Shoe Carnival Inc (SCVL) 2007 Q3 法說會逐字稿

Good afternoon, and welcome to Shoe Carnival's third quarter earnings conference call. Today's call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with a discussion of risk factors included in the Company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward-looking statements which speak only as of today's date.

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

Thank you. Welcome to Shoe Carnival's third quarter 2007 earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our Chief Financial Officer; Cliff Sifford, Executive Vice President and General Merchandise Manager; and Tim Baker, Executive Vice President of Store operations.

We continue to see a tough retail climate in the third quarter as net sales decreased 8% to $173.9 million from sales of $189.1 million in the same period last year. Comparable store sales for the quarter decreased 5%. We recorded positive comp store sales during the back-to-school period but business slowed in October and September until the last week and a half at the end of October when traffic picked up again. Net earnings for the third quarter were $4.2 million or $0.33 per diluted share compared with $8.4 million or $0.61 per diluted share in the record third quarter of 2006. Obviously we are not satisfied with these results, but I believe our management group has done a commendable job negotiating a very challenging macroeconomic environment for the middle income consumer. The infrastructure and systems enhancements we have implemented during the past few years have provided us the tools to do this.

While our overall gross profit margin declined, this decline was directly attributable to the deleveraging effect on buying, distribution, and occupancy costs. Our merchandise margins actually improved by 50 basis points. We believe this was attributable to continued improvement in execution by our merchants coupled with the merchandise system enhancements we have implemented over the past two years.

Our merchants have done a good job of controlling inventories, both in terms of quantity and composition. At the end of the third quarter total inventories on a per store basis were down approximately 1.5% when compared to the end of the third quarter of 2006. Our age inventory has been reduced as well. We continue to be excited about the improvement in product design and assortment from our leading vendor Nike. Additionally, we made some nice additions to our brand mix for the back-to-school period and for the fourth quarter, particularly Etnies and Heelys.

Selling, general and administrative expenses rose by only $352,000 from last year's third quarter despite operating 23 more stores than last year at the end of the respective third quarters. Included in third quarter SG&A costs are 4407,000 associated with opening new stores compared to $298,000 in store opening costs in the third quarter of 2006. Again, our investments in technology have greatly assisted us in controlling both store level and administrative expenses, particularly last year's implementation of the wide area network and the pin debit process.

We opened 11 stores in the third quarter and one additional store in November for a total of 25 new stores in fiscal 2006. We also closed two stores in the third quarter and plan to close three more stores in the fourth quarter. We will continue to be aggressive in closing under performing stores utilizing discounted cash flow models as the primary analytical benchmark. We now expect to end the year -- the 2007 fiscal year -- with 291 stores in operation. Next year we expect to open 30 to 40 new stores net of store closings.

I would like to reemphasize that the number of new stores we open is dependent upon the availability of desirable store locations primarily in our existing larger markets and small markets in our current geographic footprint. Real estate developers are still pushing forward with quite a number of new viable strip centers based on the expansion plans of certain key big box retailers. While we recognize that the immediate profitability of newly opened stores will be impacted by a difficult macroeconomic environment, we also believe that taking advantage of real estate opportunities in a down retail market is a prudent long-term strategy especially when those store locations fill in existing under penetrated markets. To that end, 75% of the potential new store locations under consideration for 2008 will fill in existing markets or open small markets close to existing larger markets. When entering small markets, we are opening slightly smaller stores to satisfy a smaller population base. Thus new stores for 2008 are expected to average approximately 9200 square feet.

While we have seen signs of life from the middle income consumer during key shopping periods, we expect that the fourth quarter will remain challenging in the footwear and apparel sectors. Thus we will continue to operate in this difficult environment in a conservative manner with regards to cost structure and inventory management. We are currently making organizational changes in a number of our functional areas including store operations, real estate, marketing, and merchandising groups to enhance the long-term operational health of the organization. We also recognize the important role technology plays in successful retail operations today, and we will continue to fund technological improvements in all areas of our business but particularly in the areas of merchandising, logistics and distribution.

