Shoe Carnival Inc (SCVL) 2009 Q3 法說會逐字稿

Good afternoon and welcome to Shoe Carnival's fiscal year 2009 third quarter earnings conference call. Today call is being recorded and also being broadcast via live web cast. 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 decision 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 risks 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 fiscal 2009 earnings conference call.

Joining me on the call today are Kerry Jackson, Chief Financial Officer, Cliff Sifford, Executive Vice President and General Merchandise Manager, and Tim Baker, Executive Vice President Store Operations. We are very pleased to report that Shoe Carnival delivered its second strongest quarterly financial performance in the Company's history. We believe that our ability to improve our key financial metrics reflects the strength of our business model and the commitment and hard work of our associates in our stores, in our distribution centers and in our Company headquarters. Despite the economic challenges that continue to impact the US economy, we were able to generate a net sales increase of 12.6% for the third quarter of fiscal 2009 compared to the same period last year.

Our comparable store sales increase of 10.2% is the same largest increase in the Company's history. The sales increase combined with an increase in the gross profit margin and improved leverage of selling, general and administrative expenses resulted in a 211% increase in operating earnings and 188% increase in net income compared to the third quarter of last year. Earnings per share increased to $0.59 in the third quarter from $0.21 in the third quarter of 2008. This very strong earnings performance coupled with our emphasis on timely controlling inventory and fixed assets enabled us to generate cash flow of $18 million over the last 12 months and we ended the quarter with $27 million in cash and equivalence.

Now focusing on our third quarter results in more detail. The comparable store sales increase of 10.2% was significantly above our expectations for low to mid single-digit comp increase. From the very beginning of the third quarter, our customers responded well to our wide selection of value priced footwear for the entire family. Our 360-degree back to school advertising campaign which included a combination of television, radio, print circulars and digital marketing help drive an increase in customer traffic particularly during the first half of the quarter. Our positive sales results were broad based with every operations region and each broad product category delivering a comparable store sales increase for the third quarter as compared to last year. While athletic product was the dominant product category in the back to school period, we experienced strong boot sales later in the quarter.

Once again, we were successful in implementing our strategy of raising the net realize price of our footwear. For comparable stores, the average price per pair sold was up 5.5% in the third quarter while footwear units sold were up 4.3% as compared to the same period last year. We continue to see a favorable product mix shift to sale of higher price footwear including boots and at athletic product.

In the third quarter of 2009, our gross profit margin increased to 29.8% as compared to 27.2% in the same period last year. The realization of increased unit prices partly due to less clearance activity was the primarily reason for 110 basis point improvement in the merchandise margin. Due to our cost saving initiatives and reduced store closing costs, we were able to actually lower distribution and occupancy costs in the third quarter of 2009 compared to last year. These efficiencies combined with increased leverage due to higher net sales and the improvement in the merchandise margin resulted in a 260 basis point increase in the overall gross profit margin. Our management group continues to do a great job of controlling expenses.

In fact, selling, general and administrative expenses for the third quarter increased by only $2.5 million or 5.9% over the same period last year. The increase was primarily related to performance based incentive compensation and certain other employee benefits. And finally as I mentioned earlier, we continue to improve our balance sheet over the prior year period. Our cash position increased to $27 million and we remain free of interest bearing debt at the end of the third quarter of fiscal 2009. We ended the quarter with inventory up 2.4% on a per store basis. We feel this increase in inventory is one of the keys to our current success, and we expect will enable us to maximize our business during the fourth quarter of 2009.

Turning now to store expansion. Our 2009 new store opening plan was completed in the third quarter. With the four stores we opened during the third quarter, we have 16 new stores this year. We closed one store in the third quarter and we will close six additional stores in the fourth quarter of 2009. With this we expect to end the year with 311 stores operating in 30 states compared to 304 stores at the end of last year. The majority of the cost involve 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. We believe our strong un-leveraged financial position leave us well positioned for additional square footage growth as a retail real estate market improves over the next several years.

