Shoe Carnival Inc (SCVL) 2010 Q1 法說會逐字稿

Good afternoon, and welcome to Shoe Carnival's fiscal year 2010 first quarter earnings conference call. Today's call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the Company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward-looking statements which speak only as of today's date. The Company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release to reflect future events or developments. I will now turn the call over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival for opening comments. Mr. Lemond, please begin.

Thank you and welcome to Shoe Carnival's first quarter fiscal 2010 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 of Store Operations. Following my opening remarks, Cliff will review our merchandise performance and Kerry will review the financial results for the quarter in more detail. I will then provide some closing remarks and we will open the call to take your questions.

I'm pleased to report that our entire Shoe Carnival team executed our business strategy very nicely in the first quarter of 2010 and therefore we were able to take advantage of consumer demand across each broad merchandise category and every operations region. The results of our efforts was a record quarterly comparable store sales increase, which when combined with the higher gross profit margin and controlled expenses, resulted in the strongest quarterly earnings performance in the Company's history.

Followed much improved comparable store sales in the third and fourth quarters of last year, we were able to generate a first quarter sales increase ahead of our initial expectations. First quarter 2010 net sales increased 13.3% to $189.5 million compared to the same period last year and above our expectations for net sales in the range of $181 million to $183 million. Our record comparable store sales increase of 13.1% was also significantly better than our expectations for an increase in the range of 8% to 9%. Comparable store sales in the first quarter of last year were virtually flat.

Our sales increase, combined with continued improvement and the gross profit margin and improved leverage of selling, general and administrative expenses resulted in a 118% increase in earnings per diluted share to $0.72 in the first quarter of 2010 from $0.33 per share in the first quarter of 2009. This record earnings performance, coupled with our consistent emphasis on tightly controlling inventory and fixed assets enabled us to generate cash flow of $7.6 million and we ended the first quarter with $51.8 million in cash and equivalents. Notably, over the past four quarters, we have generated about $30 million in free cash flow.

Now, focusing on our first quarter results in more detail. As previously mentioned, our comparable store sales increase of 13.1% was significantly above our expectations for a high single digit comp increase. From the very beginning of the first quarter, our customers responded well to our business model of providing the right product assortment for the entire family at a compelling value. Our positive sales results were broad based, with every operations region and each broad footwear category delivering a comparable store sales increase for the first quarter as compared to the same period last year. We benefited from an increase in customer traffic, a higher conversion rate, and increase in units per transaction, and an increase in average unit retail prices. While toning and athletic footwear were a key driver of our sales in the quarter, our non-athletic footwear contributed approximately half of our comparable store sales increase. Cliff will discuss this in more detail in a few minutes.

In the first quarter of 2010, our gross profit margin increased to 340 basis points to 31.3%, from 27.9% in the first quarter of last year. Our merchandise margin increased by 220 basis points due to the realization of increased unit prices, partly the result of less clearance activity, particularly in our women's dress and casual product. Due to the higher first quarter net sales and tight control over expenses, we were able to leverage buying, distribution and occupancy costs by 120 basis points. Our management group continues to do a good job of controlling selling, general and administrative expenses. SG&A expenses for the first quarter increased by only $4.2 million and as a percentage of sales, decreased 60 basis points compared to the first quarter of 2009.

And finally as I mentioned earlier, we continued to improve our balance sheet over the prior year period. Our cash position increased to $51.8 million and we remain free of interest bearing debt at the end of the first quarter of 2010. We ended the quarter with inventory up 7% on a per store basis, in line with our strategic plan to increase inventory in categories where we see strength, in order to maximize our business during fiscal 2010. Our continued improvement of key financial metrics reflects the strength of our business model and the committment and the ability of our entire team to execute on certain fashion trends currently driving consumer demand.

Turning now to store expansion. In the first quarter, we opened three stores and we closed three stores to end the quarter with 311 stores operating in 30 states. I want to reiterate our management team 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 unleveraged financial position leaves us well positioned for additional square footage growth as the real estate market improves over the next several years.

For the remainder of 2010, we continue to expect little incremental store growth, net of closures, due primarily to the lack of new lifestyle and strip center development. While we expect to open approximately 10 new stores for the full year, we will close approximately seven stores. Our current estimate for the number of store closures in fiscal 2010 has been reduced from our previous expectation of 13 closures due to the anticipated successful completion of negotiations with landlords for short-term extensions at favorable lease rates. Please keep in mind, our store closure number may change depending upon further negotiations during 2010.