Our financial condition continues to be in excellent shape. During the third quarter as part of our $50 million share repurchase program, we repurchased approximately 339,000 shares of our outstanding stock at a cost of $6.4 million. To date we have repurchased 1 million shares for a total of approximately $25.6 million. Thus $24.4 million remains available under the current authorization. Due to those share repurchases and seasonal inventory needs, we ended the third quarter with approximately $14.2 million in borrowings against our line of credit. We now expect fourth quarter earnings of between $0.10 and $0.13 per share. Additionally, we also anticipate that year end inventories inventories on a per store basis will be flat to slightly below the end of last year's levels. Based on those projections, we would anticipate fourth quarter borrowing needs to only result from any additional share repurchases. In short, despite this current challenging retail environment, we will end the year in excellent financial shape with a strong balance sheet. Now I would like to turn it over to Cliff Sifford for some merchandising comments.

Thank you, Mark. As Mark mentioned, we continue to experience a decline in customer traffic during the third quarter. While the decline was felt across all customer segments, the largest decline continued to come from the African-American and Hispanic customer segments. We continue to work with the vendor community to come up with fresh new ideas from a product perspective but as of yet we have not seen a return of this customer. This along with the slow sales of all seasonal categories had a negative impact on our performance for the quarter. All of our departments posted a decline in comp store sales except for the adult athletic department which posted a small comp store increase. We have over the past few weeks seen additional positive signs in our athletic department and in particular our women's athletic business.

Now I would like to give you a brief overview by department for a few of the quarters trends. In women's nonathletic the only area that showed positive performance was our casual category with flats being the strongest. All other categories trended down with the largest decreases coming from the junior and seasonal categories. In the men's nonathletic we experienced good sales out of our traditional preppy categories of boat shoes and slip-ons. In addition to this the the work category continued to perform well, again just as in women's our fall and winter categories of boots and rugged casuals did not perform.

In children's shoes boys basketball and boys and girls fashion classics remain soft as did boots. We did however see nice increases out of our girls athletic, low profile, skate, and molded footwear. Due to the back-to-school shifts in Florida and Texas, we experienced a small comp store increase for the quarter in adult athletics. This was driven primarily from growth in the skate classification for both men and women. Performance running and Chucks also performed well. As a category, classic product continued to down trend. Inventories as a whole are down 1.5% on a per door basis at quarter end. We have been aggressive in moving through slow-selling product, and I am pleased with the fact that our inventories remain fresh with aged inventories at an all-time low on a per-door basis. We're taking a proactive approach to turning around our sales trend and have implemented several initiatives to achieve this.

First, we are working very closely with several of our key vendors to develop and provide product that appeals to our customer base, specifically the African-American and Hispanic customer. Nike and New Balance along with Rockport have been willing partners in this endeavor. Second, we are in the process of studying the effectiveness of our message to the consumer. We are testing our advertising creative and also changing the media mix to be more effective. Third, we are in the process of searching for a new VP of Marketing whose job it will be to analyze all aspects of our marketing plan and to implement a new plan that will capture the attention of the consumer. Fourth, we created a new position of merchandising manager whose job it will be to strengthen our product assortments on a door-to-door basis. We selected one of our strongest merchants with an analytical mindset to fill this position, and lastly, we have rechallenged the buyers to move our average unit retails higher by upgrading our product assortments and by adding new brands. You will see the result of this as we enter into the spring season.

Business in the last few quarters has been tough, but I am very proud of the merchant's ability to control our aged inventory and overall inventory levels. I am also very excited about the potential benefits to be achieved from the execution of the initiatives I have listed. Now I would like to turn the call over to Kerry Jackson.

Thank you, Cliff. Our net sales for the third quarter decreased $15.2 million or 8% to $173.9 million compared to sales of $189.1 million for the third quarter of 2006. Our comparable store sales were down 5% for the quarter.

The components of this sales decline are as follows. Due to the shift in the retail calendar, and net of 14.2 million in sales shifted out of Q3 and into Q2. The comparable store sales decline was $8.4 million, and the net effect of new stores increased sales by $7.4 million for the quarter. As you can see, the majority of the decline in Q3 sales was due to a shift in the retail category due to last year being a 53-week year. This year the first three quarters end one week later than they did last year. This change in the calendar shifted an important week of back-to-school out of third quarter and into Q2 and moved a less important week into Q3 this year from Q4 last year. The net difference in this shift was the decline in sales of $14.2 million in sales in Q3.

