Shoe Carnival Inc (SCVL) 2010 Q2 法說會逐字稿

Good afternoon, and welcome to Shoe Carnival's fiscal year 2010 second 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 these 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'll now turn the call over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival for opening comments. Please go ahead, sir.

Thank you. And welcome to Shoe Carnival's second quarter fiscal 2010 earnings conference call. Joining me on the call today are Kerry Jackson, Executive Vice President and Chief Financial Officer, Cliff Sifford, Executive VP and General Merchandise Manager, and Tim Baker, Executive VP of Store Operations. Following my remarks, Cliff will review our merchandise performance, and then Kerry will review the financial results for the quarter in more detail. I will then provide some closing remarks, and we'll open up the call to take your questions.

We are very pleased with our record results for the second quarter of 2010, as the Shoe Carnival team exhibited their ability to consistently execute on our business strategy. For Shoe Carnival, the second quarter has traditionally been a quarter that was focused on cleaning up inventory, making sure that Summer product is off the shelves, and we are delivering good, fresh, Fall product, particularly in the athletic category for back-to-school, and that strategy continues today.

However, in the second quarter of 2010, we were able to take advantage of healthy consumer demand for footwear due to a number of developing industry trends. Consequently, our strong quarterly sales performance, which, when combined with a higher gross profit margin and controlled expenses, produced record second quarter earnings.

Following a strong first quarter, we were able to generate a second quarter sales increase in line with our expectations. Second quarter 2010 net sales increased 8.2% to $165.4 million, and comparable store sales increased 8.3%, compared to the same period last year. Comparable store sales in the second quarter of last year were down 6.4%.

Our sales increase, combined with the continuous improvement in the gross profit margin, and improved leverage of selling, general and administrative expenses, resulted in a 240 basis point operating margin increase as compared to the prior year period. Thus, we recorded a 300% increase in earnings per diluted share to $0.32 in the second quarter of 2010, compared to $0.08 per diluted share in the second quarter of 2009. This represents the highest second quarter earnings performance in the Company's history, and was above our expectations for earnings per share in the range of $0.23 to $0.27.

Our continued strong financial performance, and today's positive footwear industry trends, give us the confidence to remain optimistic about our outlook for the back-to-school sales season, which is traditionally our most important sales and earnings period. In a few moments, I will provide more color on our outlook.

Now focusing on our second quarter results in more detail. As previously mentioned, our comparable store sales increase of 8.3% was in line with our expectations. In the second quarter, our customers responded well to our business model of providing the right product assortment for the entire family, and 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 second quarter as compared to the same period last year. We benefited from favorable consumer traffic, and increased conversion rates. While toning footwear was a key driver of our sales in the quarter, our non-athletic footwear, particularly sandals, performed very well. Cliff will discuss our footwear merchandise category performance in more detail in a few minutes.

In the second quarter of 2010, our gross profit margin increased 150 basis points to 28.3% from 26.8% in the second quarter of last year. Due to the higher second quarter net sales, and tightly managed expenses, we were able to leverage buying, distribution and occupancy costs by 50 basis points. Our management group continues to execute on our strategy of controlling selling, general and administrative expenses. SG&A costs for the second quarter increased by only $1.7 million, and as a percent of net sales, decreased 90 basis points compared to the second quarter of 2009.

And we continue to improve our balance sheet over the prior year period. We ended the quarter with almost $41 million in cash and cash equivalents, and we remain free of interest-bearing debt. We entered the third quarter with inventory up about 10% on a year-over-year basis, in line with our strategic plan to increase inventories 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, as well as the commitment and the ability of our entire Shoe Carnival team to execute on certain fashion trends currently driving consumer footwear demand.

Now focusing on store expansion, we opened three stores very late in the second quarter, and we closed one store to end the quarter with 313 stores operating in 30 states. For the remainder of 2010, consistent with our previous expectations, we continue to anticipate 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 seven stores. This will result in net square footage growth of a little more than 20,000 square feet for 2010.

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. Looking ahead to fiscal 2011, we expect to ramp up our store expansion plan. At this time, we anticipate opening approximately 20 new stores, and closing about six stores next year. This would represent a square footage increase of approximately 5%, or 155,000 square feet in 2011. Looking forward, we are optimistic that fiscal 2012 will yield even greater new store growth opportunities.