Looking forward to 2010, we expect little incremental store growth net of closures due primarily to the lack of new lifestyle and strip center developments. While we expect to open between 10 and 15 new stores, we will continue to strengthen the profitability of our comparable store base by closing 13 stores. We constantly evaluate our unit profitability and when economic feasible close stores that underperform our cash flotation. In 2010, six of the 13 anticipated store closures will happen at the end of the natural 10 year lease term and we expect to incur minimal closing cost for these stores. For the seven other underperforming stores, we intend to avail ourselves of negotiated kick out of co-tenancy clauses. We have recorded the majority cost to close these stores.

Now looking to the balance of fiscal 2009. We are very encouraged by our third quarter momentum and our outlook for the holiday selling season. We are very pleased with our inventory levels and we believe that the current merchandise assortment has us well position for the remainder of the fourth quarter. We expect that early category strength in women's boots in the third quarter to continue into the holiday season. Historically, November and December are our strongest volume boot months. In addition, we anticipate continued strength in the athletic category and are enthusiastic about the opportunity to have two new significant product lines in the wellness category with Skechers Shape-Ups and Reebok Easy Tone Shoes. Neither of these fast selling lines were available in our stores last year.

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 from the competition during the holiday shopping season. We continue to be optimistic about our sales trend for the remainder of the year and therefore we currently expect fourth quarter comparable store sales to increase in the range of 3 to 5% over last year.

Finally, I want to reiterate once again that our management team remains intently focused on managing the controllable aspects of our business, improving profitability, generating positive cash flow and gaining long-term market share.

I will turn the call over to Cliff for more details on our merchandise.

Thank you Mark. As Mark stated our total comparable store sales were up 10.2% for the third quarter of 2009. For comparable stores average unit retail is up 5.5%, traffic was up 5.7%, and most importantly merchandise margins improved by 110 basis points. We recorded increases in every department as our customer responded positively to our back to school merchandise strategy and favorable weather help jump start our boot business in September. We believe that a combination of our trend right product assortment, our depth of inventory and our value proposition made us the destination of choice for consumers.

Now I'd like to take you through each department and share with us trends that grow in where business. In our women's non-athletic department comparable store sales were up high single-digits. The increase was driven through the boot category as fur lined, flat casuals and western boots all sold through at a much higher rate than the same time period a year ago. Boots have become the new sport shoe for the season and we see this trend only getting stronger as we go through the fourth quarter and into the beginning of first quarter of 2010.

In our men's non-athletic department our comparable store sales were up double-digit and once again we saw strong double-digit comparable store sales increases in our men's boot category. In addition to boots we experienced strong increases in the boat shoe, canvas casual and soccer sandal categories. The children's combined business also ended the quarter with comparable store sales up double-digit. The increase was driven primarily out of the athletic categories although boots achieved a double-digit comparable store sales increase. Key athletic drivers of this increase were girls and boys running, skate, and fashion athletic. Key brand were Nike, Skechers and Converse.

In adult athletics, comparable store sales were up double-digits for the quarter with both the men's and women's athletic departments performing at the same rate. 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. One key classification I'd like to touch on is Wellness. For Shoe Carnival there are two key brands Reebok and Skechers. The strong sales we have experienced in the Wellness category helped drive our comparable store sales in the quarter, but even if we excluded the benefit from this category, we would have driven a high single-digit comparable store increase in athletics.

I would like to add color in the strategy we used to help drive our third quarter performance. First, as we mentioned in the last call we put together an all encompassing marketing campaign that included print, electronic, and digital media. We saw customers started to respond to this marketing campaign the first week of August and then saw momentum build as we moved through the end of the back to school season. We believe that our commercials resonated well with the young consumers and our print advertising called the attention of mom.

Second to help drive our third quarter performance we increased our store level inventories by reducing the amount of back stock we normally reserve in our distribution center. Although our overall average inventories were flat compared to last year, on a per door basis, we made the decision to increase our store level inventory position as we entered the third quarter. Thus we were able to flow key product from our distribution center in advance of our sales and as a result we had the right styles and sizes available to our customers at the time they were in our store ready to buy.