Gross margins for the third quarter of 2007 decreased to 29.1% compared to 30% in the same period last year. Our merchandise margin increased 0.5% was offset by a 1.4% increase in buying distribution occupancy costs as a percentage of sales. The deleveraging of the buying distribution occupancy costs was due to lower sales for the quarter combined with increases in occupancy and distribution costs due to operating more stores. In addition, our new distribution center incurred higher fixed cost due to the excess capacity we need for future growth.

As Mark mentioned earlier, we controlled the increase in dollars spent in SG&A. However, due to the decrease in sales for the quarter, as a percentage of sales, our SG&A increased to 25.1% for the third quarter compared to 22.9% in the same period last year. Store preopening costs in the third quarter were $407,000 or 0.2% of sales compared with $298,000 or 0.2% of sales in Q3 last year. We opened 11 new stores during the third quarter of fiscal 2007 compared with eight new stores opened during the third quarter of fiscal 2006. Store closing costs included in SG&A in the third quarter were $96,000. Last year in the third quarter we incurred $232,000 in store closing costs. The effect active income tax rate of 39.5% in the third quarter of 2007 was relatively steady with last year's third quarter.

Now let me transition to the year-to-date numbers through the third quarter. Net sales decreased 2% to $494.3 million compared to $504.4 million last year. Same-store sales decreased 5% for the first three quarters this year. Gross margin this year decreased to 28.5% compared to 29.5% last year. The merchandise margin increased 0.1% and buying, distribution, and occupancy costs as a percentage of sales increased 1.1%. SG&A as a percentage of sales increased to 24.9% compared to 23.7% last year. Preopening expenses this year have been $963,000 compared to $460,000 in the first three quarters of 2006. Store closing costs included in SG&A so far this year were $525,000 compared with store closing costs of $486,000 in the first three quarters last year. Year-to-date net income is $11.7 million or $0.87 per diluted share compared with net income of $18.6 million or $1.36 per diluted share in the same period last year. Depreciation expense for the third quarter was $3.9 million, and $11.8 million for the first nine months of this year. Capital expenditures for the first nine months of 2007 were $15.3 million with the main components detailed as follows. We spent $4.4 million on the new distribution center and $2.3 million on the new corporate headquarters. 2007 new stores were $5.9 million, and the remodeling and relocation of stores costs $798,000.

I would now like to provide some guidance for Q4. Earnings per diluted share in the fourth quarter of fiscal 2007 are expected to range between $0.10 and $0.13. Same-store sales are expected to be down 4 to 5% for Q4 and total sales are projected to decrease to between 167 million to $169 million compared with total sales of $177.2 million in Q4 last year. The fourth quarter last year consisted of fourteen weeks, and this year Q4 will revert back to the typical 13 weeks. The extra week last year added $11.5 million in sales to last year's fourth quarter. We expect that the additional sales in Q4 from our net new stores will offset the comparable store sales decline leaving the total decline in sales for the fourth quarter to be from the loss of the extra week of sales included in Q4 last year. While we expect our merchandise margin to be slightly up in Q4 this year, we expect to deleverage our buying distribution and occupancy costs and our SG&A costs due to lower total sales compared with last year's Q4. This concludes our financial review of the third quarter of 2007. I would now like to open up the call for questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from John Shanley with Susquehanna International.

Thank you and good afternoon, folks.

Hey, John.

Mark or Cliff, can you give us an idea of how much shopper traffic in the quarter may have been off from previous third quarter periods and specifically, Cliff, you referenced African-American and Hispanic shopper traffic being off noticeably. How important is that consumer segment to your overall customer base?

John, this is Cliff. The traffic was down in total about 6%, for the quarter. What we consider to be AA stores and Hispanic stores were down somewhat more than that, just under 10. We think that as, we don't have exact numbers, so it is kind of difficult to tell you that our African-American business is exactly this percent, but it is higher than -- it is a good bit higher than the country's population percent, if you know what I mean, it's at least 20.

