shifted, we have already shifted dollars out of our athletic category into the non-athletic category for the exact categories that you just described, vulcanized canvas, low profile and women's, the flat business is very, very strong. We are seeing the molded scandalized business gain a momentum with one or two of our vendors. So, yes, we will shift some of the open to buy, we will continue to shift open to buy out of that athletic into those categories. From a low profile standpoint, we are still seeing double-digit gains, as I sit here, and low profile product, especially in the Hispanic markets. So we see that continuing at least through back to school. We have not pre-lined as of yet the third quarter product, so I don't want to go past that, but we do see a low profile continuing as double-digit.

Are the margins, when you look at that -- at that category, I know vulcanized canvas is pretty high margin catagory for you guys, is that incrementally a higher margin product category than some of that athletic product its replacing?

We will drop higher margin out of the vulcanized canvas product than we did traditionally out of athletic. But the concern you have there is you don't want to trade athletic business strictly to vulcanized canvas because you are lower your average price point. I personally think that what's going to happen is that you will see the sandal business, some of the sandal business, shift into flats, into vulcanized canvas. You will see the athletic business continue to convert into low profile.

Okay, that's helpful. And then just on the Nike program, the Reak product was very successful for you guys in 2006 and I'm sure you guys always wanted to get as much as you possibly could from that product. As you look to 2007 and the programs that you see, react and I think the Zoom I think is the next reiteration of the product, I guess can you talk about your opportunities there and what that could possibly mean for you guys?

Well, the new generation of React's product has just been delivered and it's working very well and Nike is slowly but surely increasing our allocations on that, which will help. As the increased allocations come at back to school that will obviously help our business with that React product. The Zoom product has been delivered and selling well and the name slips my mind now, but the I-pod friendly product is also being delivered to our trade channel this spring. So Nike continues up to upgrade us with new technology and improved technology and improved allocation. So we expect that to continue to increase.

Okay, that's good to hear. Mark, a question for you. As -- when you talk about starting to expand unit growth when you move beyond 2007 and you talk about 12% to 15%, I guess obviously you are talking about roughly 35 to 40 new stores as you look beyond. How -- I mean, can you talk about have you started at all signing new leases on those stores or is it too early or maybe just talk about the unit growth opportunity both in existing and new markets.

We haven't started to sign leases on 2008 and 2009. Obviously we are looking at sites as we speak for 2008 and 2009. And again it goes more to our strategy of if we are going to -- when we open some of the larger markets as we expand out kind of concentrically from Evansville, we are looking further down the road than just the sites that are initially on the drawing board. In other words, when we look at a new market, a new larger market, we are saying, do we have good visibility on six to eight stores, for example, rather than just one or two stores in a larger market. If we've got good visibility on a good grouping of real estate then we are going to open those little bit larger markets. If we don't have good visibility, then we are going to wait until we see that visibility. So we are looking further out than we ever have in the past, but we haven't signed any leases for 2008 or 2009 yet.

Okay, fair enough. The last question I have is just on any thoughts that you might have with regard to Foot Locker's concept for quarters and any response you might be hearing from some of your vendors. If you can comment on that.

Certainly Foot Locker is a competitor to be reckoned with. It's one of those risk factors that you include in all your documents where there's many competitors in the retail space and many of those competitors have larger financial resources than us. Certainly Foot Locker could be included in that category. We've been in the family footwear side of the retail business in the mid-tier price points for a long time. For a long time now we've geared our systems, we've geared our training programs, we've geared our real estate, we've geared our management towards operating in an open stock branded and private label footwear with both athletic product and brown shoe product and we've done so very profitably over a number of years. There's been competitors come in this marketplace. There's been competitors go out of this marketplace.

It's -- every three or four years there's a new competitive name that pops up that people get worried about and right now it's Footquarters. We will see. I think we can operate competitively against anybody in that space given our cost structure and given the size of our stores and the nature in which we do business, which is a little bit different than -- I shouldn't say that -- it's a lot different than most anybody else in this mid-tier retail space. So I think we can compete against most people.