Now, looking to the second quarter of 2010, we are very encouraged by the continued momentum we have seen since the beginning of the year. Our continued strong financial performance gives us the confidence to remain optimistic about our outlook for the Summer and back-to-school season. Therefore, we currently expect second quarter comparable store sales to increase in the range of 8% to 10% and net sales to be in the range of $165 million to $168 million compared to the same period last year. As a result, we expect net earnings to be in the range of $0.23 to $0.27 per share compared to $0.08 per share in the second quarter of 2009. At the high end of our guidance these earnings would equal the highest second quarter earnings in the Company's history.

We are happy with business coming out of the Memorial Day weekend and we expect momentum to build as we approach the back-to-school season which is traditionally our most important sales and earnings season of the year. In closing, I would like to reiterate our Management team remains focused on managing the controllable aspects of our business for long term growth and strong free cash flow generation. Now, I'd like to turn the call over to Cliff for more details on our merchandise performance.

Thank you, Mark. As Mark stated, our total comparable store sales for the first quarter of 2010 were up 13.1%. For comparable store sales in the first quarter, average unit retail was up 5%, traffic was up 5.5% and most importantly, merchandise margin for the Company improved by 220 basis points with every department either showing improvement or flat compared to the first quarter of last year.

We recorded a high single digit increase in units sold and higher average unit retails in every department, as our customers responded positively to the first quarter merchandise mix. In addition, although we enjoyed a benefit from the toning business, our comp store sales still would have increased high single digits for the quarter excluding the toning category. Our continued committment to offering our customers a broad assortment of trend right product, along with our value proposition has made Shoe Carnival a key destination for family footwear.

Now I'd like to take you few each department and share with you a few of the key trends that drove our business for the quarter. In our women's non-athletic department, comparable store sales were up double digits. This increase was driven primarily from the sandal categories with flat sandals, sport sandals, and athletic sandals all selling at much higher rates than last year. In addition to casual sandals, we achieved sales increases from sandalized wedges, both casual and dress, trail hikers and vulcanized canvas.

In our men's non-athletic department, our comparable store sales were up double digits. Sales in this department were driven by vulcanized canvas, boat shoes, trail hiking, sandals, and work shoes. Our children's business ended the quarter with comparable store sales up high single digits. This increase was driven primarily from the non-athletic categories, with girl's boots selling early in the quarter and fashion canvas and sandals selling later in the quarter. The other key drivers of these increases were girls and boys running, Chucks, and fashion athletic for boys.

In adult athletics, comparable store sales were up double digits for the quarter with women's athletic up high teens and men's athletic up high single digits. This performance was not one-dimensional as several categories of athletic footwear performed well. Outside of toning, our largest increases in women's athletic came from categories such as vulcanized canvas, primarily Chucks, and performance trail running. In men's athletic, we were pleased with the performance of men's basketball, retro basketball, cross training and trail running.

And now focusing on the toning category. As we all know, this category of footwear continues to gain momentum at retail. Although toning has played a very important role in our comparable store sales increase, we would have still reported a high single digit comparable store increase without the benefit of toning. For Shoe Carnival, there are three key toning brands -- Reebok, Avia, and Skechers. Skechers and Avia are currently in all stores and we will be all stores with Reebok by the end of the second quarter.

We continue to believe that marketing is fueling the excitement around this category. Our strategy is to continue to support the brands that have strong marketing programs. This allows us to build exciting visual statements inside our stores that tie into specific brand messaging. We have these in store visuals on all doors for each of the three brands we currently support in the toning category. We believe that the toning category will continue to gain momentum in our stores as we rollout additional stores and styles from key brands. We expect to realize continued strength throughout 2010 as we did not have all these brands in all of our stores throughout 2009.

As I stated earlier, our average unit retail was up 5% for the quarter, which resulted in our highest first quarter average unit retail in our history. Toning obviously played a key role in this increase, but even without toning, we still beat our previous record first quarter results. I believe this speaks to the quality of our merchandise mix, and the excellent job our buyers have done at identifying trends and reacting to key items. Our overall inventories ended the quarter up 7% on a per store basis, which is part of our previously announced strategy of funding our business more aggressively to maximize our sale opportunity. This per door increase, which includes toning, is still well below our historic average for the end of the first quarter. We will continue to build per door inventories through this quarter with fresh new product just in time for back-to-school. In addition, our buyers continue to do a terrific job of controlling our aged inventory, which is running well below last year and at a historic low.

