Shoe Carnival Inc (SCVL) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Shoe Carnival's fiscal year 2009 second quarter earnings conference call. Today's call is going recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the Company's SEC filings and today's press release.

Investor 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 contain 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, and welcome to Shoe Carnival's second quarter fiscal 2009 earnings conference call. Joining me on the call today are Kerry Jackson, our Chief Financial Officer, Cliff Sifford, Executive Vice President and General Merchandise Manager, and Tim Baker, Senior Vice President and Operations Manager. We are pleased to report that Shoe Carnival met or exceeded the majority of our internal goals for the second quarter of 2009. While customer spending and the overall economic environment remained challenging in the second quarter, we were able to improve our year over year of gross and operating margins and therefore record earnings per share equal to last year. Our results demonstrate the strength of our business model and our ability to effectively manage the controllable aspects of our business; particularly operating expenses, inventory and our marketing and merchandise strategies. We are very pleased that our back to school sales season has been much better than anticipated to date especially in those markets where schools have reconvened. I will provide more detail about our future outlook in a few moments.

Now focusing on our second quarter. As anticipated net sales were lower in the second quarter of 2009 compared to the prior year period due to the decline in customer traffic. Comparable store sales were down 6.4% which was in line with our expectations for a mid-single-digit decline. As we expected customer traffic in the second quarter was negatively impacted by several factors compared to the same period last year. First, a shift in the retail calendar moved the majority of sales tax-free holidays from the end of the second quarter in fiscal 2008 into the third quarter in fiscal 2009. Let me explain that a little further. This year only 19 stores are in states where tax-free days fell in our fiscal second quarter. Compare that to 2008 when 121 stores were located in states with tax-free days that fell in the second quarter.

In addition, government stimulus checks were received by consumers during the second quarter of 2008, which we believe had a positive effect on sales last year. As you know this particular stimulus effort was not repeated in 2009. In the second quarter 2009 our gross profit margin increased to 26.8% as compared to 26.6% in the same period last year. Our ability to clear through inventory in the first quarter of 2009 positioned us well for the second quarter with a very clean product assortment. As a result promotional and clearance activities were in line with our expectations. Importantly although we saw a decrease in transactions due to the decline in consumer traffic, we realized an increase of about 6% in the average price per pair sold. This strategy of continuing to raise the net realized price of our footwear is particularly significant as we enter the back to school sales period and athletic footwear becomes much more important. In addition to the improved gross profit margin we effectively controlled selling, general and administrative expenses resulting in savings of $1.7 million in the second quarter of 2009, as compared to the prior year.

Our store level distribution center and administrative management groups did an excellent job controlling costs despite opening two new stores in the quarter and operating 11 more stores than in the same period last year. And finally we continue to improve our balance sheet over the prior year period. Our cash position increased to $17.7 million we remain free of interest bearing debt at the end of the second quarter of 2009. Part of our strategy to mitigate the impact from the downturn in the economy has been to shrink our average per store inventories. We reversed that strategy in the second quarter. While we ended the quarter with overall average inventories about flat compared to last year, we decreased the amount of inventory held in reserve in our distribution center and increased by an average of 6% the amount of inventory actually in the stores. We feel this increase in inventory is one of the keys to our current success during the back to school sales period and will enable us to maximize our business in the remainder of the third quarter.

We also believe our strong unleveraged financial position leaves us well-positioned for additional square footage growth over the next several years. For 2009 we still plan to open approximately 16 stores, two of which celebrated grand openings on August the 1st, with the final four openings scheduled for the third quarter. 14 of the 16 new store openings will fill in existing markets. We closed one store in the second quarter and we'll close six additional stores in the second half of 2009. The majority of the cost involved to close these stores were recorded in prior periods when we made the decision to close these specific locations. We will continue to review our annual store growth rate based on our view of the internal and external opportunities and challenges in the marketplace. At the end of the second quarter we operated 314 stores in 29 states. We feel very confident in our position as we enter the back half of 2009.

During this challenging economic environment associates in our stores, in the distribution center and at our company headquarters are focused on delivering an in-store experience that separates us from our competitors. We think there are certain key elements of our overall strategy that accomplish exactly that. A few of them that we believe are particularly important in today's retail environment are, number one, providing a full assortment of family footwear at prices our customers can afford. Number two, maintaining a stronger focus on children's product and sizes than our competitors. Number three, shifting our product mix to include a broader and deeper selection of athletic footwear. And number four, implementing creative in-store visual elements that highlight key product styles and the hottest brands.

Now let me speak briefly about the back to school season. We are seeing greatly improved sales trends in August especially for stores where schools have reconvened. Comparable store sales thus far in August are up approximately 11%. Only about 5% of that 11% increase is due to the shift of sales tax-free holidays out of fiscal July and into fiscal August. While there is considerable uncertainty regarding consumer discretionary spending after back to school, we remain optimistic about the sales trends for the remainder of the quarter. Therefore due to these improved trends early in the third quarter we expect to record positive comparable store sales for the first time in the last 12 quarters. Customers are responding well to our marking efforts, in-store promotional activities in both our athletic and nonathletic product assortments. We believe when customers have a reason or need to shop like during the back to school season combined with the right incentives to buy, they are looking to Shoe Carnival for the value proposition they demand.