Okay. That's fair enough. Also, Cliff, on the lower sales generated in the quarter for traditional footwear products and boots, is that a trend that you expect to continue into the fourth quarter? And is that reflective of the indication of the lower earnings for the quarter that Kerry just gave us?

Well, specifically on the boots, I believe the boots will pick up as the weather gets more conducive to boot sales as we go into December and January. Last year, John, we felt we were short in boots going into January and February. The weather turned -- I don't know if you remember, the weather patterns are somewhat similar to this year, and the weather turned cool in the latter part of December and through January and February, and we think that we still have the opportunity to sell a few boots. We do believe, however, that the customer count, we haven't seen any indication that the customers are sitting on the sidelines just waiting to come storming back, so we would like to get through this quarter a little bit before we make that call. Based on where the customer count has been over the past quarter is the reason we are planning our sales down not because we think boots won't sell.

Fair enough. Also, Cliff, are you getting a larger percentage of the overall volume from athletic product and is that in turn giving some difficulty in terms of margin levels that you're achieving? I mean what percentage--?

Actually our merchandise margins were up for the quarter, so it wasn't the fact that the women's business down trended that much. We're getting pretty good margins out of our athletic business now. Once Nike gave us better product and New Balance has given us better product, there is a couple other vendors that -- plus Mark mentioned to you about Etnies, and that product is selling through at high margins, so we were driving pretty good margin out of the athletic side of the business. Our overall athletic business grew as a percent to total during the quarter however, though.

Can you give us an idea what percentage of your business is athletic, then?

For the quarter 55%.

Okay.

That's again though, John, that's not unusual for the third quarter.

Right. I realize that.

The back-to-school numbers.

Right. Sure. Talking about Nike, are you getting exclusive products from that brand now, Cliff?

It really depends upon what you want to call exclusive product. We get a lot of make-up product from Nike, make-up colors, but I can't tell you that we're getting a great deal of exclusive product. What they are giving us that they haven't given us in the past is some product that will appeal to the African-American consumer, and new colorations and new fabrications, so that's how they're helping us address that African-American consumer.

Do you expect them to give you more of that? Is that what I was hearing?

There is absolute no question about that as we move into spring. We were just with them last week, and there will be more product coming our way as we go into spring and especially as we go into back-to-school.

That's great to hear. Last question I had is, Mark had mentioned in the second quarter conference call that you were expecting to get a pretty good amount of new woman's product coming in for the fourth quarter. Is that still the game plan or was something--?

Here is what we did, John. We are bringing a good bit more spring product into our assortments, especially when you look into the deep south. Anything that is I-10 and below, which is different than what we did a year year ago. In addition to that there are a couple of new brands that we'll be introducing in the fourth quarter in that area, and then for spring of next year as I mentioned in my prepared remarks, there is a couple of new brands that we'll be adding to our women's mix. I am really not at this time prepared to announce that for competitive reasons.

Okay. Fair enough. Thank you very much. Appreciate it.

We will take our next question from Jill Caruthers with Johnson Rice.

Good afternoon. Could you talk about some of the change you're doing in the infrastructure, particularly you pointed out you added a new position, perhaps Merchandise Manager, and kind of how that's impacting the assortment allocation on the store level?

Yes, Jill. We feel like over the years that we've done as good a job as anyone in the mid-tier of creating an assortment based on each individual customer -- excuse me, stores needs. As we've grown, that's become more and more difficult because of obviously the number of stores, and the team that was putting the allocations together for the stores were reporting in up through the buying department, and we didn't feel that that was giving us the best assortment on a store to store level, so what I did is we created a position of merchandising manager, and we took what was one of our strongest buyers and put her over that position, so you have tremendously strong analytical skills, she understands product, she understands how to build assortments, she knows how to train and we took those -- that allocation staff and we had them report. They're now reporting into her. We believe that this will not only help us build better assortments but it will give us actually stronger communication between the buyers and the folks that are actually allocating the staff -- excuse me, allocating the product to the stores.

