Shoe Carnival Inc (SCVL) 2007 Q1 法說會逐字稿

Good afternoon and welcome to Shoe Carnival's first quarter earnings conference call. Today's call is being recorded and 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 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'sdate. 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 would now like to turn the conference over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival, for opening comments. Mr Lemond, please go ahead, sir.

Welcome to Shoe Carnival's 2007 first quarter earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer, and Cliff Sifford, General Merchandise Manager . Most retailers in the footwear sector experienced slower sales in the spring period and we have to include ourselves in that group, as both comp store sales and total sales were below our initial expectations. Net sales for the first quarter decreased 1.7% to $165.7 million from sales of $168.5 million in the same period last year. Comp store sales for the quarter declined 3.7%. Certainly cooler spring weather was not the only issue in the quarter, but about half of our comp store loss for the quarter came from the one week leading into Easter Sunday, when a series of storms and cold weather rolled through the middle of the country. Consequently, net earnings fell below our original expectations and slightly below last year's first quarter.

Net earnings for the quarter fell by $73,000 to $7.3 million or $0.53 per diluted share from net earnings of $7.4 million or $0.54 per diluted share in the first quarter of 2006. While we are disappointed with our sales results for the first quarter of 2007, the effect on both first quarter earnings and, importantly, future operations could have been much worse if not for our ability to manage our way through a tough period in terms of gross margins, expense control, and inventory control. During the first quarter of 2007, we completed the conversion to our new distribution center. In doing so, we incurred approximately $900,000 or about $0.04 per share in distribution center costs in excess of last year's first quarter. Offsetting this added cost was the savings of approximately $0.05 per share realized from state tax incentives attributal to opening this new DC. Due in large part to the start-up costs associated with the distribution center and the deleveraging effect of the comp store sales loss, total buying, distribution, and occupancy costs rose by 1.5% of sales in the first quarter of 2007.

However, our merchants were able to improve the merchandise margin by about 1% of sales despite the lackluster environment. Consequently, our total gross margin only declined by 0.5% of sales to 30% in the first quarter of 2007 from 30.5% in the first quarter of 2006. During the first quarter of 2007, we opened seven new stores and incurred approximately $290,000 in store opening costs. In the first quarter of 2006, we did not open any stores and incurred no store opening costs. Despite this increase in new store opening costs, we were able to decrease net selling, general and administrative expenses by over $300,000. As we look forward, we intend to plan our business slightly more conservative for the second quarter of 2007. We are building inventory plans around comparable store sales of between negative 1% to positive 1%.

However, relying upon past experience, we do expect that there could be some pent up footwear demand in our consumer segment as we head into the back-to-school period and the fall season. We've seen this kind of trend in prior years. In fact, from 1996 to 2006, we have experienced 11 straight years of positive third quarter comp store sales averaging around 2.9%. Obviously a key component of future profitability is the management of inventories through a slow sales period. Our buying staff did a good job of mitigating the effect of a first quarter decline in cost of sales of over $7 million relative to our initial merchandise plan. Total inventories on a per store basis were almost 1% lower than last year at the end of the first quarter. And despite the negative effect of cooler spring weather in the first quarter, our sandal inventories were also down on a per store basis. We have adjusted our markdown cadence accordingly, focusing on styles that have not sold well so far this season in any kind of weather.

We remain on track with our growth plans as well as infrastructure and systems improvements. We opened seven new stores in the first quarter and expect to open 18 more stores the remainder of the fiscal year, concentrated in the second and third quarters. Our new distribution center is now fully operational and we have fully vacated our old DC. Additionally, we will begin moving into our new corporate headquarters building tomorrow. We are looking forward to having these inherent disruptions of these two key infrastructure changes behind us, as we seek to improve our profitability over the remainder of 2007. What I'd like to do now is turn it over to Cliff Sifford for some comments about the merchandising, Kerry Jackson will follow with some details on the financials, and subsequently we'll open it up for

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 nonathletic, we finished the quarter up low single-digits on a comparable store basis. We continue to be happy with the performance of our Junior department as it produced a high single-digit comparable store increase. Flats, vulcanized canvas and low profile all performed well. In addition to Junior footwear, we have seen good performances out of most of our casual categories. We were not happy with the performance of our opened up footwear for the quarter, as Easter sales in this category did not materialize, which resulted in double-digit comparable store loss. Women's nonathletic percent of sales increased by 170 basis points for the quarter. This improvement keeps us well on our way of achieving a key initiative of generating at least 28% to 30% of our overall business out of the women's nonathletic product.