Looking forward to back-to-school, we remain confident based on our current trends and strong product offerings from our most important brands. Our consistent strategy of having broad assortment with depth of sizes along with a comprehensive marketing plan will continue to make Shoe Carnival the footwear destinations for consumers long term. As of today, there aren't any key shifts in tax free days which would affect the second quarter. One state, Georgia, has eliminated tax free in July. The history shows us that when this occurs, that customer still buys for back-to-school, just not in one limited weekend.

In closing, I'd like to reemphasize that our comparable store sales increases are not one dimensional, and are being driven from every department with key items and classifications that are not only driving historically higher average unit retails but also higher margins. Now, I'd like to turn the call over to Kerry Jackson for details on our financial results.

Thank you, Cliff. Let me begin by discussing the results for the first quarter of fiscal 2010, followed by information on cash flows. Our net sales for the first quarter increased $22.2 million or 13.3% to $189.5 million, compared to $167.3 million for the first quarter of fiscal 2009. This increase in net sales resulted from a comparable store sales increase of $21 million, plus a four point increase in sales generated by new stores opened since the first quarter of fiscal 2009. These increases were partially offset by a $3.7 million loss in sales, resulting from stores closed since the beginning of fiscal 2009.

Gross profit margin for Q1 increased 3.4% to 31.3% compared to Q1 last year. The merchandise margin increased 2.2%, while buying, distribution and occupancy costs as a percentage of sales decreased 1.2%. This decrease was due to an increased leverage from higher sales. On a dollar basis, we experienced a minimal increase in buying distribution occupancy costs for the quarter. Our selling, general administrative expenses increased $4.2 million in the first quarter 2010 to $44.3 million; however, our sales gain enabled us to leverage these costs by 0.6% as a percentage of sales.

The increase in SG&A expense was primarily attributable to increases in incentive compensation and store closing and impairment costs. Incentive compensation, which includes cash bonuses and equity compensation is $3.6 million during the first quarter 2010 as compared to the prior year period. In Q1 last year, we reversed $653,000 of performance based restricted stock expense due to our outlook at that time that certain tiers would expire before performance targets would be met. With our more positive current outlook, we reinstated $279,000 of the expense that was reversed in Q1 last year which accounted for $932,000 of the overall increase in incentive compensation for the first quarter of this year.

Store closing costs and non-cash impairment charges included in SG&A expense for the first quarter were $1.2 million, or 0.7% as a percentage of sales. The majority of the first quarter expense was a $1.1 million non-cash asset impairment charge for underperforming stores. This compares to $130,000 or 0.1% as a percentage of sales in store closing and impairment expense in Q1 last year. Pre-opening costs included in selling, general and administrative expenses were $175,000 or 0.1% of sales for the first quarter 2010 as compared to $481,000 or 0.3% of sales for the first quarter last year. We opened three stores in the first quarter 2010 as compared to 10 stores in the first quarter 2009.

Operating income for the quarter was $15 million compared with $6.6 million in Q1 last year. Our operating margin for the quarter improved to 7.9% from 3.9% in Q1 last year. Our effective tax rate for the quarter was 38.1%, as compared to 36.9% for the first quarter last year. The increase in tax rates between the two periods was primarily due to lower federal tax rate in the first quarter of last year, as a result of lower projected taxable income. Our effective income rate in fiscal 2010 is expected to range from 38.5% to 39%.

Net income for the quarter was $9.2 million compared to $4.1 million in Q1 last year. Our diluted EPS for Q1 2010 was $0.72 compared to $0.33 last year. Now let me discuss information affecting cash flows. Depreciation expense for the first quarter 2010 was $3.5 million. Depreciation expense in fiscal 2010 is expected to be approximately $13.5 million.

We expended $3.3 million cash during the first quarter 2010 for the purchase of property and equipment of which $1.2 million was for new stores, remodeling and store relocation activities. We also incurred $550,000 for enhancement to our distribution center. We anticipate capital expenditures of approximately $10 million to $11 million for the remainder of 2010 and including our CapEx expectations are the addition of seven stores that are projected costs of approximately $2.4 million, store remodeling and relocation costs of up to $4.6 million, and $1 million to complete enhancements to our distribution center. Additional lease incentives received from landlords are expected to be approximately $1.6 million.