Okay. And I know you've done really well managing your inventory. Could you maybe talk about what percentage of your inventory now is more boots, more fall product, seasonal product, concentrated?

I don't have that particular number.

Jill, we don't have specific numbers on how much are boots relative to the other product. I will tell you though that our boot inventories on a per store basis are below last year's number by a pretty significant amount. Even though we're not selling boots as well as we did in prior years, the inventory risk is not there as well.

Okay. Just last question, on the accelerated growth plan you have for 2008, maybe you could talk about the number of stores you're pretty much committed to on the lease and if that number is flexible given continued weak perhaps macro environment and whatnot?

Well, again, I think we're at lease with 13 stores, so from a strict flexibility standpoint there is some. However, like I said, we think it is prudent to take advantage of what's happening in the real estate markets today, particularly as it impacts the strip center operations and particularly when it -- when those strip centers are going to contain or going to house one of the big box retailers that are doing very well right now, whether it be a Target, a JCPenney's, a Kohl's, those kind of strip center operators, so there is a lot of development going on in terms of new development, and a lot of redevelopment happening that are producing some very nice retail size and in particularly in our existing marketplaces that we're trying to fill in on our under penetrated markets. So what we're trying to do is take advantage of that real estate construction today more so than trying to adhere to a strict number or quantified expansion rate if you will. So it is not a matter of trying to hit 30 or 40 stores for the sake of hitting 30 to 40 stores in an expansion strategy. It is a matter of taking advantage of what I consider a pretty decent real estate market happening right now in a down retail market.

Thank you.

We will take our next question from Heather Boksen with Sidoti and Company.

Good afternoon, guys. Looks like in the quarter you did a great job of managing your SG&A expenses. How sustainable is that going forward given your expansion plans?

Well, Heather, that makes it tough. There are individual quarters that we can flex some of the expenses like advertising, but as we grow, we're going to be incurring additional costs, and you will see some of that in the fourth quarter this year with the full complement of stores that are going to open this year. We won't be able to hold that percentage increase in actual dollars as tightly as we did in Q3.

Understood. That's what I thought. Just to remind me, looking back a year ago at the fourth quarter of 2006, were there any duplicate distribution center costs running during the quarter or was that mainly a first quarter issue?

No. That was a Q4 last year and a Q1 this year. Last year in Q4 we incurred about 900,000 in start up costs and duplicate distribution center costs in Q4 last year, and that rolled through the cost of sales line.

So it was roughly equal to what you ran in Q1 of '07?

Yes. Q1 of '07 was about $800,000, I believe.

Okay. And just one last question to -- well, one quick clarification question here. Inventories roughly flat maybe down slightly at the end of the year, I think you said in the scripted remarks. Was that in just -- was that on a per store basis or a raw number?

On a per store basis.

Okay. And lastly one other thing from the scripted remarks. You mentioned you are seeing signs of life from the moderate consumer. Can you give any color as to what that is in regards to? It looks like your outlook is still pretty cautious for the fourth quarter. Is that -- just what are you seeing?

When I say signs of life, I was referring to certain key periods of retail. For example, we saw comps increase during the back-to-school period. What we see for fourth quarter is still obviously very -- it's not very optimistic. We are being fairly conservative in our guidance, so it remains to be seen how that customer comes out in shopping the holiday period, but certain key periods of the year we are seeing that customer come out and shop.

Okay. You did mention that when it got cooler here towards the end of October and November, you said traffic picked up. Is it still down from a year ago or is it actually ticking positive?

For when the weather changed in the Midwest and the upper Midwest, traffic actually turned positive, but again we're not expecting to see that continue throughout the fourth quarter and consequently we gave guidance what it was.

Okay. Thanks, guys.

We will take our next question from Jeff Stein with KeyBanc Capital Markets.

Kerry, wondering what you baked into the fourth quarter for store closing costs? It looks like you're going to end the year with fewer stores than we had in our model.

The stores that we're planning on closing this year we had taken either charges last year or had been expensing those store closing costs for the stores we anticipate closing Q4 all year long.

So there is -- the three stores you're closing in the fourth quarter, that was always in the plan?