We are very pleased with our inventory levels and we believe our current merchandise assortment has us well-positioned for the last two weeks of back to school and the remainder of the third quarter. We are confident that our business model of providing the right product assortment for the entire family at a compelling value and in a fun shopping environment will continue to set us apart in this challenging economic environment. Our management team has been through many economic cycles and we will continue to conservatively manage the controllable aspects of our business until we have better clarity with respect to a sustained economic recovery. We remain intently focused on profitable operations, cash generation and gaining long-term market share. Now I'd like to turn the call over to Cliff Sifford for a few more details on our merchandise.

Thank you, Mark. As Mark stated our total comparable store sales were down 6.4% for the second quarter as traffic was down 6.1%. On a positive note our average unit retail in from a was up in footwear was up 6.2%. We recorded losses in every department as our customer had less disposable income due to lack of consumer stimulus checks compared to the prior year. This economic downturn has taught us that the customer will spend when there is a need or when dollars are available as she did in February with rapid refund. I would like to share with you a recap by department of our second quarter sales and would then like to take you through the current back to school sales trends.

Our women's nonathletic department our sales ended the quarter down mid single digit. However, we have been pleased with the positive results within our women's sandal category as gladiators, sports sandals and thong continue to sell well. Unfortunately the strong performance of sandals was not enough to overcome the disappointing performance of dress shoes, low profile and traditional flats. As we reported on our last call, our buyers did a very good job of clearing through the last of the fall carry over during the first quarter. This allowed for margin increase of 110 basis points in our women's nonathletic department. The men's nonathletic department our comparable store sales were down mid-single digits for the comparable store sales were down for the second quarter.

As we reported on the last call we continue to see a move to more traditional classifications such as comfort dress shoes, boat shoes and soccer slides. Here just as in women's we have seen a continuing slow down of low profile casuals. Margins in this department remain relatively flat for the quarter as average unit retails climb 2.8%. The children's combined business also ended the quarter down mid-single digits. The children's athletic business was down low-single digits while the children's nonathletic business was down high-single digits. The children's nonathletic loss was primarily due to our exiting the molded footwear business from the second quarter prior year period. Since molded footwear was a low margin business our margins in children's nonathletic ended the quarter up 200 basis points. In children's athletic losses were driven by boys' skate and basketball as well as girls' classic.

On a positive note Converse Chucks, boys running and fashion athletic from Nike all showed strong sales. In adult athletics comparable store sales were down mid-single digits for the quarter. Losses were primarily from the classic categories, fashion low profile, men's basketball and skate. We were pleased with the performance of several key classifications such as Converse Chucks, urban fashion styles from Nike along with the running category for both men and women. Now I'd like to give you some insight into the exciting things that we've seen happen for back to school. For the month of August we have experienced comparable store increases in every department.

Our nonathletic departments are reporting mid-single-digit increases while athletic departments are up double-digit. Key items are coming from brands like Sperry, Blowfish, Nike, Converse and Puma. Key categories include women's boots, junior's flats, women's and men's boat shoes, children's and adults Chucks, children's skates and adult fashion athletic. As Mark stated, we have completed all tax-free holidays and as of today 90% of our markets have gone back to school. The trends over the past several years as the customer gets back to school, sees what is hot and then decides to buy. This year not only did the customer shop early, but our sales in stores have already gone back to school have continued to be strong. Now let me add some color as to what we believe is driving these increases.

As we said on our last call, we believe that in challenging economic time periods buying habits shift from want to need. We believe that back to school is a time of need and we definitely experience this as we entered the season. Our merchants did a great job of shifting purchases into key categories for this time period. We planned our inventories on a store-to-store basis up from a year ago concentrating on buying depth in key items and classifications. We put together an all-encompassing marketing campaign that included print, electronic media and digital. We are very excited about our entry into the digital space as it gives us more access to a younger consumer.

One of the strategies we executed was the creation of a Facebook page where customers can opt into follow us as a fan of Shoe Carnival. We keep our fans updated on the latest ads or special events going on during any particular week. We set this page up less than four weeks ago and to date we have already registered over 10,000 fans. We are pleased with the customer response to this new marketing strategy.

In closing we are very pleased with the strong performance for back to school. I would again like to call out our merchants, store operations and the distribution teams who all did an outstanding job in getting trend right merchandise in the stores for this all important season. Also our marketing staff did a great job in putting together a campaign that was memorable and exciting. We feel that our campaign set us apart from our competition and drove customers to our stores. As we move through fall we hope to build on these successes as we execute our holiday campaign. Now I'd like to turn the call over to Kerry Jackson.

Thank you, Cliff. Let me begin by discussing results for the second quarter and first six months followed by information on cash flows and ending with certain expected financial metrics for Q3 and the full year. Our net sales for the second quarter decreased $5.7 million to $152.8 million compared to $158.5 million for the second quarter of 2008. The decrease in sales resulted from a decline in comparable store sales of 6.4%, in addition to a loss of sales from the stores close since the ends of second quarter of last year. This decrease was partially offset by an $8.1 million increase in sales generated by new stores opened since the second quarter of 2008. Of the total comp store sales decline for the quarter, about 2% of the decline was attributed to the shift in sales tax-free holidays that Mark discussed in his remarks. Gross margins for the second quarter of 2009 increased 0.2% over the same period last year to 26.8%, an increase of 0.4% in the merchandise margin was partially offset by 0.2% increase in buying, distribution occupancy costs as a percent of sales.