I will let someone else get in the queue and I wish you guys the best of luck in '07.

Thanks.

We will now move to Harry Ikenson with Soleil Securities.

Thank you, good afternoon, congratulations on achieving all those accomplishments during the year.

Thanks, Harry.

I would like to start by asking Cliff a question. And that's could you go into a little bit detail, give us some more examples, because you have talked about the zone pricing before, but this is the first time you started talking a little bit more about buying and advertising by market. How much would you do incremental, I guessing maybe 20%, and give us a little bit more of an example of some things that you might be doing or planning to do on that vein. And then I have a follow-up question on the DC afterwards.

Harry, I look at it more instead of a 20% incremental sells growth, obviously we expect to get a sells growth or we wouldn't be implementing the program. I look at it more as a margin savings. Today if you run an advertising piece throughout our Company from Chicago to Houston, you are going to, regardless of the customer profile, you are going to have product in stores that the stores don't need. If you advertise a suburban piece in a Hispanic market or in an African American market, you are going to have product in those stores that the customers don't want and vice versa. So if we can tailor make, as we tailor make these pieces for the customer in a specific market, that means that we can buy shoes and buy more depth of product for those advertising pieces directly to that customer. So we have eight different versions that we do with every insert that we create and that allows us to take product to a specific consumer in a specific market. Does that make sense? That should. And then in the long run not only will it help us improve our sales but will help us as one of the initiatives that we have put in place to help us improve our margin.

It does, but I guess maybe I didn't ask my question only makes it less clear on it. I mean, some other stores, not in the footwear, will have, let's say, 80% of similar merchandise and then only take 20% specifically tailor made for a customer or a market. So I guess what I was asking is how much of the merchandise are you going to try to tailor specifically or are you saying you are going to do almost all of it tailored?

Oh, no, Harry, it's -- you're not far a way from it. It's the last 25% of what we buy. But this is the 25% of the purchase that makes the store special to that consumer.

Okay. That's what I thought. Okay. But on that 25%, if done correctly, it could be meaningful then on the margin side and sales side?

Absolutely. I didn't understand that.

Okay. All right. Thank you. And then second question. On the DC, Kerry, I don't think we've talked about this before. You have the new DC in now. Are you going to need any additions or further things down the road a couple years later or are you really at a capacity now that you are going to just build into as far as over the years reaching that 700 goal of stores at roll-out? Because it would seem to me that if that's the case then if there is a lot of leverage going out further on because you would be operating in a much lower capacity.

Harry, what we decided to do with this distribution center is not build the ultimate amount of distribution capacity we are going to need to be a 700 store chain. What we designed this to be is about 450 stores, so we can add considerable amount of stores from where we stand today. But we will look at having to do another 150 to 200,000 square foot addition to this building. Our thoughts are at that point in time, with anywhere from 550 to 600,000 square feet of distribution space, we should be able to service the entire United States.

Okay. That's what I was getting at. I thought that might be the case. And then finally, I think in an earlier question somebody asked where the costs were going to go. Are the -- is the inc -- somebody said the costs on the SG&A side or is it in the gross margin line?

It's in the gross margin line. We included -- .

That's what I thought. Okay. So then, I'm sorry, so it's included in buy [INAUDIBLE] distribution and gross margin?

Which is included in cost of sales.

Right, cost of sales, right. And then - so when you said -- I think you said $0.01 a quarter incrementally but by the fourth quarter that goes away? Is it just the first three quarters, because at first I thought you misspoke and said the fourth quarter, also.

Well, we will have the enhanced fixed cost because of this -- this new DC has higher fixed cost. But however, when we start to wrap around and we hit fourth quarter next year, we incurred $900,000 worth of conversion cost in the fourth quarter of '06 and we won't incur that in the fourth quarter of '07. So we will start to see some leverage of our distribution cost in the fourth quarter when you start comparing it back against the fourth quarter of '06.