This concludes our first quarter 2010 financial review, and now I'd like to turn the call back over to Mark for a few final comments.

Thanks, Kerry. Obviously we're very pleased with our record achievements in the first quarter 2010. I would like to conclude our prepared remarks by thanking our Shoe Carnival associates on their execution to date and I would like to thank our valued vendors for their continued support. As I mentioned earlier today we believe our outlook for the second quarter is very positive and we look forward to delivering continued improved financial results in the remainder of 2010. Operator? We would now like to open the call up for questions.

(Operator Instructions). We'll take our first question from Jeff Stein with Soleil Securities.

One clarification, first, Kerry. On the capital spending, is the $10 million to $11 million the entire amount for the full year, or is that for the balance of the year?

For the balance of the year.

So we're talking about somewhere between $13 million and $14 million?

Correct.

Okay, great. And secondly, Mark I'm wondering if you could just kind of address the outlook for real estate, it seems that those who recently come back from ICSC seem to be a little more optimistic that things may open up in 2011, but if that doesn't happen, do you have a strategy or any thought in mind in terms of how many locations you may be able to open next year and in turn, would you consider possibly slowing down the number of closings?

Well, that's two different things, Jeff, the openings and the closings obviously. I'm not being facetious when I say that. Let me talk about the ICSC, recent ICSC meetings. The mood out there was better than the last couple of years. That seems to be the general consensus.

We had sometimes three meetings going on at one time, so there's a lot of things going on but there's not a whole lot of new strip center and new lifestyle development, certainly within the footprint that we have in the United States, so from a new development standpoint I don't see that much happening. There's a few things, but not to any great degree. I think it will take some more openings by some of the bigger anchor tenants, for example, a JCPenney or Target before a strip center development really starts to pick up again. I don't see a lot of that happening in 2010, nor do I see much of it being talked about for 2011. In 2012, however, there's, and you hear this a lot at ICSC, and a lot of it doesn't come to fruition, but there's a lot of talk about a lot of new development in 2012.

With respect what we are meeting about mainly with landlords, if it's not about extending leases on more favorable lease terms, and I'll get to that in just a second, we have met with a lot of developers regarding renovations of existing strip centers, so where some of the anchor tenants or not even the anchor tenants, where some have left, developers are talking now about redeveloping the stores, whether it be larger boxes or even combining smaller boxes to put more nationally recognized tenants such as ourselves and certainly more tenants with better balance sheets than some of the more nebulous local tenants, so we're looking at a number of different avenues for strip center development with existing real estate, so I think that's our best opportunity not only for 2010 but for 2011.

In terms of number of stores I would hate to put a number on it for 2011. Like I said, we had a lot of meetings, there's a lot of discussion about a lot of centers being redeveloped, but right now it's just a lot of discussion and an indication of interest on our part, so there's a lot of people going back to the drawing board right now trying to put space together for us, and we'll see what happens, so I'm a little bit more, not a little bit, I'm more excited about our opening opportunities for 2011 than I was for 2010.

So having said that about openings, talk about closings. As we mentioned about three or four months ago we expected to close somewhere around 13 stores this year. We've been fairly successful in negotiating short-term extensions, some time short-term extensions with option periods for favorable lease rates and we're taking advantage of that. Consequently, the 13 closings that we anticipated just a few short months ago has now dwindled to somewhere around seven stores. I anticipate that kind of action going forward into next year as well, so where we've got leases either coming due or coming up for potential closure because of kick out clauses, tied to sales. We are currently negotiating a number of those for again more favorable lease rates on short-term extensions, so we'll take advantage of that as we much as we possibly can so we're turning some stores from marginally profitable or unprofitable situations into fairly profitable stores for us right now on short-term lease deals.

Got it. I do have one follow-up question for Cliff, and I'm wondering, Cliff, based on your experience, where are we in kind of this product life cycle for toning, and how long do you think it runs before the major players in the industry start promoting price, because it seems to me like from day one they have been able to hold price and the product is selling pretty well.