The men's nonathletic, we finished the quarter down mid single-digit on a comparable store basis. We experienced losses in dress shoes, urban boots, and sandals. Key product category for the quarter, each producing double-digit increases, were comfort dress, boat shoes, and low profile. In addition, we have definitely seen an improvement in our men's sandal business as we move to the latter part of April and into May. We expect this category to carry right into back-to-school as it did last year. In children's, we finished the quarter down mid single-digits on a comparable store basis. Our largest loss came out of the athletic department, as we saw declines in girls' and boys' fashion classics as well as boys' basketball. We saw a very strong growth in girls' low profile, boys' skate and fashion athletic. Looking towards back-to-school, the low profile business in children's continues to grow and we expect increases in this area to at least last through third quarter.

In addition to this, we are expecting continued increases out of our skate and fashion athletic. In adult athletics, we experienced mid single-digit declines on a comparable basis. Our men's athletic finished the quarter down low single-digits and women's athletic finished down mid singles. We continue to see decline in urban classic product. This decline in classic product is much greater in women's athletic than in men's. In addition to classic product, we also experienced losses out of our men's basketball category, as this classification continues to struggle throughout the market. Skate for both men's and women's have performed extremely well. In addition to performance running, fashion athletic, and Chuck Taylors, all produced healthy increases for the quarter. For back-to-school, we see each of these categories continuing as drivers. We are especially excited about skate for both kids and adults due to great product and an exciting introduction of a new brand.

As Mark mentioned in his remarks, our sandal inventory on a per door basis was down at quarter end. This in spite of the fact that our sandal sales were down double-digit for the quarter. Our merchants have done a good job of controlling our seasonal inventory. As we have stated many times, one of our key initiatives is inventory control and through this control keeping fresh product for our customers. Last year, we implemented Oracle's markdown optimization tool to assist our buyers and maximizing margin, while clearing through product early in the season. I believe this tool was instrumental in achieving that result. More importantly, by keeping our inventories clean, we are able to deliver some key product for second quarter to our stores earlier, which will allow us to get early reads on the all important back-to-school time period. Thank you very much for listening and now I'd like to turn the call over to Kerry.

Thank you, Cliff. Our net sales for the first quarter decreased 1.7% to $165.7 million compared to $168.5 million for the first quarter of 2006. Our same store sales declined 3.7% for the first quarter. Gross margins for the first quarter of 2007 decreased to 30.0% compared to 30.5% in the same period last year. The management team did a commendable job controlling expenses during the quarter. Despite operating 15 more stores during the first quarter this year compared with the first quarter last year, and incurring a significant increase in preopening expenses, selling, general, and administrative expenses for the first quarter decreased $309,000 to $39.3 million from $39.6 million in the first quarter 2006. However, as a percentage of sales, selling, general, and administrative expenses for the first quarter increased to 23.7% from 23.5% in the first quarter of 2006. This increase is attributable to a 0.2% increase in store preopening costs for the quarter. The effective income tax rate for the first quarter of 2007 decreased to 32.0% from 38.3% in the first quarter of 2006. The reduction in the effective income tax rate was due to a reduction in state income taxes from state incentives related to the investment in the new distribution center. The reduction in income tax expense related to the these tax incentives equates to an increase of approximately $0.05 in earnings per diluted share for the quarter. While we expect to continue to receive additional state tax incentives as we grow and add additional employees over the next 10 years, any additional state incentives received are not expected to be material to any future quarter or a year. Our operating margin for the first quarter was 6.3%. Net income decreased $73,000 or 1% to $7.3 million the first quarter compared to $7.4 million last year. Diluted earnings per share for the quarter declined $0.01 from last year to $0.53 per share. Depreciation expense for the first quarter was $3.9 million. Capital expenditures for the first quarter were $6.0 million with the major components detailed as follows -- we spent $3.7 million on the new distribution center; 2007 new stores were $1.5 million; and the remodeling and relocation of stores cost $333,000. During the fourth quarter of fiscal 2006, the board of directors authorized a $50 million share repurchase program. We repurchased 10,000 shares of our common stock during the first quarter as part of this repurchase program at a cost of $295,000. I would now like to provide some guidance for Q2. Earnings per diluted share in the second quarter of 2007 are expected to range between $0.20 to $0.23. This assumes that total sales will increase between 13% and 15% and same store sales will range from a decrease of 1% to an increase of 1%. Due to the 53-week period in fiscal 2006, the second quarter this year will end on August 4th, which is one week later than Q2 ended last year. This one week shift in the calendar now pulls an important week of back-to-school into Q2 this year. Our total sales guidance takes this calendar shift into account. When we report total sales for Q2, it will be for the 13-week period ended August 4, 2007 compared to the 13-week period ended July 29, 2006. However, this calendar shift has no effect on our comparable store sales because we report comparable store sales on a comparable week basis. For example, our comparable store sales in Q2 will be for the 13-week period ended August 4, 2007, compared to the 13-week period ended August 5, 2006. Now, not all retailers report on the same basis, so our comparable store sales may not be comparable to other retailers on a quarterly basis. Also included in our earnings guidance for Q2 are higher preopening costs. We expect preopening costs to be approximately $350,000 in Q2 this year compared to $164,000 in Q2 last year. We plan to open seven stores in Q2 verses four stores in Q2 last year. This concludes our financial review for the first quarter. I'd like to open up the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from John Shanley from Susquehanna Financial Group. Please go ahead, sir.