As we entered the fourth quarter we are upbeat about our merchandise opportunities. We continue to do a terrific job of controlling our aged inventory which is running well below last year. Once again, just as we did for back to school, we have strategically positioned our product mix in categories we believe will drive our business. As I mentioned earlier we believe the boots are the sport shoe of the season in all departments and we are well positioned to maximize our sales in this category. In addition to boots, we believe our key vendors in the Wellness category will continue their intense marketing campaign during the fourth quarter which in turn will continue to drive this high average unit retail business for us. To take full advantage of this hot selling category we have taken a strong inventory position in Wellness. Therefore, inventories are up 2.4% on a per door basis with boots and Wellness accounting for all of this increase. And lastly we are excited about our 360-degree marketing campaign which we believe will continue to capture the attention of the consumer and lead them to Shoe Carnival.

In closing, I once again would like to recognize our merchants, our marketing department, our store operations and distribution teams who all did an outstanding job making our record breaking third quarter performance possible. Now I would turn the call over to Kerry Jackson for details on our financial results.

Thank you Cliff.

Let me begin by discussing results for the third quarter and first nine months of 2009 followed by information on cash flows and ending with certain expected financial metrics for Q4. Our net sales for the third quarter increased $21.4 million or 12.6% to $191.5 million compared to $170.1 million for the third quarter of fiscal 2008. The increase in sales resulted from our 10.2% comparable store sales gain plus an $8.6 million increase in sales generated by new stores opened since the third quarter of fiscal 2008. These increases were partially offset by $3.6 million loss in sales resulting from the stores closed during past four quarters.

As we discussed in the Q2 earnings call in August, most of the state sales tax free holiday that we participate in shifted from the last weekend in Q2 last year to the first weekend in Q3 this year. We estimate this shift negatively affected our comparable store sales in Q2 by 2% and positively affect the comparable store sales in Q3 by 2%. On a year-to-date basis we feel the sales tax free holiday shift had little or no effect to total or comp sales. Gross profit margin for Q3 increased to 29.8% from 27.2% in Q3 last year. The merchandise margin increased 1.1% and buying distribution and occupancy cost as a percentage of sales decreased 1.5%.

The merchandise margin benefited from less clearance activity and strong sales of men's, women's and children's boots which carried a higher margin. The leverage of our buying distribution occupancy cost was a result of our significant increase in sales combined with incurring less expense in the quarter compared with Q3 last year. Our selling and general administrative expense increased $2.5 million to $44.9 million in Q3 this year. However, our Q3 sales gain enabled us to leverage these costs as a percentage of sales by 1.5%.

The $2.5 million increase in SG&A expense was primarily the result of additional cost related to incentive compensation and employee benefits and to a lesser extent advertising and cost to operate additional stores. Preopening cost in Q3 decreased to $225,000 from $386,000 in Q3 last year. We opened four stores in Q3 this year versus opening eight stores in Q3 last year. Store closing costs included an SG&A decreased to $138,000 from $336,000 in Q3 last year. Operating income for the quarter was $12.2 million compared with $3.9 million in Q3 last year. Our operating margin for the quarter improved to 6.4% from 2.3% in Q3 last year.

Our effective income tax rate for the third quarter was 38.5% as compared to 34.0% for the third quarter last year. We continue to expect the annual income tax rate to be approximately 39%. The income tax rate in Q3 last year was lower due to certain discreet period adjustments. Net income for the quarter was $7.5 million compared to net income of $2.6 million in Q3 last year. Diluted EPS was $0.59 per Q3 this year compared to $0.21 last year.

Now transition to year-to-date results. Our net sales for the first nine months of 2009 increased $21.0 million to $511.6 million compared to $490.7 million in 2008. Comparable store sales for the year increased 1.4%. Gross profit margin for the first nine months of 2009 increased to 28.3% from 27.6%. The merchandise margin increased 0.1% and buying distribution occupancy cost decreased 0.6% as a percentage of sales.