Well, Jeff, I hate to be like Mark, but that's a two pronged answer. One is holding price because everybody is holding price because the vendors have restrictions on price, and I think that as long as the vendors continue to have restrictions on price and the way you can advertise a product, then I think the retailers will hold price. As far as where we are in the life cycle of toning, I think we're just beginning. We just recently got to all stores with a couple of key brands, and we'll go all stores with the other brand by the end of this quarter, and then you got the major player in athletic that comes out with a toning product at the end of the year, and there are several other major players that are coming out with toning, and I think the more this product is advertising, the different ways that toning can be used, Nike is coming out with fitness, not actual, it's on a stable base, it's not based on instability. I think that toning will just continue to gain momentum. I see this as a strong category that's going to continue for a good long while.

Jeff, let me add one more thing. Not to go on top of Cliff, but the one thing that I see as a jeopardy in the marketplace, not with respect to dropping prices on current products, or I should put it differently, new extensions of current product lines, what I see is a tendency of retailers to expand their product lines across the category, so where it dilutes the price point. In other words instead of carrying product at the $99 or $109 level and being very selective about the vendors we carry that from, which we are going to be, that they expand it, now you might see toning product in a retail store anywhere from $39 to $109 and I think that's the jeopardy that we've got to guard against within our own strategies, that we don't expand the price points and start eating away at the sales in the $99 price point and see sales into $39 to $49.

And you're not going to go with a good, better best strategy, initially at least for now you're going to stay with best?

We are staying with best and the strategy for us is we want the brands that we're carrying to have a strong marketing program, because we still believe that the product category is driven marketing, and therefore, we'll stay with the best brands that are behind the marketing program.

Got it. Thanks a lot.

We'll take our next question from Chris Svezia with Susquehanna Financial Group.

Good afternoon, everyone, and great job. I guess a couple product-related questions for you, Cliff. I'm going to ask the boot question again. Just in terms of your thoughts about how you're thinking about the boot business in the back half of the year, I think last time you talked about it kind of planning it flat on a per store basis. Any change to that thought process, but I think you thought you could get higher average unit retail out of that category. Any changes there?

Actually now that we've completed the buy and set down with the boots, we feel very strong about the boot category, and we're looking for a high single digit increase in boots this year. On top of the double digit increases, higher double digit increases we had last year, I'm not looking at that from a higher average unit retail, do look to sell more units and drive maybe just flat to slightly higher unit retails.

Okay, and then you mentioned trail quite a bit in your commentary, from some of the categories. Just curious what that is exactly.

We look at that as it's actually started in the athletic area, but it's mainly for hiking, outdoor, and we found that as we move further west with our stores that outdoor hiking has become more important, and as we put it in those stores and we found strong items and expanded it to other doors outside of the western regions, we saw strong sales there as well, so that's the product category that we are expanding.

Okay, and then when you guys think about just want to be clear on something on toning. Are you guys going to be getting the free product, Cliff by any chance in the second half or doing something for you guys specifically on the fitness side?

Nike has put together a strong product presentation of free product. I think it's okay for me to say that for the channel in the second half.

Right, but are you guys going to be getting some of that?

Yes, we will in the fourth quarter.

That's good and then just I guess two quick questions just on the outlook for a second. When you guys look at second quarter can you remind me Kerry what the comp trend was last year in the second quarter kind of where that business fell off just so we can get sort of a representation early and if you want to do it month by month or however you feel comfortable second quarter last year?

Well we don't give out monthly comps Christopher. I tell you it was a difficult quarter, keeping in mind we're just coming off that bottom of the market, so it was a difficult quarter throughout, though remembering at the end of the quarter in July, we had those tax free day shifts, so the end of the quarter was probably the hardest part of it. Not that we don't have those dramatic shifts in tax free days this year that we did against last year so it's a comparable period.

And as you think about when you go into the back half at least on the surface from a comp perspective in margin to a degree, on the surface, it looks like tough comparison but if you look at a historical two or three year trend line, it doesn't look that difficult for the comp or to a degree from a margin perspective. I mean, I don't want to put words in your mouth, but if you continue to see strong trends whether it's toning or whether it's boots, whether it's your athletic product, can you still drive merchandise margin improvement and leverage the business? Can we really see earnings growth in the back half of the year at the end of the day?