Please keep in mind our expected store closings for both 2010 and 2011 may change depending upon the resolution of lease negotiations with landlords currently in progress. We continue to believe our strong, unleveraged financial position provides a solid platform for additional square footage growth, as the retail real estate market continues to improve over the next several months and coming years.

Now, let me speak briefly about the back-to-school sales season. We are seeing increased sales trends in August, especially in the markets where schools have already started. For the first three weeks of the month, our comparable store sales have increased approximately 6% on top of an increase of 11% for the same period last year. For those stores where schools have reconvened, our comp store sales in the first three weeks were up low double-digits. We believe that when consumers have a reason or need to shop, like during back-to-school, combined with the right incentives to buy, they are increasingly looking to Shoe Carnival for the footwear selection and value they demand.

Therefore, based on our early sales success, we expect comparable store sales in the range of 3% to 6% for the third quarter of 2010. Last year, we achieved a record 10.2% comp in the third quarter. Kerry will provide more detail on our third quarter and full-year guidance in just a few moments.

In closing, we are very pleased with our inventory levels, and we believe our merchandise assortment has us well-positioned for the remainder of the quarter. We remain 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 other footwear retailers. Our management team continues to be intently focused on managing the controllable aspects of our business, and we will continue to focus on strong free cash flow generation.

In view of our current cash position, and anticipated future operating cash flows, on Monday our Board of Directors authorized a $25 million share repurchase program. This authorization demonstrates our continued confidence in Shoe Carnival's future growth prospects.

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 second quarter of 2010 were up 8.3%. Traffic was up 4.7%, and drove comparable store increases in each merchandise category. We also recorded increases in total units sold in each merchandising category, as our customers responded positively to the second quarter merchandise mix. Although we enjoyed a benefit from the toning business, our comp store sales still would have increased low single digits for the quarter, excluding the toning category.

Now, I'd like to take you through each merchandise category to discuss a few of the key trends that drove our business for the quarter. In our women's non-athletic category, comparable store sales were up high single digits. Similar to the first quarter, this increase was driven primarily from Summer sandals, with most of the sandal category selling at much higher rates than last year. Additionally, we are very excited about the performance of our boot category, as it finished the quarter with high double-digit comparable store sales increases, even in spite of the record breaking heat wave that most of our Shoe Carnival markets experienced during June and July.

In our men's non-athletic category, we continue to see tremendous growth with our fourth straight quarter of double-digit comparable store sales increases. For the second quarter of 2010, sales were driven primarily from sandals, vulcanized canvas, hiking, and the work shoe classification. Our children's business ended the quarter with comparable store sales up low single digits. Increases were driven from girls fashion canvas, girls and boys sandals, and girls and boys running, slightly offset by the under performance in skate, fashion classic, and boys and girls athletic slip-ons compared to last year.

In adult athletics, comparable store sales were up mid-single digits for the quarter, with women's athletic up high single digits, and men's athletic up low single digits. Toning footwear continues to be an important category in our overall business, and we expect the category to continue to have a positive impact on comparable store sales through the rest of 2010.

Customers continue to respond positively to new technologies and younger silhouettes. In addition, new categories and technologies are being added to the mix as we move through Fall. Shoe Carnival's key brands continue to market this product aggressively, which we expect to help keep the category in high demand.

In store, we have created toning merchandise areas that not only highlight this product, but also illustrate the features and benefits of each technology. This strategy brings each vendor's marketing campaign to life, as our customers shop our stores.

Our overall inventories ended the quarter up 10.2% on a per door basis, including toning, and up mid-single digit on a per door basis excluding toning. Aged inventory remains at an all-time low, and we were well-positioned with fresh new product in our stores in time for the all important back-to-school sales period.

Now I'd like to give you some insight into the exciting things that we've experienced thus far for back-to-school. To date, for the month of August, we've experienced comparable store increases in every category, with our non-athletic categories as a whole reporting double-digit increases, while our athletic category as a whole is up mid-single digit. This performance comes on top of the double-digit comparable store sales increases we achieved last August. Key classifications include men's and women's boots, sports sandals, boat shoes, girls fashion canvas, children's running, and performance running for men and women. We have completed all tax-free holidays, and as of this past weekend, almost 60% of our markets have gone back to school. This year, as in years past, not only have sales picked up as back-to-school approaches in an individual market, but sales continue to be strong in the days and weeks following the start of school.