Thank you very much and good afternoon, guys. Mark, can you take us through why you're now expecting basically flat comps and earnings contribution? I know Kerry gave us an explanation concerning the week that you're going to lose. But you would think that your momentum would build in the second quarter since your sales in the first quarter were somewhat below expectations. You'd think you'd get some of that business back. Is that not the case?

Well, I think, John, there's a number of factors that need to be considered. A number of factors that we've considered. Number one is our inventories are absolutely not bloated as a result of the lackluster sales in the first quarter. We are not in a position where we have to start liquidating product at any cost. That's absolutely not the case. Our merchants have done a very good job controlling inventories. And we're -- in fact we've got open to buy in the second quarter and we plan on bringing in fresh goods. Having said that, I don't really see, other than warmer weather starting to spur sandal sales as they have, I don't see a tremendous catalyst from an economic standpoint in the marketplace today that leads me to believe that business is going to be significantly better.

Although, I will say that so far in the second quarter business has been much better or has trended much better than it did in the first quarter. But I just don't see the economic stimulus in our consumer segment in the second quarter of the year to place much -- place much faith in a tremendous comp store sales increase. However, like I said in my prepared remarks, we've seen this kind of trend before where we've seen a lackluster spring followed by a period of flattish kind of sales in the second quarter because of no economic stimulus. And we've come back in back-to-school because back-to-school is certainly a huge catalyst in our business and sales have trended much better. And like I said, we've seen a period of 11 straight years now where we've seen a positive comp store increase in the third quarter of each year, primarily due to back-to-school, which is our biggest piece of the year, our biggest part of the year.

Sure. Sure. Also, Mark, there was obviously a noticeable differentiation of performance of your major competitor Famous Footwear in the quarter. Cliff went through some of the product categories. One that really caught my attention was kids business basically being down in the quarter. Famous reported this morning that theirs was up 13%. Is it products specific that may have caused them to have a somewhat better performance in the quarter? Or was it just something else that was going on that inhibited Shoe Carnival's performance in the quarter in terms of both comps and overall sales volume?

Well, I'll let Cliff speak to the product. I'm going to call Joe Wood and try to get those reports and see what the reports tell me as the product differences and how he sell through his product. But I don't know, Cliff, you want to speak to any particular product issues that we're seeing?

the biggest issue we had in kids was out of our boys' athletic category where we took huge losses in the basketball business. I don't know how Joe does or how Famous Footwear does in boys' basketball in the past, but that's been a very important category to us and, as you know, that business has been down trending. That was the lions or the, not the lions share but the biggest loss we had during the quarter in kids. The other loss came directly out of Easter weekend. The weather moving in literally just -- our kids business was doing fairly well to two weeks leading into that week. And then as the weather moved in to the Midwest, the business just dried up. And John, you know that if you don't do kids brown business during the week of Easter, it just doesn't happen. I can't explain why. Maybe there's geographic reasons why his business was stronger during Easter time period than ours. But I can tell you, that's when our business stopped that week.