SG&A expense increased $1.6 million for the year-to-date period. However, our year-to-date sales gain enables to leverage these cost as a percentage of sales by 0.6%. Store closing cost included in SG&A decreased $463,000 to $375,000. Preopening cost included in SG&A increased $33,000 to $859,000. Operating income was $20.7 million compared to $13.2 million last year. The operating margin increased to 4.0% from 2.7% last year. Net income was $12.6 million compared to net income of $8.4 million last year. Diluted EPS for the first nine months in the year increased to a $1 as compared to $0.67 in the prior year period.

Now let me discuss the information affecting cash flows. Capital expenditures for the first nine months of 2009 were $8.7 million of which $5.1 million was from new stores. We currently expect total capital expenditures for the full year of fiscal 2009 to be between 10 and $11 million. Total (Inaudible) we received from landlords for the fiscal year 2009 are expected to be approximately $2.1 million. Depreciation expense for Q3 was $3.7 million and $11.3 million for the first nine months. For the year, depreciation expects to be approximately $15 million.

My final comments today are on certain financial metrics we expect in the fourth quarter of 2009. With the expected continued strength in boots and Wellness footwear, we currently expect our comparable store sales in Q4 to increase in the range of 3 to 5%. In Q4 last year, our comparable store sales decreased 8.3%.

In Q4 last year, our gross profit margin fell 280 basis points due to promotional selling and the deleveraging of buying distribution occupancy cost. With our inventories controlled and well positioned for Q4, we feel we can recapture significant portion of the gross profit margin decline from last year. We also expect to leverage SG&A expense in Q4 by holding total dollar spent relatively flat with last year. Last year in Q4 we incurred $2.4 million in store closing cost. This year in Q4 we expect about $400,000 in store closing costs. We also expect to incur increase cost in Q4 this year related to incentive compensation, employee benefits, advertising and higher cost for the additional stores we will operate during the quarter.

This concludes the financial review for the third quarter 2009 and now would like to open up the call to questions.

Thank you. (Operator Instructions). We'll take our first question from the line of Sam Poser with Sterne, Agee. Please go ahead.

Good afternoon. What were the comps by month and what's the trends of November?

Sam, we don't typically give comps by month, but they were high -- higher in August and September and a little bit lower in October.

But positive all the way through?

Positive all the way through.

And then how are we looking so far in November?

Really early to tell in November. Still good, but it's a very -- you really can't tell much about how comps are going to turn out in November until you get through this next Friday. So that's -- such a huge emphasis placed on the back few days in November that the first part really is not that meaningful.

And given that sales were, that sales exceeded the plan significantly, especially the boots, are you -- do you have access to the product that you need going forward?

Sam, when we saw the trend in boots start to happen in August and September September, we reacted to that and we have boots on hand as we go to the fourth quarter to drive that business.

And then can you talk a little bit about your clearance strategy on boots? Is this something, in past years everybody goes on sale in December, very aggressively, but there's a lot of cold weather following up at the beginning of the year. Are you going to be holding off getting aggressive until later on this year and are you going to be testing any fall 2010 products say in January, February of 2010?

We actually, I will address the testing first. We did that last year in January and February, very successfully, and that's how -- that's one of the ways we were able to drive some of our boot comps this year. You learn during January and February and then you react to it for the Company as you go to the fall. The -- as far as your first question is concerned on clearance, obviously any slow selling boots that we have, we'll take a clearance campaign on that as we go through December. But we truly believe that this year more than years past that boots as a sport shoe and that's what they are buying them as will move into early spring much more profitable than they have in years past.

When you are referring to boots as a sports shoe, so you are --

Not as a athletic sports shoe, a casual shoe.

The price points on boots are more expensive than most other things. But are you seeing, how much of that boot business is incremental? Are you calling it the sports shoe. What was the like shoe selling last year that the boots might be taking away from right now?