Looking forward into the Fall season, we're very encouraged by the early performance of boots. We believe in 2010, similar to last year, boots will be the number one fashion trend of the season for women, men and children. We also believe that the toning category will continue to grow with the introduction of the new technologies and new silhouettes. And most importantly, Nike is entering into this fitness category for the mid-tier channel with their Free technology. We are referring to the combination of toning and Free as active to match the growing active lifestyle being promoted by all the key vendors, and embraced by the consumer. We remain optimistic that the active category will continue to show comparable store sales growth for the foreseeable future.

Now, I'd like to turn the call over to Kerry Jackson for detail on our financial results.

Thank you, Cliff. Let me begin by discussing the results for the second quarter, and the first half of fiscal 2010, followed by information on cash flows, and then our expectations for the third quarter and full year.

Our net sales for the second quarter increased $12.6 million or 8.2%, to $165.4 million compared to $152.8 million for the second quarter of fiscal 2009. This increase in sales resulted primarily from an 8.3% comparable store sales gain, plus a $3.6 million increase in sales generated from new stores opened since the first quarter of 2009. These increases were partially offset by a $3.4 million loss in sales resulting from the stores closed since the first quarter of 2009.

Gross profit margin for Q2 increased to 28.3% from 26.8% in Q2 last year. The merchandise margin increased 1.0% on top of a 0.4% increase in Q2 last year.

Buying, distribution, occupancy expense decreased 0.5% as a percentage of sales, due to increased leverage from higher sales compared to the prior year period. Overall, volume distribution and occupancy expense increased for the quarter. A decline in occupancy expense was more than offset by an increase in distribution expense.

Our selling, general and administrative expenses increased $1.7 million in the second quarter of fiscal 2010 to $40.8 million. However, our sales gain enabled us to leverage these costs by 0.9% as a percentage to sales. The $1.7 million increase in SG&A expense was primarily a result of additional costs related to advertising, and incentive compensation, and to a lesser extent incremental increases in store operating expenses. These increases in expense were partially offset by a reduction in the costs associated with our self-insured healthcare plan.

Expenses associated with incentive compensation increased $1.0 million during the second quarter of fiscal 2010, as compared to the prior year period, due to our improved financial performance. We also spent an additional $730,000 in advertising, and incurred an additional $1.0 million in store operating expenses. These increases were partially offset by a $900,000 decrease in healthcare costs.

Operating income for the quarter was $6.0 million compared to $1.9 million in Q2 last year. Our operating margin for the quarter improved to 3.6% from 1.2% in Q2 last year.

Our effective tax rate for the second quarter was 30.8%, as compared to 47.3% for the second quarter last year. Included in the second quarter rate for fiscal 2010, was a reduction in state income taxes resulting from a favorable resolution of a state tax position. Without this tax benefit, our effective tax rate for the quarter would have been approximately 38.6%.

Net income for the quarter was $4.1 million compared to $982,000 in Q2 last year. We recorded diluted EPS of $0.32 for Q2 versus $0.08 in Q2 of fiscal 2009. Included in the $0.32 per diluted share was a $0.04 benefit resulting from the lower tax rate in Q2 that I just mentioned.

Now transition to year-to-date results. Our net sales for the first half of fiscal 2010 increased $34.8 million or 10.9%, to $354.9 million compared to $320.1 million for the first half of fiscal 2009. This increase in sales resulted primarily from a 10.8% comparable store sales gain, plus an $8.8 million increase in sales generated from new stores opened since the beginning of fiscal 2009. These increases were partially offset by a $7.2 million loss in sales resulting from stores closed since the beginning of fiscal 2009.

Year-to-date, gross profit margin increased to 29.9% from 27.4% in the prior year period. The merchandise margin increased 1.6%, and buying, distribution and occupancy expense decreased by 0.9% as a percentage to sales, due to increased leverage from higher sales. Our selling, general and administrative expenses increased $6.0 million in the first half of fiscal 2010 to $85 million. However, our sales gain enabled us to leverage these costs by 0.7% as a percentage of sales.