But you may have just answered it. It could be that they're a national chain, you're more of a regional player. And he may not have had as much of an impact on his west coast or Southeast stores that you guys may have had. Cliff, could you take us through a percentage breakdown in the quarter in terms of how your sales broke by major merchandise category on a percentage basis?

Sure, John. Our women's business averaged -- was just over 29% of the total, which was actually, I think I said it was up 170 basis points and that would have been correct. Our men's business was right at 14%. Kids in total was very close to 16% and athletic for adults was 37%. If you look at athletic as a total, we ran close to 48%, if you include kids athletic with the total.

Is the product margins in the woman's business continuing to expand?

It is. We had nice -- we had a margin increase for women and, more importantly, our average price has expanded there, which is something that we've really concentrated on.

Yes, that's great to hear. Got one last question for Kerry. Kerry, are you still guiding us to $1.90 to $2.00 for the fiscal '07 period?

John, we typically don't update our annual guidance mid-year. We would put it out at the beginning of the year to give people the impression of what we think for the year. But after that first guide for the year, we have typically only given one quarter at a time after that. We let the analysts run their models based on the information we're putting out. And now Q1 being actual and our guidance for Q2. So we're not updating it, but we're not disavowing it. We probably won't update that until end of third quarter.

Okay. Fair enough. Thanks a lot. I appreciate it.

And we'll take our next question from Jill Caruthers from Johnson Rice. Please go ahead.

Good afternoon. Possibly could you talk about is the first week of August shift into the second quarter, is it still expect to contribute about $13 million in sales?

Yes, it is.

Okay.

It should be around 12 to 13.

Jill, this is Mark. I will -- I will qualify that statement with we're, as of right now, we're not entirely sure of a couple of states backed our tax free dates yet. That may shift, it's convoluted, but that may shift some of those sales back into the August period from what's now the July period.

Okay.

Couple of states are thinking about having their tax-free dates later in the back-to-school period as opposed to when they had them last year. As those dates move around, that has an impact on, obviously, on sales for those particular states.

Okay. Any thoughts of changing your advertising play in the second quarter given back-to-school? You've got the week of August throwing into the second quarter. Anything we should look at differently there on the spending?

We plan advertising on a weekly basis. As the sales period moves from one quarter to another, the advertising effort will move from one quarter to the other, as well. I don't know if that answers your question. But we don't -- we don't plan advertising based on a quarterly basis. It's all planned on a basis of weekly.

Okay. And so with the first week of August now into the second quarter, should we expect a higher advertising spend versus last year in the quarter, just year-over-year looking at?

In terms of absolute dollars, yes. In terms of relative to sales, probably not.

Okay, they are not that material. Okay. And I guess just last question on your second quarter comp outlook. You did say that with the warmer weather, you've seen some pickup from your first quarter reported decline. Just your cautious attitude is you don't really see anything pushing that momentum continuing up or just a little bit more on that.

As we look out, the reason why we try to forecast sales into the future is obviously for inventory planning purposes and how we replenish inventories. We've, as you well know, we've been fairly conservative in how we look forward and how we plan those inventories. I just don't see with -- and I don't want to sound like a doomsday [sayer], because I'm not. I think back-to-school is -- could have the potential of being very strong. But with $3 a gallon in gasoline right now and some other economic indicators a little tough, I just don't see the catalyst for the consumer in our consumer segment to go out and all of a sudden reverse their trend so far in the first four or five months of the year and all of a sudden go from flattish kind of comp store sales to a big improvement in comp store sales in this summer period.