We are not selling the numbers of low profile product that we sold a year ago. We are selling more pairs of boots, and I believe that customer shifted out of low profile product into things of more jean friendly.

Interestingly. Can you walk through -- I did not expect to hear about a material effect on the wellness category for the third quarter, but I assume -- what is the difference, what is the difference of the amount of product you are bringing in on the wellness category in Q4 versus what you had in Q3?

Sam, I will let Cliff answer this question. We will let somebody else answer that question.

That's fine.

Sam, here is the way it works. We had a few stores with Wellness product in August. Actually we delivered that product early in the second quarter, and then as we saw the product selling through early in the second quarter and in August, we bought for additional stores for September. Then we bought for more stores in October and as we move through fourth quarter all stores actually within the next one week, all stores would have. So the inventory built during the quarter and as the inventory built product reap the benefits of the sale.

Thank you.

Our next question comes from the line of Chris Svezia with Susquehanna Financial Group. Please go ahead.

Congratulations, gentlemen. Really a great job.

Thanks, Chris.

Just to follow on Sam's question, when you think about the Wellness category and the sustainability of this category, what are your thoughts as you go into spring of next year? Is there additional product, style, SKUs, what your thoughts are to what this business can be and then it becomes more meaningful as you go into next year.

We agree with you, Chris, that it will continue to become meaningful against our total business, but both companies are expanding product selection, and I'm not -- they are moving into all sorts of products for wellness. At this point, the only way I know to answer that question is as long as the advertising, as long as the companies continue with the product advertising, I believe we are going to be successful. And at this point both companies are planning to continue with product advertising.

Okay. Just to switch gears for a second. Cliff, you mentioned your men's boot business was positive. Your men's was positive but you mentioned boots.

Yes. Men's business was positive in total and the men's boot business was the lead driver there.

Was there, given that it got cool, was there any forward of business or do you think, that is more on a technical side for the men, is that sustainable as you go through the fourth quarter? Overall boots and the women's boots in the fashion aspect will the men carry forward as you go through the fourth quarter?

It will carry forward and it wasn't necessarily all technical. It was also fashion. And we believe, we believe not just like in ladies but we believe we are in the beginning of a trend that will carry forward through the fourth quarter.

What is happening with your urban consumer? I mean, when you talk about athletic having strength and you talk about boots having strength, is that urban consumer? There's been a thought process you guys are getting better product, taking some share away from other players that are out there, but as you guys think about that urban consumer and you think about some of the key products like boots and athletic, are they starting to translate more to Shoe Carnival recognize the value proposition or talk about what is going on there specifically.

Chris, we do believe that we brought probably new customers into our stores from the mall because of the urban product that we are able to get especially when you look at our Nike assortment today compared to two years ago, and that's obviously showing up in our athletic numbers. The boot number that you are talking about in men's, a good bit of that is out of the urban category as well. So our urban business has been, we do believe that our urban business has gotten better, and it's because of the product selection that we have in our stores today as compared to several years ago.

The last question I have. It looks like you have 45, $50 million in cash at year end thereabouts give or take. Any thoughts to that in terms of how you look at cash in your balance sheet, uses of cash, et cetera?

We don't think that is extraordinarily high amount of cash to go forward. As we start to ramp-up growth when there are opportunities available at that point we'll start using some of that cash. For 2010, there are limited opportunities for new store growth because of the lack of strip center development primarily. So we are taking a good look at conservative uses of cash but we'll utilize that cash going forward in opening new stores.

All right. Best of luck to you guys. Thank you.

Thanks, Chris.

(Operator Instructions). We'll take our next question from the line of Jill Caruthers with Johnson Rice. Please go ahead.

Good afternoon. Fourth quarter comp you gave 3 to 5% impressive but given your strength that you saw in third quarter, based on your ears year compare to fourth quarter it might prove conservative. Any thoughts on that?