I think you hit the nail on the head, Chris. There are, unlike the prior couple years, there are so many good trends in the footwear industry today that that's what we're excited about as we head into back-to-school. Second quarter for us has traditionally been a quarter that we focus on cleaning up inventory and making sure that the Summer product is off the shelves and we're delivering good fresh Fall product, particularly in the athletic category for back-to-school, and that strategy does continue today.

We look at the back-to-school period as being the single most important period during the entire year, so we think there are not only the toning trends, but as Cliff mentioned, a couple other product categories and he might reiterate those in a few minutes, but there are some trends we feel good about not only for the back-to-school period, but as we continue into October, November and the boot season coming up, so if you look strictly at the numbers which as you well know is a dangerous game to play, when you look at the prior few years, that gets easier when you look at the comparisons but you really got to look at the underlying trends in the footwear industry and what consumer demand is expected to be and I think right now the consumer demand may wane a little bit from the first quarter and into the Summer doldrums just the way it has been every year I've been running this business, but the next big impetus for the consumer to come out and buy and that's why we do so well in the back-to-school period is that back-to-school period, with our good strong kids business and our good strong athletic business and the fashion trends that are happening today, we're really excited about the latter part of July and heading into the third and fourth quarter so we're probably more optimistic about the third and fourth quarter than we are the second quarter.

Okay, best of luck. Thank you.

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

Good afternoon. If you could talk about on the toning category as new brands enter, as the existing key brands are expanding the product offering, have you seen any cannibalization, or do you expect any on maybe the other core athletic products?

Cannibalization you're talking about from the sub-brands, Jill?

Yes.

Everyone's got a wedge and everybody is walking in the door has one and as Mark mentioned earlier you can buy them at just about any price point, rocker bottom wedge, so you do see that but again, what we find, and you can graph it out, what we find is when the brands are marketing the product, whether it be on TV or even in the magazines, when brands market the product, the better brands are what's selling, and or at least that's what we're seeing out there when you're in airports or in malls or wherever, it's the better brands that are on the feet and that's, we think that's going to continue with the addition of other, again better brands entering into the category, it's just going to continue to make the whole category stronger.

And do you feel like that category, since it's so strong is it cannibalizing maybe other athletic sales like a typical walking shoe or a running shoe that is real high performance or what not?

If it were going to cannibalize any area it would be walking, but we actually haven't seen that as of yet and the true test is going to be back-to-school, but again, the toning category doesn't go toward the back-to-school customer, so we think that we're very excited about back-to-school and the product offering, but I want to mention that just really quickly about product offering that our key vendors are giving us. Before we even started expanding toning to all stores, we were already planning for a good back-to-school based on the product offering we've seen from our major athletic suppliers, so very excited about it. I haven't seen any switch from running or walking or cross training into toning category as of yet.

Okay, and then just last question, kind of as you enter in the second quarter you've had very strong sell-through and while it becomes typically a more clearance-oriented quarter, how do you feel with your inventory, we're hearing from some retailers they are missing sales because they are light on clearance, and I guess you do get better margins. Just kind of how do you feel in that stance going into the second quarter?

Well we think we're clean. The second quarter is traditionally a time to clean up any leftover sandals or Spring product you didn't get through. We're happy with where we stand with the sandalized product today and although there will be some clearance of that product, our aged inventory has never been lower as a percent to our total or on a per door basis pair wise, so we're pretty pleased with that which will allow us to keep the average unit retails up and our margins up as we move through second quarter.

Thanks so much.

(Operator Instructions). We'll go ahead and take our next question from Sam Poser with Sterne Agee.

Good afternoon. Just a couple questions on gross margin. In the first quarter, did you see improved initial markup or is this really more driven by the cleaner inventory better styles and just less markdowns than the year ago?

It was primarily driven by cleaner inventory. Sam, as you remember in Fall of 2008, we had an issue in women's non-athletic business and we took steep markdowns through that quarter, the fourth quarter and through the first quarter of last year, so it was we came into this year much cleaner than we did the prior year and we were able to drive higher margins.

Okay, thank you, and then if you just leave the gross margin, Kerry, if you look at the gross margin in the second quarter historically it's been lower than Q1 by at least a couple hundred basis points; however you really haven't been this clean in a long time especially with the commentary you just made on the aged goods. How should we be thinking about the gross margin for the second quarter?