Now, having said that, any time we've seen a lackluster spring in the footwear industry and, particularly with respect to Shoe Carnival and I'm saying this based on history, we've seen a somewhat of a pent up demand with regard to footwear purchases as we'd move into the back-to-school, particularly in the children's segment of the business, which is obviously a very important piece of the back-to-school business. So we've seen that sales trend come way back in back-to-school at times that we've had negative comp store sales in the first or even the first and second quarter of particular years. . And I would point to -- I'm sorry, I don't have the years in front of me, but I think if you look at two or three years ago, we had somewhat similar trends and then we came back with a strong back-to-school period. And followed that with a year of very good comp store sales. In our segment of the footwear industry, it's fairly stable because of the necessity of footwear purchases, let me say that first, over a period of time.

So when we see a period of lackluster sales, assuming we control our inventories and our merchants have done a pretty good job with doing that, we expect to see a period of pent up demand following that. And what I'm saying is the next period of pent up demand, the catalyst is back-to-school. The back-to-school purchase period. So that's why we're looking at back-to-school as that next piece of business that really is going to -- or that we're pointing to for increases in comp store

Understood, thanks for the clarification. Does that make sense? Yes, thanks.

And we'll take our next question from Harry Ikenson from Soleil Securities. Please go ahead.

Afternoon, thank you. Couple of things. Could you go into a little more detail and update us, you said that profit logic helped in reference to controlling the inventories. Have you started to make adjustments on a local basis which you talked about on the last conference call? Is that more for the second half on the justine to store profile locally? And have you done the zone pricing yet?

Yes, we are currently, Harry this is Cliff, we currently -- actually since the implementation of profit logic last, I guess, it was May, April or May, we have been zone pricing in our stores. And that is exactly the way profit logic looks at the inventory in the sales and is predictive. So it takes a look at the curve. And when you miss a curve in a zone price zone, it then recommends, by looking forward at an exit date, a decrease in price on the item that missed the curve. So it's right down to the item color level by zone area. And that's -- that's the way it works.

Okay. But you -- you did say last year that you had more of a benefit this year. So where and when, is it more second half? Or are you getting -- ?

I feel like we do -- did have a benefit. Sales declined, inventories are below on a per store basis.

No, I understood that.

And margins are up a full point. So I feel like we saw a benefit from.

I guess let me ask another way. I -- obviously you store benefit. But do you have more to go to the second half or are you already getting all the benefit that you're going to get from the systems? Are you doing the profiling by -- in addition to getting the optimal markdowns, are you doing the 20% to 25% we talked about on the last call on the store profile from the product yet? Or has that been done? Or is that for the second half?

Well, the way and I'm not sure if I understand the question, but let me -- let me answer it this way. The way profit logic works is it takes deeper markdowns at the beginning of the season so that you don't have to take enormous markdowns or catastrophic markdowns at the end of the season. So the improvement that profit logic gives you actually climbs as the season progresses. Does that make sense?

No, I understood that. But I thought you said the second --the other thing that you were going to do, and I thought it had to do with profit logic, maybe that's not the case. You also said that you're going to start doing, like I said, the new systems on the store profile basis where you were going to take 20% to 25%. Have you started to implement that yet in reference to specialized product for a store where smaller sizes, different ethnic region.

Yes, that's not profit logic, that's assortment planning. And yes, we have -- we've implemented -- we are implemented our own assortment planning program. And that -- that's so that we can make each store individual to the consumer that they cater to, whether it be Hispanic or African-American or large sizes or small sizes. And yes, we have -- that has been implemented. Harry, it's tough for me to tell you that that's working 100%. We just had a comp store loss for the quarter. I certainly don't blame that on our assortment planning program. I think we need to wait and see how the benefit's going to pay.

Harry, that -- obviously those kind of programs are an ongoing process. That's not a -- that's not a start a system and all of a sudden your inventory changes in any particular store. That's a, I shouldn't even say evolving, but that's a constantly changing process that we've put in place from a systematic standpoint.

Okay. All right. Thank you.

And we'll take our next question from Jeff Stein from KeyBanc Capital Markets. Please go ahead, sir.

Mark, I'm wondering how we should think about SG&A on a go forward basis, excluding your preopening expenses. In other words, you were down in dollars in the first quarter, which is pretty impressive when you consider you had 15 more stores. So as we move into Q2 through Q4, how should SG&A dollars, excluding preopening costs, expected -- how do you expect them to trend?

Jeff, I'm going to let Kerry address that.