As discussed earlier, the merchandise margin benefited from entering the second quarter with substantially less clearance product in our inventories. Despite incurring less buying distribution occupancy expense during the quarter, compared with second quarter last year, we deleverage these expenses by 0.2% due to lower sales for the quarter. We were able to decrease our selling, general and administrative expenses $1.7 million or 0.1% as a percent of sales, despite operating additional 11 stores at the end of the second quarter as compared to the prior year. Approximately 30% of the savings in SG&A for the quarter was due to incurring less advertising expense. We shifted advertising from July and into August to correspond with the shifts in sales for tax-free holidays and the later back to school date.

Store closing costs included in SG&A for the second quarter decreased to $132,000 or 0.1% of sales as compared to $300,000 or 0.2% of sales for the second quarter last year. Preopening costs for the second quarter decreased to $153,000 or 0.1% of sales compared to $406,000 or 0.3% of sales in the same period last year. We opened two stores in Q2 for the current year as compared to 12 stores in Q2 last year. The remaining expense savings are spread across many categories and are a result of tight expense controls by our associates. Operating income for the quarter was $1.9 million compared with $1.5 million in Q2 last year. Our effective income tax rate for the second quarter was 47.3% as compared to 34.3% for the second quarter last year. Included in this year's Q2 expense were state tax audit adjustments which caused the rate to increase compared to the prior year. We continue to expect the annual income tax rate of approximately 39%.

Net income for the quarter was $982,000 compared to net income of $977,000 in Q2 last year. Diluted EPS was $0.08 for both Q2 this year and last year. Now transitioning to year to date results, our net sales for the first half of 2009 decreased $490,000 to $320.1 million, compared to $320.6 million for the first half of 2008. The decrease in sales resulted from a decline in comparable store sales of 3.3% in addition to a loss of sales from the stores closed since the beginning of fiscal 2008. This decrease was almost completely offset by $17.3 million increase in sales generated by new stores opened since the beginning of fiscal 2008. Gross margins for the first six months of 2009 decreased 0.4% over the same period last year to 27.4%. The merchandise margin decreased 0.4% while buying distribution occupancy costs remained flat as a percent of sales.

SG&A expense decreased $908,000 for the year to date period and as a percentage of sales decreased 0.2%. Store closing costs included in SG&A decreased $240,000 to $262,000 in the first half of 2009. Preopening costs increased $194,000 for the first half of 2009 to $634,000. Net income was $5.1 million compared to net income of $5.8 million last year. Diluted EPS for the first half of the year decreased to $0.41 as compared to $0.46 in the prior year period. Now let me discuss information effecting cash flows. Capital expenditures for the first half of 2009 were $5.5 million, of which $3.6 million was for new stores. We continue to expect total capital expenditures in fiscal 2009 to be between $10 million and $12 million. Lease incentives received from landlords are expected to be approximately $1.9 million. Depreciation expense for Q2 was $3.7 million and $7.6 million for the first six months. For the full year, depreciation expected to be approximately $15 million.

My final comments today are on certain financial metrics for Q3, 2009. As Mark said earlier, given the strength of our sales so far in August, we feel that we can achieve positive comp store sales in Q3. We anticipate this increase should be in the range of low-single digits to mid-single digits. The shift in tax-free holidays from Q2 will be a benefit to our Q3 comp store sales for the full quarter by about 2%. In Q3 last year comparable store sales declined 5%. With our inventories well controlled we expect a slight increase in our gross profit margin in Q3 this year, although increased promotional activity during the remainder of the quarter could impact this increase.

We will continue to control our SG&A expenses. With the expected increase in sales we expect to be able to slightly leverage our SG&A in Q3 this year. We will increase overall dollars spent in SG&A over Q3 of last year due to additional advertising and employee incentive program expense along with the cost of operating additional stores. Part of the increase in advertising is due to the shift in tax-free holidays. This concludes our financial review for the second quarter. I would now like to open up the call for questions.

Thank you, and ladies and gentlemen, our question and answer session will be conducted electronically. (Operator Instructions) We'll pause for just a moment to assemble the queue. Our first question comes from Sam Poser with Sterne, Agee.

Good afternoon, everybody. A question on the SG&A. How much of the SG&A is fixed versus -- are variable and figured costs, Kerry?

Sam, that's a difficult question. We can adjust if we perceive a sales trends coming down we can adjust our expenses accordingly and we proved that in the past. However, if we see if we see it sales would be a short term event, then we would have a difficult time adjusting our expense structure accordingly. So we have a great deal of flexibility if we can see an opportunity coming. Now items like we are seeing in Q3 where we have a tax shift, that benefited SG&A in Q2, whereas we incurred less advertising costs, but in Q3 we will incur more advertising cost. So there are certain elements out of our control just following the pattern of sales.

How should we look at the SG&A looking in the short term into Q3?

Well like I said I think even though we are going to incur more dollars in pure SG&A expense given we are also going to incur additional sales we should be able to leverage the overall expense based on our expectation of higher sales.

You have it offset in the fourth quarter from last year, correct?

We do. Last year we took a charge in store store closing costs of about $2.4 million.

Okay. And then, Cliff, just wanted to follow up with you on some of the categories, how is the wellness category shaping up for you, so to speak?

Sam, since that really is right now it's one shoe or one style, we really don't comment on a single category or style like that.

I was told I was allowed to ask about categories.

I would be glad to talk to you about categories, that category it's one shoe and for competitive reasons would rather not talk about that one shoe.