Harry, what makes this -- what makes this discussion a little bit more complicated than superficially saying it's $0.01 or $0.04 per share for a year, is that if we would have operated a certain amount of stores, say 250 stores, in our old distribution center with no growth and we would have operated 250 stores with no growth plans in our new distribution center, those costs would be very easily attained. However, we've operated the old distribution center with a continued growth rate, but albeit at a slower rate than we are going to operate the new distribution center. And the new distribution center is going to be operated with different operating metrics than the old distribution center.

So it makes the comparable a little more complicated than just say the new DC is going to cost us $0.01 per quarter more than the old DC or -- you see what I'm saying? The growth rates and the fact that we are growing and the fact that we are growing into the expanded capacity in the new distribution center makes that a little bit more difficult of a conversation. Just a little bit more complicated way to look at the cost of distribution as opposed to on an absolute basis, if you look at it more on a percent of sales basis, I think it makes a little bit more sense.

Okay. Thank you very much.

We will take our next question from RJ Hottovy with Next Generation Equity Research.

Thanks and congratulations on all the hard work this year.

Thank you.

The first question I have was just in terms of the new store productivity. Obviously it's great to see the new stores running at 90% of the sales productivity of mature stores. Is that a trend that you guys are foreseeing here in '07 and even into the later years?

I certainly hope it's a trend that continues into '07. Obviously we haven't opened any new stores for 2007 yet. So what I'm giving you is our current trend rate for stores that we just recent -- the 2006 openings. So we certainly expect -- well, we expect those stores to comp up still fairly nicely in the first through three years, first through four years of their maturity curve. But we do expect to see a much more productive box as we go forward in opening these new stores. Particularly as we fill-in these marketplaces that are under penetrated and as we continue to focus on the one store smaller marketplaces that we're focused on.

Okay. Thank you. That was helpful. My second question has to do with the calendar shift and maybe this is one for Kerry here. A competitor of yours said last week that actually the calendar shift this year actually helps that first quarter more than it does the second quarter. And that being that you pick up a number of high selling spring days in the first quarter this year. Just wanted to see if you had any comments in terms of the calendar shift and its impact on the first quarter results.

Well, I can just speak to our business. What you are looking at is what's dropping out of the calendar is the first week of May, which while it's a reasonable sales period, we are picking up in second quarter the first week of August and that has a much more significant benefit to us, especially since that first week now moves all the tax-free days back into Q2. So that's where -- the way our business runs and we do a great job of back to school. That's why you are seeing the most significant influence of this calendar shift is coming out of this shift between Q2 and Q3.

And then my last question has to do with just the share repurchase program and the impact it has on the guidance for the year. Just maybe if you can give us a little more clarity as to what you've modeled in to your EPS assumptions in terms of the share count for next year.

We have not modeled in any share repurchases into our EPS guidance.

So it's essentially just a flat share count from this year.

There's typically a natural growth from the issuance of restricted stock to stock options and also if the stock price rises that creates a rising diluted share count. So that's the only thing we've built in our guidance, the typical increase.

Okay. Thank you and good luck, guys, as we head into spring here.

We will move next to Jill Caruthers with Johnson Rice.

Good afternoon. Just two quick questions. If you could talk about your boot inventory. I know you said boot sales were down November, December, given the warmer weather, picked back up in January. Maybe if you could talk about how your boot inventory ended at the end of the quarter as well as you going into February where had you cooler weather, was it an advantage or disadvantage with having more or less boots in the store?

Well, as we, obviously as we moved with the cold weather it was an advantage to have more boot inventory in the store. The biggest issue we had as we moved out of the fourth quarter into the first quarter was weather boots, because we really didn't get as much weather as we had expected to get. I'm talking about true utilitarian weather boots. Our boot inventory today, excluding weather boots which we normally carry over from year to year, was down double-digits. So we are in terrific shape in the boot inventory.