Jeff, what you're going to see on a year-over-year basis, SG&A dollars in absolute numbers in Q2 will be up more so than you would have thought on a normal trend and that's because the cost moving in that week moving into -- from August. Week one moving in from Q3 to Q2 carries with it quite an expense burden, advertising, it's a peak sales period so we're going to have, from a dollar standpoint we're going to have more payroll in our stores, from a percent of sales standpoint that would be leveraged. But you'll see the Q2 will have more dollars in it. Q3 will look more of a natural type of a trend that on -- based on growth and Q4 maybe a little more elevated than -- it'd be close to normal but a little bit higher because we had some really strong expense savings in Q4 last year.

Okay, so when you say normal, are we talking about normal inflationary increases a couple percentage points?

What he's talking about, Jeff, it's going to follow the same kind of curve as our growth plans is what he's trying to allude to. So in other words, as we grow the store base by 25 stores this year, the progression of SG&A costs is going to follow that trend.

Got it. So as a percent of sales, we should not expect to see a great deal of leverage in the back half of the year, even if comps show some marginal improvement. Would that be a way to look at it?

We do not expect to see a great deal of leverage and one of the reasons is when we built this new infrastructure, the pieces of infrastructure, we didn't expect to see that -- we don't expect to see that until we start leveraging those costs against higher sales base in 2008 and beyond.

Got it. And how should we think about distribution center costs second quarter through fourth quarter? Are we behind this big year-over-year bubble that we saw in the first quarter, that $900,000 increase? Should that begin to diminish, other than the increased appreciation?

Jeff, what we had talked about before was that we were going to see a higher than normal run rate in Q1. And Q2 and 3, it was going to average out more to about the cost of $0.01 a share. So just higher operating costs because we have an underutilized facility right now. And then in Q4 it reverses, because we start wrapping around those big start-up costs we incurred in fourth quarter last year, which we won't incur into fourth quarter this year.

And all of this runs through the gross margin line?

Yes, it does on distribution.

Okay. So your leverage point on buying, distribution, and occupancy costs, what is it now?

Well, typically, we have seen that it would take about a 2% to 3% comp store sales increase to leverage occupancy costs. Buying and distribution takes a much smaller comp.

And are both of those statements true for this year?

Well, one of the things is you've got to keep in mind about this year is that in the fourth quarter, we have last year we had an extra week, a 53rd week, that had a very strong leveraging effect. In fact, if I remember, the number is 60 basis points worth of leverage on our expense structure for that one particular quarter. Well, obviously we're not going to have that benefit of those extra sales and therefore you're not going to see this one thing from a margin standpoint that's going to hurt us is that we won't have those extra sales and we won't be able to leverage the fourth quarter. So it's hard to say those rules of thumb hold true all the time because of the different nuances like that 53rd week last year.

Okay. Fair enough. And one question for Mark and I just want to clarify this, it's been discussed in Q&A already. But your second quarter comp expectation of plus 1 to minus 1, is that based upon what you're seeing or what you expect?

That's what I expect, Jeff. And again, it's as much in the way we plan our inventory build as it is for any other reason.

Right.

That's what we're planning our inventories around is the negative 1 to plus 1 comp for the -- for the remainder of these next two months. Like I said, our sales so far in the second quarter have trended much better than they have in the first quarter. But we're planning our inventories around a negative 1 to plus 1 comp. The next seasonal period that, the seasonal sales period that we enter into, with the exception of the clearance periods in June and July of typical sandal clearance, is going to be the back-to-school period, which starts basically the last two weeks of July this year.

Got it. And a follow-up on Harry's question on profit logic. Any thoughts in terms of -- because I'm sure when you guys made the investment in profit logic, they promised you X and then you discounted that by Y in terms of the benefit. How much of that 100 basis point merchandise margin improvement would you attribute to profit logic if you were to guesstimate?

I don't even want to guesstimate, Jeff. That would be unfair to try to estimate that difference.

Well, if you didn't have it, do you think you would have shown a merchandise margin improvement in the first?

If you ask our buyers, I would suspect they would say yes, we would have shown a margin improvement. What I think profit logic is showing from a financial standpoint is the ability to keep our inventories in line. At the same time take expedient markdowns and still have the capability of increasing our gross profit margin over last year.

Okay, very good. Thank you, Mark.