Can you give us a little bit of color on the kids business and on where the action is there and where you see that going forward as well as you commenced on the boot business is off to a good start. And how you look at playing out to the balance of the year.

Our kids business, any time in your a recession kids business continues to be strong. We've seen that this year with the children's business and for back two school we are continuing to see that as I said in my prepared remarks. We are getting good traction out of our fashion athletic which is really dominated by Nike, again, good traction out of skate especially in girls and in running as well. So it's a little early yet for me to tell you that boots are going to be strong, although the early delivery we've gotten on boots so far we've seen some good sell through in kids. We know we are about to enter into a good boot market.

And lastly, Cliff, to what degree would you say is your assortment narrower than it was a year ago? How much more focus has it gotten on a year over year basis?

I don't think it is narrower. We expanded our selection somewhat, especially in athletic, not only in styles but in depth. We added color which we felt we were probably a little lack in last year for back to school. We added some color to our assortment, and obviously we added depth, and we think that might be the difference in what we are experiencing at retail.

But did that mean that in other businesses like women's dress maybe was made a lot narrower to allow for the depth and breath of athletic?

We absolutely shifted dollars out of the brown categories and into athletic categories for back to school.

So you are focused much more on the key items --

Yes. We are not any different than anyone else. More than 65% of our business for August is athletics. So we shifted dollars out of the brown shoe business and into athletic.

Thank you very much. Good luck.

We will take another question from Barry Sosnick with Gilford Securities.

Hi, how are you? Actually looking at the numbers, particularly inventory turns, it's hard to get an idea about how well you've been turning the inventory because of the high sales of stock ratio at the end of the quarter. Wanted to get an idea in terms of what you guys are looking at internally.

On inventory turns, Cliff.

Actually our inventory turns will stay somewhat flat to last year. In fact flat to last year. Really depends upon how sales trend as we go through the second half. But we are planning, I will tell you this, we are going to plan our inventories up at key time periods. We do believe that a key to our success at back to school is that the customers were able to find what they were looking for. As we go into holiday we'll increase our inventory a little over last year in hopes of generating additional sales which should not affect turn in any way.

But turns were up for the second quarter because again --

I would say turns are relatively flat to last year.

Okay. In terms of the shift of the inventory from the distribution center our to the stores how much of that was related to the upgrade in the distribution center, which of course is a segway to getting some update in terms of how that's progressing.

I will let Mark address the distribution center, but I can tell you that none of that shift into the stores was because of the upgrade. That was a strategic decision that we made not to count on fill-ins. Back to school is such a concentrated short period of time, that if you count on refilling the stores once the back to school season starts in the schools you can't get the product in fast enough. So what we do is we anticipated the need prior to school and we put the product in the stores in greater depth than we did a year ago and a greater assortment than we did a year ago and that way when the customers came in they were not disappointed.

As far as the update on the distribution center?

We have just right prior to back to school went through and up grated the software and replaced all the existing software in the dc with a new set of software and that software is working very well. It was a very uneventful conversion. Later during the fall we will be upgrading certain pieces of the conveyor systems. We expect here again that not to be an issue where it will affect operations. We will work around those upgrades around the need to get product to the stores.

Well, it's wonderful news and best of luck in the upcoming quarter. Thank you very much.

And now a question from Bernard Sosnick.

Yes, I just wanted to focus a little bit on the overhang of inventory, apparently at the manufacturing level due to difficulties from other retailers. Do you foresee opportunities -- opportunistic buys coming your way that could be helpful in the second half of the year?

We have not seen great increase in opportunistic buys. As every year and every season we do, we are made privy to some of those buys, but as of today I haven't seen a great increase in that year over year.

I'm also kind of interested in what your experience has been at time in the past when other athletic footwear retailers have had difficulty, has it resulted in more promotional activity shifting down to Shoe Carnival?

Actually with the -- most of the key vendors now have their own outlet stores. And as product is cancelled off they normally take that product into their own stores. So we have not seen an increase in promotional activity due to the difficult environment. As I said every quarter or every year there are close-outs made available to us. We just have not seen a great increase in that activity over the past year.

And finally, based on was said about the early August sales, sales are running better than you expected. Your inventory is churning better than expected moving out faster. Why did you reference the possibility of an increase in promotions later in the third quarter?

Well, I don't know that we did but if someone did mention that there's a possibility of an increase in promotions it would be in reaction to what our competitors do throughout the remainder, not only the third quarter but as we go into the fourth quarter as well. Bernie, as you well know we have the capability in-store to be very reaction near to what our competitive set does, either through the advertising medias or mediums or with regard to whatever kind of promotions that they run. So that's what we generally speak of is, we have got a fairly -- not a rigid but have a set promotional calendar and we can very rapidly react both within the media and more particularly inside our stores to what our competitors do on a promotional activity level.

Thank you. You've made it very clear that your success so far is due to a better differentiated assortment, so good luck in the months ahead. Thank you.

Let's now go to Jeff Stein with Soleil Securities.

Change direction here for moment here. Can you bring us up to date, Mark and Kerry, on your store closing plans for the balance of the year? You mentioned six and for some reason in my model I have eight for the back half of the year. Am I just wrong or have you reduced the number of planned closing in the back half?

Well, we are planning on eight for the full year, Jeff, so I don't know if there was confusion regarding the back half or versus the full year. That's -- and I'm not sure without looking at which particular stores are -- without trying to reconcile your number and our number, where the difference lies, but we are planning right now on eight store closures for the full fiscal year of 2009, and I believe two of those have closed, so we have got six in the back half.