Okay. And then maybe just kind of talk about merchandise margin drivers. I know there's multiple factors that play into that, but maybe kind of if you could break apart some of the factors weather, leaner inventory, higher markup, product mix or the contribution from the markdown software, kind of how you see those factors playing into '07 and the merchandise margins there? Thank you.

That's a big question and I'm going to try to break it down. Obviously, we expect to see improvement throughout the year with ProfitLogic. As Mark mentioned in his prepared remarks, zone pricing is going to play a factor in that plus the early site that we see to that ProfitLogic brings us to seasonal merchandise that is not going to hit the curve that it should hit later in the season, so it has us take markdowns earlier in the cycle which gives us a better margin at the end of the cycle. We see ProfitLogic as a big advantage. The marketing effort that I detailed to Harry and in my prepared remarks, I see that as a benefit, especially in our urban and Hispanic stores. The fact that there has been a shift, in my opinion, from flat or the sandal category into what I called molded footwear, which a couple of our vendors are into and we are selling through very well. Plus vulcanized footwear, I think that will help us out margin category with margin. But that plus the fact that we are going to operate this year on much leaner inventories throughout all our categories, not just in athletic, will help us speed turns and will also add to margin.

Okay. And then maybe just last question, if you could talk about the performance of the smaller stores that you've opened in kind of the one store market versus the performance of the new stores that are kind of in the filler, the larger markets, kind of comparing those two stores, the performance, whether you saw -- kind of how the sell volume tracked, as well as increased productivity on lower cost or what not.

Well, Jill, I am not going to get into specific individual stores, but it really does depend upon where we filled in those stores. For example, at the fill-in stores in Houston have performed very nicely because we are getting a decent number of stores down there and we can advertise, we can afford to advertise for the first time and those stores are ramping up very nicely. Some of the smaller stores that we've opened in the outlet areas have come out of the box very nicely. So I'm not sure that there's any definitive trend if you want to break it down between one store markets versus fill-in markets versus outlet stores versus strip center stores. There really is no discernible, really definitive trend or I should say a big gap between all those different kinds of formats.

Okay. Thanks for the insight.

We will take our next question from Angelique Dab with Nollenberger Capital Partners. Your line is open, Ms Dab.

Good afternoon, I just have a quick question, most of my questions have been answered. Could you comment on inventories per store and how you feel about them?

The inventories, we are planning inventories per store on an average basis, average inventory down in the mid single-digit range and we are going to end the year down low single-digits.

Angelique, I think that at the end of the fiscal year our inventories on a per store basis were up about 3.7%. But again that increase was attributable to in transit inventory. So in other words, it's not actual inventory within that store, it's total inventory divided by the number of stores, that number was up 3.7%. Again, we brought in more goods in January to offset a shift in the Chinese New Year, offset a slightly earlier Easter and some other issues with respect to how we needed to receive goods in our new distribution center. The primary, well not the primary, the whole increase in our per store inventories had to do with goods that were in transit and not in our distribution center or in our stores yet.

So you feel that the mix is right in terms of your inventory?

We feel pretty good about the mix. As Cliff mentioned, coming out of the winter season, although it didn't look like it going into January and February with respect to the boot inventories, we came out of the winter season pretty clean in boots, in fact cleaner than last year,I think, on a per store basis. So we didn't make a whole lot of money on those boots in the fourth quarter but our margins for the fourth quarter in boots were not significantly lower than our margins in the fourth quarter of last year, which was a pretty good boot quarter. So coming out of February certainly we feel really good about the boot inventories. As Cliff mentioned, if you want to say there's a glut, it's not really a glut in our inventories, but it's with respect to weather boots and as he said, functional weather boots or the utilitarian weather boots, which are not a fashion item and don't go out of style from one year to the next, so we feel 200% better about the boot inventories coming out of February than we did going into January.

That's great to hear. Thank you and congratulations.

Thanks.

Next we will go to Steven Martin with Slater Capital.