It may turn out to be conservative. First of all, we are very happy with the prospect of Shoe Carnival itself relative to the marketplace. What we are a little uncertain is where this economy goes from here. It's been fairly strong from a retail standpoint and fairly strong, much stronger in the footwear segment of retail in the third quarter. Where the consumer goes from here, remains to be seen. So the 3 to 5%, yes, it would seem conservative but when we see, I guess what I'm saying is I'd like to see a better indicator of what happens with the consumer. I think we'll get a better indicator the day after Thanksgiving and the following week. But we like to see a better indicator on where the consumer goes from this point in time. It's more of a macro concern for us rather than a concern with Shoe Carnival prospect in and of itself.

Understood. And then if you can touch a little bit from the mall but if you can talk about you are clearly performing very well in this market. Where do you feel like your biggest market share gain is coming from right now and where are the opportunities going forward?

Jill, as far as other retailers?

Yes. You noted that you are pulling some new customers particularly in the urban from mall and retailers. Maybe broaden that scope.

I'm not sure I am ready to talk about other retailers specifically. I do think -- I do think, Jill, that customer is looking today for quicker in and out and more value, and I think strip centers in general where we primarily operate are getting stronger. You can look at some of the numbers from our key department store or competitors at strip centers. They are much better than the department store, mall department store. So I believe that we'll reap some benefit and we are seeing in the way we are selling boots and the way we sold at ash ash athletic through the third quarter.

Thank you.

We'll take our next question from the line of Scott Krasik with CL King. Please go ahead.

Hi, gentlemen, good job.

Thank you.

Question. Cliff, I guess. In terms of the Wellness category, I know it's early, but are you selling those shoes to your traditional customer base? Do you think you are pulling in new customers looking for the Wellness products and if that's the case, are you doing anything to try to keep them as customers by tailoring your assortment differently if you are bringing in a higher end customer?

We have no way of telling whether or not we are bringing in a new customer. We do know, we have a unique concept. As we get product in and refill of this product has been selling out and we've been filling it back in, we can get the next delivery and such, but we have the Mike person in every store who can inform the customers who are coming in that the wellness product has been redelivered. So we actually believe that our customers are stepping up for this product, and they've been looking for it. The marketing campaign has worked and it's been the shoe store of choice for our customer. They are coming in to buy it.

Okay. That's great. And then just in terms of your athletic business, call that running. Anything else? Basketball? Anything else you are seeing in your categories there?

We have seen over the past four to six weeks a nice increase in our basketball business and again primarily led by Nike. Obviously and I call this out that Converse business has been phenomenal and that continued to back to school and that has continued throughout the third quarter. I would call out those three categories as the, Urban -- Urban shoes from Nike, the pass coal bought especially over the -- basketball and then Converse.

Thanks very much.

Our next question comes from the line of Steven Kernkraut with Berman Capital. Please go ahead.

Hi guys. Very impressive quarter. A couple of questions. One is you are doing so well, but when you go to your cite is just a view only, not a shopping cite. What are your plans to generate some incremental revenue through web sales?

Steve, right now we don't have any plans to do e-commerce through the website. No current plans.

No current plans. So you are assuming that your customers want to go to the store. They are not online shopping.

No. I didn't say that. We have no current plans.

Okay. And then secondly your products are basically a buy for myself rather than a gifting kind of product, what is the game plan for the fourth quarter from a promotional point of view to get more people into your store to have -- potential have a product that would be sold that would be a gifting mode?

Well, as I mentioned, we put together a 360-degree marketing campaign that would begin actually next week and run through the Christmas season that involves just about every form of media just like we did for back to school. So we feel pretty strong about the opportunity, we feel pretty strong that we are going to hit the consumer the way we want to. As far as our product not being a gift giving category I'm not sure I agree with that. Shoes have been a pretty good gift giving category and this year with the wellness category should be even better.

Okay. Well, I look forward to seeing a great fourth quarter. Thanks very much.

Our next question comes from the line of Bernard Sosnick with Gilford Securities. Please go ahead.