So 16 openings and eight closings.

That's correct.

Okay. Any thoughts at this point about next year? I would think you've got to be thinking about what you are going to do in 2010.

We are, and I would tell you that as of right now the openings and closings are probably not too much different than fiscal 2009. We probably have got a few less stores that are scheduled to be closed, but I would expect that new store openings will be in the range of 16 to 20 stores. Working on -- obviously we are working on quite a few more deals than that, but I would anticipate somewhere between 15 and 20 new stores for next year.

Okay. And wondering as you look at your August sales trend, you talked about classifications that are doing well, sounds like athletic, any comment on performance by gender, men's, women's?

Well, Jeff, the performance for back to school, athletic is about 65% of our total. The women's and men's business are both up. They are up about mid-single digits. But the athletic business is up double digits. So they are picking up a little market share this month.

Can you talk about how many, what level of dollars of advertising were shifted from Q2 to Q3?

We said, it ends up being around $1/2 million.

Okay. And at this point what kind of comp store sales increase is necessary to leverage buying distribution and occupancy?

Well, we've seen a great deal of volatility in our buying distribution and occupancy as of late. Historically are the number is we would need 2% to 3% comp store sales increase to leverage that. If you look at our BD&O so far this year, we are basically flat on dollars spent. We've initiated some programs that have saved us a significant amount in our distribution center and our freight to our stores, and we've also found some cost savings by renegotiating some rent. So therefore we are able keep the dollars flat. We expect to see here again and these are unusual times and we expect to have rather flattish buying distribution and occupancy costs for the full year in dollars spent.

Okay. And despite the fact that your SG&A is going to be up in Q3, just kind of curious as we look ahead to fourth quarter, does it become more variable again so potentially if we see sales begin to slip back you could potentially see a year on year decline in SG&A dollars?

Well, Jeff, we will see a year over year decline. Again, part of the SG&A costs last fourth quarter consisted of that charge for closing stores, when we identified specifically the stores that we are going to close. In getting to the operational aspects of the fourth quarter this year versus the fourth quarter of last year and versus a third quarter, we've made a definitive decision not to cut labor in our stores in any significant way. And that's an overall riding statement. We feel that our labor costs are low enough and what we are focused on right now is with all the associates at store level is creating additional sales through sales help in the aisles, fitting customers, etc., etc.

So we are not focused on cutting labor as sales decline right now. So we won't see any cost savings generated from labor and that's besides occupancy cost and advertising, that's the biggest cost we have at store level.

Jeff, let me add some color about the Q3 total dollars spent. You have to go back last year, we saw that the economy was getting tough and we made a conscious decision in Q3 last year to significantly cut our advertising expense. We talked about it. And so what you saw with overall SG&A was cut $1.2 million in Q3 last year over Q3 of 2007. So now what we have is a shift in dollars in Q3, but on top of that we have a more traditional back to school spend of advertising and certain other expenses that came back on employee incentive programs, etc. So what I look at is Q3 spend, it looks like it's larger than -- increase year over year is larger than it is only because Q3 last year was aggressively cut.

Right. Okay. And final question for Cliff. Just kind of curious, Cliff, after the back to school rush is over, what do you think happens to top line, once it goes for more need based to back to want based selling?

Jeff, we believe that boots are going to be very strong this year. In fact the early read we've gotten so far on boots and on junior flats and certain other junior categories we believe that we are going to have a strong boot season. And if weather cooperates, I hate to use that, but in October I think you have an opportunity to pick up top line.

Got it. Okay. Thanks.

Let's go to Susquehanna Financial Group, Chris Svezia.

Good afternoon, everyone. A couple questions, first just a point of clarification, Mark, you had mentioned that 90% or so of your markets are back to school now. You said sales given in some of those markets is have gone back continue to trend positively. Is that what you said?

I think what I said -- Cliff probably said that, but, yes, that's true.

I'm sorry. Okay. But I guess just going off the prior question here, when you guys thinking about as you come through back to school and you get into September a little bit, I know the comparisons get very favorable for you guys. And based on sort of your guidance, trends get a little bit more challenging. When you make a reference to boots and what you're doing there, do you have enough differentiation in the product relative to the competition, broadly speaking, to maybe see opportunity for comps to be not potentially as bad as you're kind of indicating, or not to see maybe the declining that potentially your guidance would assume?

Chris, I'm not really sure how to answer that versus the competition. Here's what I can tell you that we do at Shoe Carnival. We merchandise our stores to the consumer that shops that store, and we feel that we have a very strong fall package put together in women's boots and men's and kids nonathletic. If we can continue with the traction in athletic and the boot sales trend positively as they are today, then you know what, the top line is going to obviously be better. But it just remains to be seen what happens after the customer goes back. There's a need at back to school. And once that need diminishes and it's going to be interesting to see what happens. We believe, again based on the fact that we've seen early performance on boots and early performance on flats and early performance on certain junior casual and dress shoes, that -- and in the men's category, that we have an opportunity to increase sales as we move through third quarter.

Right. Okay. Just in the context of you're obviously performing better than most generally speaking your peers as you've gone into back to school. In the context that your athletic positioning seems to be performing as well as it is you are obviously doing some things incrementally it different here. I was just curious if in fact those trends carry into other categories to drive some differential as you go into the second half of the year assuming incrementally we get a little more promotional, a little more competitive. I guess that was the context of the question. Just as you look to the athletic components to the business, and you've increased it as we've gone through this year, and I know it's probably early but as you think about next year early spring, does athletic continues to grow, or do you think you are starting to see some improvement in the nonathletic categories that is percentage of your business that slowly starts to increase outside of the seasonality?