That was always in the plan, yes. That was our guidance at the beginning of the year for the most part.

So can you tell us roughly what the accrual then would be for store closing costs or have you already taken them for the full year?

For the three stores we're going to close in the fourth quarter, those costs are negligible in the fourth quarter.

Can you talk a little bit about -- you mentioned average unit retail will be going up next spring. I am wondering can you be a little bit more specific about that in terms of what classifications and is it new brands that are coming in that are going to be carrying the higher price points or are you just taking price increases?

Jeff, that actually it is a little bit of both. Let me explain. We're getting better, higher end product from most of the athletic brands that we do business with, and that actually is the product that is selling the best, performance, running, actually even performance basketball even though basketball is a weak classification right now, performance basketball is performing pretty well. We're selling skate. All the higher end classifications within the athletic arena are working pretty well, so that's going to help us. That will definitely help us raise our average unit retail.

In addition to that, we are seeing price increases. Let me address women's. We're also going to be adding new brands to our women's assortment. We are going to -- we are upgrading some of our private brands to have more leather product and better, more fashionable product which will also help us raise our average unit retail and help us raise our margin. In addition to that, there have been some price increases from some of our major brands, especially in the athletic arena that will also result in higher prices.

Got it. Got it. And can you talk a little bit about some of the things that you're doing? You mentioned you're working with some of our vendors on trying to bring to bear more ethnic product. You mentioned Nike, New Balance and Rockport. Is there anything we can look forward to for spring of 2008 or is this a longer-term project?

It is a long-term project. There will be a few items -- actually, we have already delivered a couple of item from our New Balance folks and from Nike. There will be a few items, additional items delivered for the spring time period. Where I think it is going to really be impactful will be back-to-school. It is just that the athletic industry works so far out, so it, to get new designs and new product on the floor I think we're looking for the big impact at back-to-school although we do have items available today and for spring.

Okay. Thank you.

We will take our next question from Sam Poser with Sterne, Agee.

Good afternoon. Mark or Cliff, can you talk about regional differences that you're seeing in some detail, please? North, South, East, West, so on and so forth?

We, and again, a lot of it depends whether you're talking about during this weather shift we've seen recently or before or after, Sam, but for the most part we've seen our Southern stores struggle more so than we have in the North or Central. When the weather shifted in the Midwest and the West, obviously not the far West, but in our far Western regions, the Central actually, the Central part of our regions actually performed better than the North or the South, and then as the weather started to moderate, our Northern stores did a little better, and again, and this is on a relative basis to last year, did better than the Central or Southern part, but for the most part the Southern states, particularly Florida, and Texas, has lagged the rest of the country.

Do you think that's more of a macro issue or is there something specific to what you're doing there?

No. I think it is 99% macroeconomic issues.

Then can you talk about any -- you talked about Nike be a vendor highlight in the athletic space. Can you talk about any other brands that are really -- that are real highlights right now in any area, athletic, non-athletic and I can so on?

Sam, if you look at the brands that we carry, brands in particular, if they are performance related, and not fashion, they're performing well. If they are fashion influenced brands, especially Classic fashion, they're not performing well. It gets almost that simplistic. The only exception to that would be Skechers performing well.

That's just a pure fashion brand anyway?

It is. When I talk about fashion, especially where it concerns the African-American and Hispanic market, I am mainly talking about white Classic, and those brands are not performing at all.

One last thing just on this, in your -- I was hearing some rumblings that some of the white, like all white leather skate influenced shoes were starting to perform fairly well. Are you seeing any of that?

Skate as a whole is performing well and yes, white-based skate with color is performing.

One last question, Timberland, anything going on there for you?

We track our Timberland business actually three different ways, we track it urban, suburban, and work. The suburban and work business is pretty good, and the urban business is just terrible.

Well, thank you very much. Thanks.

We'll take our next question from Elizabeth Montgomery with Cowen.

Hey, guys.

Hello.

All my questions were answered, but I wanted to say good job controlling inventory in a tough environment.

Well, thank you.

Moving on we'll take a question from RJ Hottovy with Next Generation Equity Research.