Good day. You were pretty clear about your outlook for expansion next year, limited as it is by the lack of construction of strip malls. Do you have a greater inclination to become opportunistic in the pursuit of cite and are more cites becoming available and more reasonable price?

There are selected cites becoming available and I think we'll see throughout 2010 as the Big Boxes that have been vacated whether it would be some of the other boxes, linens and things, as those become available and the developers are willing to subdivide into the 12 to 15,000 square footage boxes, we would be in a position to take advantage of that. So we are definitely looking at a lot of possibles for 2010 and 2011 when developers are willing to subdivide vacated spaces.

Thank you very much.

Our next question comes from the line of Jeff Stein with Soleil Securities.

Mark, congratulations. A couple of questions. Boot sales. What percent are they historically in the fourth quarter?

Jeff, historically boots account for 20% of our total sales in the fourth quarter.

Year?

For the fourth quarter.

Got it. And for third quarter, can you segment for us the percent of sales that were athletic and then subdivide that between kids athletic and adults athletic?

Sure. We were right at 56% of our sales in athletic just under that and 16% of our sales were kids and right at 40% was adult.

Okay. So what you are suggesting is that you had double-digit comp increases in adult, correct?

That is correct.

Okay. And that if you exclude Wellness, you were up high single-digit in adult, correct?

That is correct.

Okay. And I don't recall if someone else asked this question. Have you been able to get all of the Wellness product that you are -- that you can get your hands on right now?

We are -- let me phrase that this way. We are very happy with our position in wellness. We think we are very well covered through early spring.

Okay.

Jeff, let me answer it another way. We saw the trend early, and we tested those shoes in about 25 stores in early spring as soon as we can get them. And when we saw the sell through, very aggressively went after it and as the sell through continues, the more stores we put them in, we got even more aggressive. So I'm feeling very confident that we are well covered in Wellness as we go through spring.

Got it. Question for Mark. Mark, wondering if you can comment on the Phoenix market. I noticed that you opened two stores in the third quarter. I presume those are your first two in Phoenix. Any early reads on how they are performing and state of the real estate market are you going to be able to fill that market out next year?

As far as the second question, Jeff, not fully next year. We'll work on that market, that will take time like Chicago has over the past ten years. But we anticipate filling that market as quickly as possible. There are some stores for next year but not enough to fill the market up. Interestingly we opened the Phoenix market without television advertising. The first time we ever had grand openings without TV support, and the stores opened pretty strongly, at least as strongly, virtually any of the stores that we have opened thus far this year. And they opened in the mid October period, so they haven't been open long enough to really give you a good trend as to how they are going to carry that momentum forward. But as far as grand openings they were really strong and that was without TV support. So we had radio support and we had print support for the two stores that we opened. We are happy with the way the two stores happened with that advertising.

And for the stores that you are planning to open next year, can you tell us what percent plan for existing markets versus new?

They are virtually all existing markets. In fact, off the top of my head I don't know of a new market they were planning on opening next year unless it would be a small market within a current geographic footprint.

Okay. And capital spending for next year I presume would be at or even slightly below current levels?

It might be at or slightly above current year levels. We may go back in and remodel a few stores now that we have a better sales trend going.

Okay. Thanks a lot, guys.

Thanks, Jeff.

(Operator Instructions). We'll take our next question from the line of Heather Boksen with Sidoti & Company. Please go ahead.

Good afternoon, guys. A question with regards to inventory position of 2.4%. I'm assuming with either the stocking of your Wellness a lot of that is dollars. Just curious what the inventory position looks like on a pair basis if you have it.

Just very slightly down.

Okay. And if I can switch gears a little. With regards to the store opening plans, what are you guys hearing from your developers I guess longer-term as far as any feedback from them? When do you think you'll be able to go back to a more normalize store expansion base?