We believe we are in an athletic run right now and I think that's going to continue on into the spring season.

Okay. All right. Thank you very much. Congratulations.

And let's go to Jill Caruthers with Johnson Rice.

If you could talk about -- I know one of the categories shrinks you mentioned was urban focused athletic shoe. If you can talk about maybe the performance of your urban stores versus kind of the less urban focused stores?

Jill, if you remember I think it was maybe two years ago we talked about the fact that we were -- the lack of product for our urban consumer, especially from our major athletic vendors and we worked individually with each one of those vendors and we were able to get some product that we can put in our stores. And we've seen improvement in those stores since the latter part of last year and for back to school we continue to see that improvement. In fact those stores are running with the Company.

Okay. And then if you can talk about the strength in your average selling price of up 6% plus. Is it per certain category that's driving that strength, or is it just clearly you have lower clearance in the stores so your regular price selling is greater?

It's a little of both. In the women's nonathletic and in the kids nonathletic, along with even in men's the average, well moreso than kids and women's the average price common cause we have less clearance and we are selling more regular price products. In athletic it's really the mix of brands. When you're selling the better brands the way we are selling better brands it has helped raise our average price.

Thank you.

And moving on to Heather Boksen with Sidoti & Company.

Good afternoon, guys. Most of my questions have been answered. I just was curious if you can give us a little more color. Everybody seems to be talking about good early boot reads. What specifically are you guys seeing there?

Well, today we are seeing this mainly in the junior boot category, and it's some fleece, some sweater, a little western, but it's a good bit -- it's a lot like what we saw late in the season last year and just a continuation of those categories.

Alright. And I guess my other question is with regards to cash and the plans for it, anything out there besides just store development?

Right now -- this is Mark, right now all we are talking about is organic growth with Shoe Carnival stores.

No buybacks or dividends or anything like that?

Not at this point in time.

And I'm assuming, I know it's early, but for next year it sounds like the store opening plans are similar to this year, so should we be thinking CapEx next year like this?

It would be pretty close to the same. Until we see, like I said in my prepared remarks, until we see some clarity with respect to a more sustained economic recovery, we will play store openings fairly conservative. We'll continue to focus on the stores that don't yield the capital requirements or the capital returns that we expect and so everything is going to be played pretty close to the vest. We will invest a little more money but not significant dollars in remodeling certain stores next year, particularly as they come up for renewals. So we may spend a little bit more money, but it's not going to be a significant amount, certainly relative to our cash position.

Alright. Thanks.

Shawn Boyd, Westcliff Capital Management. Go ahead, please.

Hi. I had a couple of clarifications. In the call you mentioned the ASPs at 6%. Was that on the July quarter or the comp to date in August?

I'm sorry, which 6% were you referring to?

The average selling price.

That was for the second quarter.

That was for second quarter. And can you give us for August quarter -- or excuse me August to date?

Don't have that number off the top of our heads. We can talk about that on our third quarter conference call though.

Okay. And just a little further on this, can you give us a rough range of what is high and low on selling prices for your shoes and what's the average right now?

It really depends upon what category you are speaking of, because we cover every category. We are very strong kids retailer and obviously we are in every category of men's and women's footwear. So I mean let me just say this, we carry athletic shoes up to $129. And we start at kids pricing. So from kids pricing up to $129.

Okay. Very helpful. And when you have a product at the higher ends of that range, that starts to come into the mix, is it at a similar gross margin percentage such that it's generating a higher amount of gross margin dollars per unit sold, or would it be a lower gross margin percentage?

It's about -- it's the same. It really all depends on how well you buy. If you buy shoes that the customer wants at a higher retail price, she is going to pay the price, if you don't then obviously the margins are lower.

I will add this. A lot of the product that we have at the higher end of that range is proven product within our stores. We don't typically take too many chances that that kind of price points on seasonal product or fashion forward product. So most of the products that we have at that above $100 range or even at the $100 range is really proven product within our four doors, I mean our four walls.

Okay. Very helpful. One last clarification if I may. The comp to date at 11%. We are looking at it as having a five percentage point impact with the shift on the tax-free holiday sales. The comp that you are guiding to for the quarter is low-to-mid-single digits and you expect about a three percentage points impact to that?

Two percentage points. It was about a 2% detriment to Q2. And it's about a 2% benefit to Q3 from those tax-free shifts.

Got it. Okay. Thank you so much.

And to David Turner with Avondale Partners.

Thanks, good afternoon. I too am curious about the ASP trends quarter and maybe you don't want to answer which is fine but I guess maybe I didn't read between the lines well enough. Without being specific, do you get the sense that it's more traffic coming back into the stores or is the strong start to Q3 more of ASP improvement as well?

David, the average selling price is -- the net realized average selling price is up. I don't want to get into specifics intra-quarter on exactly how much it's up. We gave comp guidance because it's the all-important back to school season as you well know, and we thought that comp guidance was appropriate at this point in time. But I'm not going to get into very detailed specifics regarding that. We have seen, obviously seen, an increase in traffic. A lot of that in the fiscal month of August has come from the shift of the tax-free days in a number of states, a lot of states. And traffic is up even beyond those tax-free shifts.