The more significant changes include increases in incentive compensation, wages, advertising, and store closing impairment expense, which were partially offset by lower healthcare, depreciation, and pre-opening costs. Incentive compensation increased $4.6 million during the first half of 2010, as compared to the prior year period, due to our improved financial performance. Wages increased $1.5 million.

Advertising and store closing impairment expense both increased $1.0 million each compared to the first half of last year. These increases were partially offset by a $1.8 million decrease in healthcare costs, as compared to the prior year period. As a reminder, last year we experienced unusually high claim activity.

Depreciation decreased $784,000, while pre-opening costs decreased $297,000, due to opening fewer stores. Operating income for the first half of the year was $21.0 million compared to $8.5 million in the first half of last year. Our operating margin for the first half of fiscal 2010 improved to 5.9% from 2.7% in the first half last year.

Our effective income tax rate for the first half of the year was 36.0% as compared to 39.2% for the first half of fiscal 2009. We expect our effective tax rate for fiscal 2010 to be approximately 37%.

Net income for the first half was $13.4 million or $1.04 per diluted share, compared to $5.1 million or $0.41 per diluted share in the first half of the prior year. Included in the diluted earnings per share in the first six months this year was a $0.06 charge for store closing and impairment costs, and a $0.04 benefit resulting from favorable resolution of a state tax position.

Now let me discuss information affecting cash flow. Depreciation expense for the first half of fiscal 2010 was $6.8 million. Depreciation for fiscal 2010 is expected to be approximately $13.5 million. We expended $6.6 million in cash during the first half of fiscal 2010 for the purchase of property and equipment, of which $3.5 million was for new stores, remodeling, and store relocation activities.

As part of our long-term strategy to grow our store base, and increase our distribution capabilities, we're in the process of redesigning certain elements of the material handling system in our distributions center. Accordingly, we anticipate spending $1.5 million on these elements during fiscal 2010, of which $1.1 million was expended through the end of the second quarter.

We anticipate capital expenditures of approximately $7 million to $8 million for the remainder of fiscal 2010. Including our second half CapEx range is an additional four stores at a projected cost of approximately $1.5 million, and up to $3.4 million of store remodeling and relocation costs. For the remainder of fiscal 2010, we expect to receive approximately $2.1 million additional lease incentives from landlords. The remaining capital expenditures are expected to be incurred for various store improvements, along with continued investment in technology, and normal asset replacement activities.

My final comments today will focus on sales and earnings expectations for the third quarter and fiscal year 2010. We expect third quarter net sales to be in the rage of $196 million to $202 million, and comparable store sales to increase in the range of 3% to 6%. Earnings per diluted share for Q3 are expected to be in the range of $0.63 to $0.66. Earnings per diluted share in Q3 last year were $0.59.

For fiscal year 2010, we expect net sales to be in the range of $728 million to $737 million, and comparable store sales to increase in the range of 6.5% to 8%. Earnings per diluted share for the full year are expected to be in the range of $1.89 to $1.95. This would result in an all-time high earnings performance for our Company. Earnings per diluted share for fiscal 2009 were $1.20.

This concludes our second quarter financial results. Now, I'll turn the call back over to Mark for a few final comments.

Thanks, Kerry. Well, we are obviously very pleased with our record earnings achievements in the second quarter of 2010. As I mentioned earlier today, we believe our outlook for the third quarter and the remainder of fiscal 2010 is very positive, and we look forward to delivering continued improved financial results in the remainder of this year.

Operator, you may now open up the call for questions.

(Operator Instructions) We'll take our first question today from Scott Krasik with BB&T Capital Markets.

Congrats.

Thanks, Scott.

Just a couple questions on product first. The stores or the regions where you've had kids go back to school, has the increase in the comp that you've seen there been consistent? And also, what categories have seen the biggest lift since they've gone back to school?

Scott, this is Cliff. If I understand your question correctly, the increases have been pretty consistent from store to store as they go back. We're getting high singles, low double increases for those stores and interestingly, we're obviously selling a lot of athletic. This is a huge athletic month for us, but in addition to that, our sandal business has been very good. I mentioned the fact that our boot business has been good, and we're seeing increases pretty much across the board. Double-digit in the brown side of the business and single-digits in the white side of the business.