Well hopefully the activity starts to pick up certainly not in 2010 because it's too late for that, but hopefully the activity will pick up in 2011 and certainly in 2012. But Heather as I'm sure you know, that depends on a lot of things that need to happen with the REITS and financing and the banks and all the financing issues that are in the marketplace today. So we are hopeful that we'll see an accelerated new store opening plan in 2011 from 2010 and even higher than that in 2012.

Good to hear. Thanks, guys.

We'll take our next question from the line of Stephen Martin with Slater Capital. Please go ahead.

Most of my questions have been asked, but you keep talking about a men's fashion boot. What constitutes a men's fashion boot?

Some of the Urban boots that we are selling today I think you would refer to as fashion.

You feel there's a brand attached to that or a look?

Steve, not to be evasive I would rather not talk about the brand. It happens to be a brand that we pretty much buy strictly here at Shoe Carnival.

Okay. Going into -- you may have said this going over the store count but I lost track some of the numbers. What is the store count going into Q4 this year versus end of same period last year?

We have 317 stores today, I believe, and last year going into Q4 it was 310.

Okay.

I believe those are correct numbers.

Would you hazard to guess as to what the cash balance would look like at the end of the year?

Depends on what that comp increase is. I hate to make a number. We can see some significant improvement over where we are at today, and we always generate cash in fourth quarter even in difficult times. So we should be able to generate some cash. It wouldn't be unrealistic to think it could be in excess of $8 million in cash.

Cash generation.

Cash generation.

That is at the guided comp?

It's just a conservative number because if our inventories come in line with where we think we are going to be at the end of the quarter, we can easily generate $8 million or more in cash -- free cash flow in the fourth quarter.

One last question. If I got this right, you said you expect SG&A dollars to be flat fourth quarter versus last year.

Correct.

Okay. And you have a decrease in preopening expense or store closing expense of about $2 million, 400,000 versus $2.4 million last year or something like that?

Correct.

So that implies $2 million of, on a like basis $2 million of SG&A increase?

There's a few categories that we are looking at. We were operating additional stores so we will have additional cost for that. On top of that, if you remember last year, we were cautious in our advertising spend, and we cut some advertising out which were being a little, we will increase our advertising in Q4 over last year. In addition to that we have incentive comp and employee benefit that are going to be going up with the market being up the way it is. The stock market, some of the bit will fluctuate with that in addition to the increased profit the incentive compensation going up on a year-over-year basis.

Thanks a lot.

We'll take our next question with the line of Jeff Stein with Soleil Securities.

I think you mentioned that you expected, you might be able to recapture the loss gross margin from last year or most of it. So should we be looking at kind of 27.5% as kind of the bogy that you are trying to get back to? I'm kind of curious. If you go back to the year before that, you guys were at 28%. So do you not have confidence that given the margins in boots, given the fact that you got Wellness going for you which I'm sure it's the full margin product that you can't get back to a 28% rate?

That would be aggressive in the fourth quarter. We would have to recapture everything we lost last year plus some. I think what I said in my prepared remarks is that we think we can recover significant amount of that lost profit margin in Q4 this year. It really depends on like Mark and Cliff have both said we will get a better read on what the consumers, how they are going to purchase beginning with the day after Thanksgiving and through the holiday season. So at this point we are not ready to give you a specific number. What we saw last year and we talked about in the call, our merchandise margins were down 200 basis points due to aggressive promotional selling and we deleveraged our buying occupancy by 80 basis points. We are going to be able to control our buying occupancy cost and keep them relatively flat. So on any type of comp increase in the fourth quarter, we will get leverage on that buying occupancy cost. The bigger question is how much of that merchandise margin are we going to recapture and we think we can capture significant amounts of that but we are going to really need to see how the consumer starts shopping at the holiday period.

Got it. Thanks.

With no further questions from the queue at this time I would like to turn the call back over to Mr. Lemond for any additional or closing comments.

We would like to thank you you for joining us on the conference call. Again, we are pleased to announce our second best quarter from an earnings standpoint ever in the history of the Company and we look forward to a good fourth quarter. Thank you very much.

That concludes today's conference call. Thank you for your participation.