So we are seeing, as we said, of the 11% comp store gain in the fiscal quarter only about 5% is attributable to that tax-free shift. So we are seeing relatively healthy, certainly relative to the recent quarters in our -- at Shoe Carnival improvement in comparable store sales. So we are really happy with that 6% improvement that we are seeing net of the tax-free shifts. However, we like everybody else are concerned that -- concerned with what happens to the consumer subsequent to that period of need or the period of want that we all call back to school. So we are not going to change the way that we plan our business in terms of expense structure.

We are changing a little bit how we plan our business in terms of inventory and the selection and the depth of product. We have increased that for back to school and we anticipate keeping it increased, if you will, all the way through the third quarter and into the fourth quarter. And we've got the capability, as you well know, to react both from a promotional standpoint and from an inventory standpoint if we need to. So again we are going to continue to plan and execute the business from a conservative standpoint as we go forward.

I've got you. And secondly, Cliff, interested in your comments about I think in the Q&A you had mentioned that you feel like your company at least is in an athletic cycle, or at least is as athletic as fairly sustainable. And this comes on the heels of some fairly negative results out of the mall-based guys I understand different geographies, different consumer, maybe. But I guess do you feel like there is a trade-down effect? I know Nike spent the last couple of years improving product in your stores, so it made sense that your athletic would improve, but is that, I guess is that taking sales from one channel and putting them in another?

I'm not convinced it's trade down. I am convinced that it's the ability to offer the customer that's been walking in our door an opportunity to buy fashion athletic and that's something that they have not had an opportunity to do over the past several years. And so I don't know that it's so much a trade down effect as it is that we are now able to please the customer as well.

Just better product.

Okay. Thank you.

We have a question now Russ Silvestri with SKIRITAI Capital.

Yes. Three questions. One, the tax rate, I heard you say something about it, I know it's abnormally high, but will that go down or is that what were you should figure going forward? Question one. Then also trying to get a sense of the inventories on a per square foot basis, given when the store openings are from the end of July or to the end of the month now, because it looks like the inventories were up versus a year ago with sales being a little bit lower, so trying to get a little bit more comfort on that. The last question, you talk about how people by for need and they come back for what they want. I was wondering if you could just elaborate. I know people have been asking but what are the styles that people have been coming back for from what they want for people from those states that have already been back to school for a significant period of time.

Let me start with the tax rate. The Q2 taxes rate was unusually high. It was 47%. And the Q2 tax rate last year was unusually low at 34%. Both of the quarters had -- last year was a benefit. This year was a detriment to stated tax audits and other types of adjustments, period adjustments. Because it's a low income quarter, Q2 is, it kind of exacerbates the percentage differential. On an annual basis with don't expect a big difference. We expect our annual rate to be about 39% this year, and it's been approximately the same, our guidance has been the same all years.

Okay.

As far as inventories are concerned, total company inventories ended the July time period relatively flat to last year, even with the loss in sales. We received inventories in August relatively flat because of the increase that we had in August. As far as want and need are concerned, a customer shops back to school for athletic product and that's a need. But when they come in and by athletic product and boots or Chuck Taylor's as part of the athletic product I think that then moves into need -- into want, excuse me.

So you are saying the Chuck Taylor brands is stronger than is one of the strongest brands that you are seeing from the demand side?

We are having a strong back to school with Converse Chucks.

Right. But there's obviously been a period of time in some cases a multiple of weeks where people can now come back and get what they want because they don't have it and it's not necessarily cool what they already have. So I was curious what is it that the kids are buying, or the parents.

I think that's what Cliff is saying is exactly that. Some of our hottest styles are coming from Nike and particularly in the running category and coming from Converse particularly the Chuck Taylors, as well as some of the junior boots. That's some of the hottest trends that we are seeing right now. Along with junior, really junior flats, but women's flats overall.

Okay.

Does that answer your question? I'm not sure we are getting to the answer.

That's okay. I'll live with it. I understand.

Okay. Well if you have got a more specific question than that please call us after the call.

Okay. I will.

(Operator Instructions) And we will take a follow-up question from Sam Poser.

Thank you. Just to clarify the inventory situation, there is just -- the inventory is pretty much the same, but there's just more inventory in the stores right now and there was more inventory in the distribution centers last year wait to go figure out where to go?

I wouldn't put it quite exactly that way. What we did, Sam, is as you well know, we hold back a certain amount of our product for subsequent fill-ins, replenishment, and so forth. What we did was we put more inventory into -- more of that product into the store in anticipation of sales as opposed to last year of letting the sales happen and then replenishing the product. So we are out front a little bit more of inventory store level to the tune of about 6% increase.

Is that primarily due to the basically how I guess back to school just became such a shortened season this year given the later back to school, later events and all the other things, that it was sort of just out of absolute necessity to do that?

It's a little bit of a change in strategy for us. Okay? What we are trying to do now is we think that we've gotten, that we have decreased store inventories to the point where we don't need to decrease inventories any more. All right? So we are taking a little more proactive approach on putting inventory into our -- specifically into our stores, but as you'll probably see throughout the third and fourth quarter, we plan to increase inventories a certain amount. Cliff is exactly right. With the increase in sales that we've seen so far in August, those inventories will tend to flatten out a little bit. Okay?

As a result of the cost of sales from that increase in sales. But our intent is to not to continue to lower inventories. Our intent is to start to build inventories now with a broader assortment and a deeper product selection.