Hi, guys, most of my questions have been answered. The range on earnings for this year of $1.90 to $2, when you look at the variables that go into that what would you say is the most significant difference between the low end of that and the high-end of that?

Sales. Sales and some of the margin assumptions. Period.

Okay. And if you -- within that guidance you said that you've got an additional $0.04 of costs in the first quarter and then throughout the year you've got preopening expenses and that, that's another $0.02 or $0.03.

Yes. It's about $700,000, a little -- $0.025.

I think what Kerry was trying to describe is some of the -- some of the noise behind the numbers, if you will, looking at distribution center conversion. We are still going to incur higher costs in the first quarter of 2006 versus what we incurred in 2005 to the tune of about 8 or 900, I think $800,000. A good portion of that $800,000 is a result of converting from the old distribution center to the new distribution center. The fact of the matter is its taking us a slight amount of time longer to convert from the old to the new because of some software issues that we had with vendor suppliers or equipment suppliers. But right now we've got that distribution center up and running to capacity that we are happy with and it's cost us just a little bit more money in the fourth quarter and we are expecting it to cost just a little bit more money in that conversion process in the first quarter.

When you look at the overall project beginning in February of 2006 and being operational at the capacity that we need and at the end of February of 2007, I am extremely happy with the performance of our information systems group and our DC management group in accomplishing not only a new building but totally new equipment, totally new material handling process and totally new software going into that whole distribution process. So we are extremely pleased with the performance of that distribution center at this point in time.

Got you Thank you very much.

Next we will move to John Curti with Principal Global Investors.

Good afternoon. I was wondering if you could flush out the rest of your capital spending for 2007 in terms of new stores, remodels, IT and other.

I don't have that with me right now. We don't typically give that out on a forward looking projection.

Okay.

We typically only give out the amount we are going to put out. Now having said that --

Well, would the new store be a little -- ?

Expect new store opening cost to be about $7 to $8 million.

For fixed assets?

For fixed assets.

How about in terms of the store opening schedule? You said seven to eight in the first quarter. Can you give us kind of a rough approximation on the remaining stores?

It should open fairly evenly through the first three quarters. We typically do not like to open stores in the fourth quarter. We will only do it if it's at the very beginning. But right now I would just say the first three quarters.

And the three store closings will occur when?

We are looking at Q1, Q3 and Q4. One each in those quarters.

Now you mentioned that the new store productivity for the stores opened in '06 was 90% of the system-wide average. That's based on an 8900 square foot store. So if you do a 10,000 square foot store, all things being equal, wouldn't it roughly go down by 10 and 11%.

Talking about sales per square foot productivity, sales per square foot productivity for the stores open in 2006 were trending at 90% of the chain average sales per square foot.

Okay. All rightie. That's everything. Thank you very much, gentlemen.

Our next question comes from Raj Shastri with Thomas Weisel.

Congratulations, guys, on the nice set of numbers. One quick question, how you plan to increase -- what was your advertising spend for this quarter and how you plan to increase or decrease your advertising spending going into '07?

Raj, we don't give out advertising spend except to discuss it on an annualized basis. We say that typically we want to spend around 5% of our sales in advertising. From a competitive situation we don't want to give that out on a forward-looking or on a quarter by quarter basis.

Okay, I understand. So was it less than five -- was it more than 5% in '06 and you plan to do it 5% in '07?

We will spend about the same amount of, same percent of sales in '07 as we spent in '06, that's the current plan.

Okay. Thank you, guys.

That concludes the question and answer session today. At this time I would like to turn the call back over to Mr. Lemond for any closing remarks.

Well, I would just like to say that we've talked about a number of items today. We've disclosed to you a number of the initiatives that we set out for 2006 and how they impact 2007 and I just want to conclude by saying we are excited about the prospects for Shoe Carnival on a long-term basis as we ramp up our store growth in 2007, 2008 and 2009. Thank you for joining us.

This concludes today's audio conference. Thank you for your participation, and have a wonderful day.