I'm just wondering if you're seeing, after parents buy their kids shoes when they're back at school, have they turned back to toning? Have you actually seen an acceleration in toning in those stores where the schools are already back in session?

I can't say that we've seen that, no, Scott. This is not -- we have not expected this to be a big toning month, and we have not been surprised by that.

Okay. Mark, the store opening schedule was definitely above prior expectations. Maybe talk about what you're seeing there and how confident you feel about opening the 20 stores next year?

Well, Scott, as you well know, it's subject to performance of developers to get those strip centers open. I should say new strip centers that we're planning on. And about half the number I gave you in for 2011, in other words, the 20 stores that we expect to open, and I am saying approximately 20 stores, about half of those are new strip center development as opposed to redevelopment of existing space. Obviously, the redevelopment side of it is easier to predict in terms of when you get a deal, when that deal will be finalized and a store will open as opposed to new strip center development. But at this point in time, it looks like we've got pretty good foresight on at least 20 stores, barring unforeseen difficulties. So, feel pretty good about the 20 store opening. Regarding the closings, we've been really successful in negotiating fairly short-term reductions in lease rents, allowing stores that may have been marginally profitable before or even losing money to cash flow very nicely and it's allowed to us keep stores open. So, I expect those negotiations will continue to be profitable in the future. So, feel pretty good about the real estate in -- or the real estate strategy in 2011. Again, I want to reiterate because I don't think I did so in my remarks, but I want to reiterate that our strategy with respect to new store openings remains that we will open stores in markets that we are already existing in, so we're focused on filling in existing marketplaces.

Generally speaking, I know you're looking to build scale in those types of markets. What are your plans for your marketing investments over the next few quarters? Do you feel like you're under invested? Is there an opportunity to take share? What's the longer term plan?

We do feel like we are taking market share at this point. The size of our stores and the amount of sales that we generate on a per store basis allow us, even with a somewhat lesser comp than what we've seen with some of our peers in the family footwear sector, the dollars are larger that we're dealing with. So, we do feel like we're taking share in the marketplaces where we coexist. Our strategy with respect to advertising is not much different than we have had in the past, with the exception that we are spending a little more money in the digital side of the business than we have in the past. Not significantly more than last year, but a little bit more, and I will say we were not happy with our creative -- our television and radio creative last year in the fourth quarter. We think we've got a tremendous opportunity to enhance that creative like we've done in the first two quarters of this year. So -- or I should say the first two seasons, the Easter season and the back-to-school season, so we think we've got tremendous opportunity working with our advertising agency to make some better creative. That's really where we're spending the money.

Okay. Good. And then, just sort of a housekeeping question, Kerry, your full year guidance of 189 to 195, what's the tax rate that that's based on?

37%.

Okay. Thanks. And for next year is that a good number to use or what's the number for next year to use?

The number will probably increase. This year's tax rate's benefiting from that state tax position resolution, so I would expect we'll go back to a more normalized 38.5% to 39% for next year.

Okay. Thanks, gentlemen.

For our next question we'll go to Chris Svezia with Susquehanna Financial Group.

Good evening, gentlemen. Nice job on the quarter there. Question here, just, if you can remind us how the comps trended last year as you went through the third quarter? I don't know if you want to give it by month or give us some qualitative remarks about how it trended third quarter last year, so a point of reference?

We haven't given comps by month, but I would say that we started seeing much improved business on August 1 of last year. As soon as back-to-school season really started, our customers responded and we had a double-digit increase and a low double-digit increase in August. September, for us, we blew it out with a mid-double digit increase in September, then October was a little bit softer. If you remember right, we had some really good seasonal changes of weather in September and boots really started to take off, not only for Shoe Carnival but across the industry. And October was a little bit more iffy in terms of -- not more iffy but a little bit more seasonal in terms of the weather pattern. So, we saw a little bit of a dip in October and then business really started to take off in the back part of the fourth quarter, so that's pretty much how it trended. We started August really nicely with double digit increases, increased that rate of acceleration in September, and then October fell off a little bit to the mid-single digits.

Okay. Thanks. Kerry, just for you on the margins, just maybe give us your thoughts about how we should be looking at that based on your comps for the third quarter? And you're doing a nice job on the SG&A as you always do. Just any color on how we should think about SG&A third quarter? And where you are in the gross margin to leverage, given where your inventories are, can you show merchandise margin improvement? I guess you could year-over-year in that third quarter based on your guidance?