And we'll take our next question from Steven Martin from Slater Capital Management. Please go ahead.

Hi, guys. Most of my questions have been answered. Two things, can you talk about the new store's performance and what -- I know you said most of this year's were infill and what they're going to look like next year? And Cliff, obviously we know you don't have the Crocs. I know you've got the Skechers substitutes and some other substitutes. Can you talk about how those are doing in that brand in particular?

Well, new stores this year are running -- I shouldn't say new stores this year, but non-comp stores, which include stores that have been open, that were open last year and so far this season, 14 last year and about seven stores this year, are running about the same as what we saw the trend at the end of the fourth quarter. So right around that $190 per square foot kind of sales trend. The stores that we opened so far this year, and this is a little bit unfair because you go through somewhat of an anniversary period which we try to take out of the trend line, but are running ahead of, with one exception, are running ahead of that $190 per square foot. With respect to the Croc's issue, I'll let Cliff address that.

Steve, I'd rather not talk about individual styles within the Skechers brand. But I will tell you that Skechers as a whole is performing very well in all departments.

And would you -- obviously you'd rather have Croc's than not, but are you happy with how that category is running?

I don't like talking about individual styles. If you'd give me that one. Skechers as a brand is performing well.

All right. Thanks a lot.

and we'll take our next question from RJ Hottovy from Next Generation Equity Research. Please go ahead.

Good afternoon, everyone. Just a couple quick follow-up questions on the expense lines here. First of all, I just wanted to get a sense where you guys think preopening costs are going to go next year when you start to expand in different markets. How should we look at that? Those going to be going up on a percentage of sales basis or are they going to remain relatively flat? Just anything there that might help us out?

I think that we can expect pretty much the same. We're experiencing, Kerry, correct me if I'm wrong, but about $50,000 to $65,000 in preopening expenses per store opening right now. I don't expect that to increase substantially, with the exception of one large market that we hope to enter next year. Obviously, I don't want to give those away for competitive reasons. But with that exception, which will entail a bit more advertising costs. But otherwise, we expect new store opening costs to be somewhat the same next year on a per store basis as this year.

Okay. My second question has to do with distribution costs not associated with the distribution center. You'd alluded to a little bit earlier with gas prices up where they are, are you seeing any pressure in terms of freight and distribution expense just as we go into the second quarter here? What is your outlook on that?

We did. I don't see -- I don't see the pressure increasing significantly more in the second quarter than we saw in the first quarter. We saw an increase in cost of distribution from a freight standpoint. But it was, I think, around 8% or 9% increase over the prior year, which we obviously absorbed very nicely in the margins. In the second quarter, I don't think there's going to be a tremendous increase, although, the price of gasoline has gone up. We've calculated those kinds of increases into our future plans. Along with the changes that we've made in our distribution center, the new distribution center, we've put into place some new logistic software and some new logistics personnel.

And we actually think we're going to realize some savings on some changes that we're making from that side of the distribution piece. Obviously, those are going to be somewhat offset by the excess capacity that we've built into the new distribution center from the standpoint of rent and depreciation and those kinds of things. But from a freight standpoint, we think we can absorb those against decreases in other costs.

Okay. Thanks a lot.

And we'll take our next question from Joseph George from Thomas Weisel. Please go ahead.

Hi, just had a couple of housekeeping questions. Just wanted to get a sense of the square footage of the new units that you have opened, the 21 new units that you have opened the last four quarters and the size of the units which are being planned in 2007 and going through 2008. Are they like smaller or larger than the existing stores?

For the last four quarters, we have opened stores ranging from 6500 square feet to 14,000 square feet. And the average is around 9,000 square feet or maybe slightly less than that. I don't anticipate a big change. We are -- and again, it depends upon the size of the population base that a trade area -- of the trade area that we go into with the store. But I expect that our average is going to be in the range of 9,000 to 10,000 square feet per store.

Okay, got it. Thank you. And the other one was just to confirm, this tax benefit that you received in the first quarter, it's a nonrecurring item, right? We don't see any of that coming in the following quarters?

No, that was a one time benefit for the -- we'll get incremental amounts of incentives, but they won't be material to any quarter, except for the first quarter of this year.