Well, what you see is the seasonality of our business like Mark said earlier, Q2 primarily is towards the end of the clearance period where we're getting rid of our Spring goods and position ourselves for our back-to-school product; however, we built into the top end of those assumptions, we do plan on our both our merchandise margin improvement in Q2, even though unlike the comparison of Q1 last year where we were going against down margins, we did increase our merchandise margin in Q2 last year and we expect to increase them in Q2 this year, and at the upper end of that comp range we gave, we should be able to continue leverage our buying distribution occupancy pretty significantly.

Okay, and then when you gave, I have a few more. When you gave in the guidance in the 8 to 10, I mean at the end of the fourth quarter or on the fourth quarter call you guided Q1 8 to 9, and then you came up with 13. How is this comp trend looking now, are you guiding at sort of the same way you did before? How is the comp trend looking as you compare those two times because you came out beating it by quite a bit and I just want to know what you're looking at that are you thinking about it in the same manner in which you looked at it before?

Sam, this is Mark. With regards to our guidance, we try to give the most appropriate guidance that we can give, taking into consideration what's transpired so far in the second quarter and what we see coming up in any quarter. What promotional activity we see in the marketplace, what promotional activity we have planned, what advertising we have planned, so we take all of those factors into consideration when we give guidance. Certainly we were pleasantly not surprised, but we were happy with what happened in the first quarter, achieving double digit comparable store sales increases. I don't know of too many retailers in our sector anyway that were predicting midteens increases in same-store sales in the first quarter.

So much of it depends on what happens with the consumer after coming off the Easter period, but like I said we're happy with our sales through the Memorial Day weekend and we think there's opportunity in the remainder of the second quarter, but I want to reiterate that what we really point to during the second quarter is the back-to-school period. That's where we see potential for business starting to build in the latter, mid to latter part of July and into August and that's really what we're focused on, so it becomes a matter of seasonality for us more than a quarter to quarter.

Just to follow-up on that and one question for Cliff. The follow-up, you commented that the mix or the assortments this year had a lot more key items in it versus last year as a comparison, so even though it's a slower period of time going into the back-to-school you're much more excited about the mix or the key items that are out there looking ahead, if I'm correct in that assumption, and number two, you commented on the first question that was asked of you, about the potential of lower price points and promotional activity in toning, and you commented that you're somewhat restricted by the vendors, but you're also restricted by the fact you're still selling them as fast as you can get them at full price I assume, and you have no reason to promote them unless they slowdown. Spoken as a true buyer, Sam.

Yes, exactly right. We're selling them as fast as we can get them so we are definitely, and I think most retailers look at it that way. We're not unhappy with the fact that there's restrictions on the marketing of that product. Getting to the key items and I didn't mean to interrupt you, I think I did.

No, no. That was the whole kit and kaboodle.

Okay, key items, I can't remember a time in recent memory where our business had been driven by strong items as they have. You get a hold of strong items and buy into them and become the destination shop for those items, it will help drive comps and I can not remember a time and that goes along with our strategy. I think we announced this maybe 18 months ago that we wanted to identify key items, own them in depth, and offer the customer when they walked into the door, walked into our stores the opportunity to find their size and our buyers have done an outstanding job of doing that, and we think that we've identified those items for back-to-school, and we have depth bought and that's the reason we feel so bullish about it.

I'm sorry one last thing. You commented on boots being strong. Are you looking at men's and women's? The men's that we've been seeing some form of men's boot trend out there, how do you sort of weight the strengths, that even though men is a smaller part of that business? We think that men's, women's and kids' boots are all going to be strong. We think that we actually believe it began last year, talked about it I think I used the terminology boots were the new casual or the new sport shoe and that's exactly what's happened. People are wearing boots with just about everything and we see that continuing on as we move to the Fall. Thanks. Continued success.

Thanks, Sam.

(Operator Instructions). It appears there are no further questions at this time. Mr. Lemond, I'd like to turn the conference back over to you for any additional or closing remarks.

Okay. In closing, I'd like to congratulate our Shoe Carnival associates for recording the highest quarterly earnings in the Company's history. I would also like to congratulate them and particularly our Accounting and Finance Department for recently being named by Forbes as one of the 100 most trustworthy companies. We're very proud of that designation. Thank you for joining us today, and we'll look forward to speaking with you about second quarter earnings results in August. Thanks for joining us.

And that does conclude today's conference. We thank you for your participation.