Good afternoon, everyone.

Hi.

First question I had is just general outlook for 2008 maybe and not looking for specific numbers here but just given the weakness that we've seen in sales, is there anything you're looking at over the next, call it six to nine months as a possible catalyst, whether it be just an increase in demand off of a soft year this year or anything else, maybe any other events or anything else you might be looking for that could help us out in terms of a outlook for '08?

RJ, this is Mark. I don't want to sound too negative, but there is a lot of economic headwinds facing retailers in 2008. Most of us know what those both economic and political headwinds are. Having said that, we are going to come off of a lackluster 2007 and comps comparisons do get easier in 2008, so we're going to plan our business pretty much flat with the past year, not significant increases over this past year but again not significant decreases over this past year, and that's the way we're going to plan inventories, and that's the way we're going to plan expense increases, et cetera. The exception to that conservative operation or conservative execution again will be with respect to real estate and the opportunities that we think we can avail ourselves of in a down retail market, so we're going to plan fairly conservative, and if we see an upside, we're in a position to react to it.

Fair enough. Kind of a follow-up question to that. Just in regards to the increase in average unit retail, is there any concern there given the macroeconomic headwinds that you just talked about, that maybe that's something that the customers might respond negatively to or is it just such a modest increase in AUR that it is not something that's a big concern?

It is a very modest increase in AUR. When we talk in terms of price increases on average prices that hover around 30 to $35, we're not talking about a significant increase. If Cliff and his guys can get 5 to 10% increase out of a particular category, that's a pretty significant number, and not a lot of that is going to be noticed by the consumer, so we're talking about small increases in price relative to where we've been, not that they're not important, they're very definitely important that we're increasing prices instead of seeing some recession in terms of our price structure, but we're not talking about something that the customer is going to revolt against per se.

My last question just in terms of some of the new hires and the new merchandising manager, are we going to see some of that expense hitting, I guess in the fourth quarter here just in terms of trying to get our models together?

We saw some expense hit in the third quarter actually, and we do have some expenses planned in our guidance for fourth quarter for some of the organizational changes that we are making.

That's all in the guidance?

Yes.

Okay. Thank you and good luck.

Thanks.

Our next question comes from Rajib Kumar with Thomas Weisel.

Hi, guys. My first question is regarding net new stores you have employed. I just wanted to get an idea of what kind of location to look at for these tools? Are you looking at strip vendors, development activities that are going on and you are like the first or the second?

I can barely understand the question. But I think the question was what sort of properties are we looking at for expansion in 2008, and yes that answer is strip center locations with big box co-tenancy.

Okay. Just trying to get a sense of whether you're looking at seven centers or (inaudible - audio difficulties) or developing and and the way that (inaudible) location enter into that might might be more forward or might not up to your expectations?

I cannot understand the question. You keep breaking up.

Well, I just wanted to get an idea of what are the risks of the 14 stores which you plan to open, or 10 or 15 would end up in a center or in a strip center where the development doesn't take off?

I think I understand the question is what is the risk of 10 to 15 or X amount of number of our strip center locations that we have got planned for 2008 might not perform up to expectations?

Yes.

If you asked the question, it is certainly to greater risk I think than any other year that we would open stores. Again, for the long-term strategy of the Company, we want to continue the growth of Shoe Carnival, not stop during a down economic climate merely for the sake of stopping store growth. Again, the reason why we're opening new stores is to take advantage of real estate opportunities that we see coming about, particularly in areas that we are -- that we have existing stores anyway. When we look at opening new stores, we're looking at a number of different factors in opening those new stores, particularly how we can leverage advertising, distribution, and management costs against a higher store base and any particular under penetrated market. That is our key reason for opening stores in 2008 and 2009. I hope that answered your question. I caught about half of the question.

Okay. The next question is regarding Kerry's comments on some expenses in SG&A regarding expansion in the distribution center. Can you give us a sense of what these expense are?

We have a -- I tell you we have a terrible connection, if the operator can do anything with that connection, that would help us out.