Okay. Got it. Thank you.

And we'll take our next question from Brett Hendrickson from Bonanza Capital. Please go ahead.

Hey, guys. That guy just made me think of an additional question. Tax rate, Kerry, for the remaining three quarters?

It's going to hover around 39%.

Okay. And then on this whole week shift, obviously for on a comp basis, it doesn't impact because your comp weeks shift with the calendar. And so the calendar's impact from last year's 53rd week is a $12 million or $13 million shift. And then, Mark, you mentioned the two states that are still deciding on their tax free weekends. Is your -- what is your comp guidance assume on those tax free weekends? And can you -- I think one is Texas, can you tell us what the two states are and what -- ?

Florida is still -- is still -- they're almost determined, I guess, is the way I should say it. I don't think they've absolutely determined -- I think there's a bill before the legislature in Florida to affirm the tax free dates and I don't think that bill's been passed yet. I think Georgia just may have just passed, and when I say that may have just, I mean maybe this week or last week passed legislature when their fax free dates are going to be. So we're trying to -- obviously, Texas and Florida are huge states for us in terms of, in terms of sales. So when I find out when, with absolute certainty, when those dates are going to be, I'll be able to help you a little bit more on guidance for comps.

Okay.

Right now we're going on the assumption that they're going to be fairly similar to what they were last year.

That was the main question. Okay. And then I missed, Kerry, in your prepared remarks, did you say $250,000 of preopening in Q2 is what you're expecting?

350.

350, versus, I think you said, 156 last year?

164.

Okay. I have great hearing. And then just your thoughts on the buyback. I know you only did 10,000 shares, was there some reason preventing you from what your normal window would be from buying back stock in the quarter?

The best answer to that is we take a look at what the opportunity is for the stock relative to the stock price at that time. Obviously, the stock -- our stock price is lower today than it was during the first quarter. So it becomes a different issue today. But we take a look at it on the opportunistic basis.

Okay. And so just so I can get a sense, does your window open up then after the normal 24 or 48 hour window this quarter, you'll be open again?

It does.

Okay. Thanks, guys.

And we'll take our next question from Adam Camora from Entrust Capital. Please go ahead.

Yes, thanks. I just had a couple of questions on the cash flow for this year. What's the total CapEx supposed to be?

CapEx would be 21 -- $20 million, $21 million.

And D&A for this year?

About $16 million.

Okay. And I noticed working capital was a usage this quarter, looked like the accounts payables and the crude liabilities was a use of cash. Do we expect that to normalize over the next couple of quarters?

We do. The end of Q1 accounts payable was lower than typically you'd expect as a percent of the overall inventory. It was just the way the timing of the payments came. That was an unusual situation.

Okay. All right. So can you just -- how much do you think working capital will be a usage as we put inventory in all the new stores this year overall.

Possibly $5 million, $6 million, $8 million, somewhere in that range, depending on year-end inventories.

Okay. Thanks a lot.

And we'll take our next question. We'll take a follow-up from Harry Ikenson from Soleil Securities. Please go ahead.

Thank you. Regarding product and trends we've seen so far. Have you made any adjustments with basketball being soft for adjustments for the back half of the year, particularly back-to-school? And then second, have you made any other important adjustments for the products? Thank you.

We are currently in discussions internally with regard to basketball and how we play basketball, not so much in the back-to-school period but into the fourth quarter. So right now it'd be premature to answer that question, Harry. With respect to other categories, I could probably let Cliff handle this more eloquently than I can. But certainly we expect skate to continue to be very strong. We've added some vendors -- we're adding some vendors for the back-to-school period in the skate categories that we're very excited about. That should help. And we'll plan that category up. Cliff, you want to add -- ?

In addition to that, Harry, we do believe that the casual business that we've seen such strong performance from so far this year will continue into back-to-school. Performance product is going to continue strong for us. And, obviously, our Junior business, which has been strong now for about a year, actually, more than a year, about 18 months, continues to just amaze us at how well it can do. Yes, we have adjusted our open to buy to address those categories.

Thank you.

This concludes our question and answer session. I'd like to turn it back over to management for any additional or closing remarks.

Well, thank you for joining us today. And we look forward to giving you better results as we go into the third quarter. Thank you, again.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.