In specific -- in the best categories?

Well, hopefully he buys the best categories.

Good luck with that, Cliff.

That would be the intent, Sam, is best categories.

That normally is our intention.

I thought you sort of hinted. I want to go back to store openings for a second, what is your, if we look out ahead three to five years where, how many stores do you see, if we see call it a normalization or getting back to you mean to some decent business looking 2010 or beyond, how big a footprint do you see Shoe Carnival having over the next three to five years?

I don't want to get into talking about 2011 and beyond. I would rather focus on 2010, until with see better clarity with respect to this economy. If we see the economy start to pick up, which quite frankly I don't see at this point in time, but when we do see that economy start to pick up then certainly we want to accelerate our store openings beyond that 15 to 20 a year. So we are focused right now on exactly like I said generating profit and cash flow in the short term, controlling our expenses and making sure that we have appropriate inventory levels and content and doing business right now.

As far as store development, obviously there's a lot of factors that go into that. Number one is availability of viability locations for 2010. I will tell you that it has been cut back just by the very nature of the real estate industry right now, but we still think that there are 15 to between viable locations that we can open in 2010. In 2011 and forward it starts to open up a little bit more with respect to real estate development, a lint in terms of new strip center development but moreso in terms of rehab of existing strip centers. So there's a lot of things that play into the amount of organic growth that we can have that real estate issue or the real estate piece of that, the real estate factor is certainly one of those. But when we start to see a better economy we will focus more on opening more stores than we plan for 2010.

Thank you very much, and good luck again.

Thanks.

And a follow-up now from Barry Sosnick.

Hi, just looking at the tables to the inventory and it actually decreased by about 9%. Your stock to sales is in good position. Does this mean that you are employing cash in a way to generate better buying terms?

Well, were not forcing purchase discounts if that's, if that's what you're asking, we are taking advantage of certain opportunities in the marketplace from a close-out standpoints when we can and when there are viability opportunities. Certainly, I don't know, Kerry do you have any further answer than that? We are not utilizing cash to generate extra discounts with our vendors and so forth, if I'm answering the question correctly.

You are. Thank you very much and appreciate your generosity with the time.

Sure.

And a question again from Jeff Stein.

Okay. Just one additional question, Mark, on the inventory, just to be devil's advocate the advantage of holding inventory back in the warehouse and your distribution center is to replenish according to need, so you are not taking unnecessary markdowns if you overshift to store. Is the risk that perhaps you are tossing the dice a little bit and if the sell off does incur you would reach higher markdowns, or have you reached the point of diminishing results where you could push inventory down and you think you are better off with a little more than less?

Well, Jeff, it becomes certainly maybe a little bit of a role of the dice, but remember it's not that we are putting a great deal of inventory into the stores that we haven't already purchased. Okay? So what, I mean with our systems what we are doing is making better predictions if you will of where that inventory is going to sell and when it's going to sell, certainly in the back to school period relative to the tax-free days and the titles that the schools go back. So all we've really done is take inventory that we own anyway, it's not like we are going out and buying additional inventory to a great extent, but taking inventory that we own already in our distribution center and saying, okay, we know we are going to have tax-free sales in certain stores, we know where and when schools are going to go back, let's be better predictors of business than we have been in the past and put that inventory to work as quickly as we can. And certainly that's -- we made -- Cliff and his team made the right call this year, because now that inventory is available to consumer approximately two weeks earlier than what it would have been last year.

So that it's not really a role of the dice if you will. It's utilize our systems better and as you well know we've put a lot of money into those merchandising systems over the past few years. So we've utilized those systems to be better predictors of business reason that business is going to happen when it's going to happen. That's how we look at it, not as if it's such a guess or role of the dice or taking much jeopardy with respect to markdowns. We really don't see it that way. What we are focused on is having more product with a broader selection and deeper inventory runs in stuff that we've already bought in the first place, if you see what I'm saying.

Yes. I understand. And your inventories at the end of the quarter on a per store basis were flat?

They were up 0.3%. I believe is the correct number. Now don't forget that the back to school cost -- excuse me, not back to school, but cost of sales from those tax-free shifts were reflected in that inventory on a per store basis at the end of Q2. So a good piece of those, well that cost of sales shifted into Q3. So we have that inventory on hand at the end of Q2.

Right.

Without that our inventories on an overall per store basis would have been slightly down.

Got it.

What I'm -- the point I'm trying to make is with respect to the third and fourth quarter, certainly we can react in a small way, but we can't react in a huge way to bring in inventories other than fill-in product in the third quarter due to the increase in sales that we've recognized so far or realized so far. So what we are looking at with respect to increasing our inventories is more in the fourth quarter and first quarter of next year. And don't misunderstand, we are not jumping out there and increasing our inventories in a significant way. We are talking about, let's make sure that we are not focused on cutting our inventories the way we have over the past couple of years.

Right. Okay. Thanks.

We have no further questions at this time. I'd like to turn the conference back over to Mark Lemond for any closing remarks.

Sure Thank you. And that you all for joining us today. Like we said, we are enjoying pretty good success with the back to school season so far. Again we don't have great clarity with what happens after -- with the consumer after back to school, but we think with the position that we've put Shoe Carnival in, we are fairly optimistic with respect to the remainder of the third quarter and the rest of the fiscal year. Thank you for joining us today.

Once again this does conclude today's conference call. We appreciate your participation.