I think the question was about the distribution center, and I assume on fourth quarter last year in the fourth quarter as we talked about earlier on a question we incurred about $900,000 in transition costs. We shouldn't incur any of those transition costs any further. However, we are incurring higher fixed costs in our new distribution center, but overall in the fourth quarter, our distribution costs from a dollar standpoint will be down on a year-over-year basis because the increase in the fixed costs that we're incurring is much less than the conversion costs we incurred in Q4 last year. We should be able to have reduced costs in Q1 again next year against those conversion costs but in Q2 we'll start wrapping around a more normalized distribution center costs on a year-over-year basis.

Moving on we'll hear from David Turner with Branch Banking.

Thanks. Good afternoon. Curious if there was a big, maybe a stark difference in productivity between the new smaller market stores and the back filling in the bigger markets and if there is any thought, if it is indeed that different from historical or even more recent trends, are you entertaining the idea of opening more of one or the other?

David, off the top of my head I don't have the quantified answer for that, but I will tell you that the difference between our smaller market productivity in terms of sales per square foot and our larger fill-in stores in terms of sales per square foot, there is probably not much difference than it has been in the recent past. As regards to opening stores in 2007, we have more stores opening in larger existing metropolitan areas than we do in some of the smaller areas or some of the smaller markets that are in our current geographic footprint, but we are opening both, and again, like I said, about 75% of our 2008 planned openings, or at least the stores that we are considering the locations that we are considering right now, 75% of those are in existing larger market places or small market places when that -- within that current geographic footprint. We're very intent upon filling in existing under penetrated markets.

Right. Just wondering how big -- what the difference was and then it doesn't sound like it is all that different. I guess digging into the same-store sales component a little bit, it sounds like traffic was the bigger problem, but without disclosing specifics or if you don't mind disclosing specifics, could you give units per transaction or total transactions or even what AURs, I know there is an emphasis to increase that but where are they now or what kind of percentage changes are manifesting currently?

Average retail prices are up slightly over the year before. Between 1 and 2%.

And then the units, basically the entire comp decline was due to traffic which or--?

Due to traffic which leads to fewer units, yes.

Fair enough. Happy Thanksgiving.

Thanks, David.

We do have a follow-up from Jeff Stein with KeyBanc Capital Markets.

Two real quick ones. First of all, the end of quarter share count, do you happen to have that?

The end of Q3?

Yes. In other words, if we don't see any additional share buyback in Q4, Kerry, what will be the average share count in Q4?

It is going to fall a little bit -- it will hover just above probably 12.7 million.

Okay. Fair enough. And I just want to make sure I understand. Mark, did you say that for next year at least at this point you're probably going to be modeling your comps to be relatively flat?

Yes, sir.

If that happens, just looking at the geography of the profit and loss statement, I would suspect that with 30 to 40 store openings and a flat comp, you almost have to be delevering both on the SG&A side as well as the gross margin side.

That would be a reasonable assumption, Jeff, yes.

Okay. Fair enough. Okay.

Definitely be from the occupancy costs, it would be tough to leverage, but we might be able to keep that a little tighter on the SG&A side on the deleveraging than we can on the occupancy side.

Okay. Is there a chance with higher buying and occupancy and distribution as a percent of sales, can you -- do you think you would be able to offset a portion of that with improved merchandise margins or would you at least try to plan it that way?

Jeff, that's our whole strategy right now is for the next few years at least we're going to be looking at how can we drive that gross profit merchandise margin higher and next year if we have a flat comp, then we probably won't increase total gross profit, but we'll have to minimize some of that deleveraging or the buying distribution occupancy costs.

Got it. Okay. Thank you.

We do have another question in the queue comes from Adam Comora with EnTust Capital.

I just wanted to follow-up on something you said earlier that things had picked up at the end of October as the weather turned cooler. Can you just talk a little bit about November?

Things have flattened out in November relative to what we saw at the end of October.

Okay. Thanks.

This does conclude the question and answer session. I will now turn it back over to our hosts for any additional or closing remarks.

Thanks for joining us on third quarter conference call. Hopefully we'll look forward to providing you with better results after the fourth quarter. Thanks again.

Once again this does conclude today's call. Thank you for joining us, and have a great day.