Well, we built into our models for our guidance for Q3 is a flat to slightly up gross profit margin.

Okay. And I would assume that's -- how do you break that out between merchandise margin and the buying and occupancy piece to the margin, to the gross margin? How should we think about those pieces?

For our projection right now we're just giving you the gross profit from the top line.

Okay. And then, I know you guys are much better in stock and there are certainly key items driving the business, but just on the inventory being up 10%, just how comfortable are you with that at this point based on what you're seeing? Certainly nice to see the non-athletic business performing as well as it does. It's certainly a good indicator for fall, but how do -- your comfort level around that inventory position?

Chris, I am really comfortable with it at this point. Again, it's important to understand that a little over half of that inventory increase was due to a new category of toning, which we think will again accelerate in September as the vendors begin to market the product again in and around Labor Day. So, we feel pretty confident on the toning category, as we move forward, that we're going to see comp store increases on that category in the mid-high single digits. The rest of the inventory increase came in not only white athletic but in the brown shoe side. We felt like we entered in the back-to-school last year maybe a little light. As you remember, we increased the store level inventory by depleting the inventory in our distribution center, which kind of left us a little high and dry as we moved through the quarter. So, this year we bought deep into some key items and key classifications in time for back-to-school and we feel pretty positive about where we are.

Okay. Thanks. And just a the last thing if I may, just on, Mark, on the 20 potential stores for next year, how the lease negotiations unfolding as you look at the rates you're getting on those stores? Relative to the overall base are you -- are they comparable? Are they below? What's the trend line in terms of those conversations on those stores?

Well, certainly they're below what we would have seen three years ago, but relative to our existing store base, I'm going to say it's not that much different. Obviously, Chris, it depends upon where the store's located and the rates in that particular market area and what's transpiring in those particular market areas. But overall, I would say it's not too significantly different than our existing store base.

Okay.

Let me clarify that. What I should say, is our existing store base that we've built in the past probably seven to ten years. Some of the older stores obviously, we have much better rates on.

Right. Right. Okay. I got you. Well, best of luck, gentlemen. Thank you.

Our next question will go to Sam Poser with Sterne, Agee.

Good afternoon, everybody, it was the best quarter I've ever seen. I just had to say that. Anyway, a couple questions. Number one, Kerry, the guidance, you're giving us GAAP guidance, correct? So, like in the first quarter you did -- you post GAAP earnings of $0.72, are you using the 72 or the adjusted numbers?

No. We always give GAAP guidance. Now, when we discuss the components that make up that GAAP, we will talk about the various pieces that come into play. But we never give non-GAAP numbers or guidance. That's just been our pattern.

So, you're using the $0.32 and the $0.72 within that dollar range, correct?

Correct.

Okay. All right.

Now, what we've been trying to do, Sam, is within that $1.04 that we earned for the year, we wanted you to understand there is a couple of unusual items. One was in Q1, we took a $0.06 charge for store closing impairment charges, which reduced EPS by $0.06. But then in Q2, we had this unusual settle -- or this resolution of the tax position which benefited by 6 -- or by $0.04, so those are GAAP numbers. We just want you to understand how we got to those GAAP numbers.

Correct. And your tax rate for the balance of the year is going to be 38.5% to 39%, though, correct? To get to that?

It'll be a little bit under those numbers, but it will be higher than our run rate in the first half.

Okay. And then the -- can you talk about what the incremental -- you talked about, Cliff, about business would have been up or, Mark, you said business would have been up in the athletic world low single digits without toning. You're comping up mid-singles right now in toning in athletic. How is toning affecting the business in the first three weeks of the year in a similar commentary from that you made for the second quarter?

Well, let me clarify one thing, Sam. I said that our sales would have been up low single digit as a whole without toning, not -- I did not call out athletic. I'm guessing you mean the first three weeks of the new quarter.

Of the new quarter, for the same commentary you made on Q2, yes.

The toning accounts for a low single-digit portion of our business. It has definitely, for this month alone, has come down significantly as the customers are buying back-to-school shoes for their kids.

But it's still an incremental lift from last year because it really didn't exist at this time last year, is that not correct?

That is correct. It is an incremental lift.

And what would the increment be for that?

We're not going to get into numbers regarding the first three weeks of August. What we tried to do with the divulging comp store sales to date was give you an idea how back-to-school has started. So, we don't want to get into specific numbers until we give sales numbers at the end of the third quarter.

Okay. Very good. And then, you commented that you expected to -- and I want to make sure I got this right, in the gross margin for the quarter, the merchandise margin lift in Q2 was what, just I think I missed that?

1%.

And then you're going to get for -- now, was this for the balance of the year, for the full year you have the $2.5 million benefit from leases? Is that from the back half?

Say that again, Sam. I didn't hear you.

In the buying and occupancy, you have $2.5 million, at occupancy of $2.5 million savings in the back half compared to last year? Is that right?

I don't know where you got that number from?

On the reduced rents. You said something. That's why I was asking the question.

No. What I said was what we've been able to see is good negotiations with certain landlords on stores that were either coming up for kickouts, where we've got kickout clauses in leases and we've been able to renegotiate the rents to a more profitable state. Or stores that were coming upon their natural lease end and we've been able to negotiate short-term extensions on certain stores that may have been marginally profitable, but where we've been able to reduce those rents or reduce those rates, it made sense to go ahead and do short-term renewals or short-term lease extensions with profitable stores.

I think the word you said $2.1 million in lease incentives for the balance of the year.

No, no, no, he's talking -- Kerry, do you want to explain? That's a completely different issue.

I'm sorry. Okay.

That's where landlords, when we open a store, will participate by helping give us money up front to build out the store. So, that's a pretty common -- people call it tenant improvement allowances, but that's really when you open a new store or you're remodeling a store, you can get the landlord to participate in that.

Okay. So, that's just reducing some of your CapEx basically?

Yes.

And then for the SG&A, I mean for the SG&A for the balance of the year, you're going to lever it but not quite as much as you levered it this quarter, correct?

We expect to see some leverage. What we're looking at is that on the dollar basis for Q3 and Q4, we expect it to be increased probably around 4% on a dollar basis year-over-year for each of the quarters, which will create, depending on what level of sales come out, will create leverage either at the 3% level, create leverage and higher leverage at the 6%.

Got you. And then, Cliff, lastly, as you look at the toning active business in general, looking ahead to the next six months, how do you -- how are you planning that business as of right now and within the athletic realm? I don't know what you want to put in -- if you want to include Nike or what parts of Skechers and so on, but how do you look at that as far as how big the potential is there?

We believe that, Sam, we believe that we're going to see mid- to high single-digit comp store increases in toning category this year versus last year. And by October of last year, we were all stores in toning with our number one brand and most stores in toning with our number two brand. So we believe that once we comp those numbers, because it was pretty much easy up until then, we'll still see mid- to high single digit increases. Toning is going to be somewhere between 5% and 6% of our total business for the second half.

And what was it in like in the first half?

Right at that same number. Then in the fourth quarter, and this is really important, the toning 5% to 6% of our business excluding Nike, then in the fourth quarter we take the Free product in and that should help improve our total performance in that active piece.

And how much of that, just lastly, how much of that is built into the guidance? Just from the way you said it implies that you're expecting less -- slightly less comp in Q4 than in Q3, if I'm doing it right or it's pretty even. But is that all built into those numbers or what are the components of this comp number for the back half right now?

It;s all built into the number we gave you, yes, Sam. From a guidance standpoint, is that what you're asking?

Yes. All right. Well, thank you, guys, very much. Continued success.

Let me clarify one question you had on the tax rate. For the first half, we had a 36% tax rate. For the second half, we're expecting about a 38%, and that will average out to 37% for the year.

And then next year you go back to normal?

Correct.

Thank you.

(Operator Instructions) We'll take our next question from Jill Caruthers with Johnson Rice.

Good afternoon. If you can talk about -- your performance was very strong in August and I think it makes up 40%, 45% of the quarter, your thoughts on your projections of quarterly comps of 3% to 6%, it just appears relatively conservative just given the strong start you've seen to the quarter?

Jill, one of the -- first of all let me say we're positive about the prospects for increased comps in the third quarter. However, when you take a look at September, mid-single digit comp in September is a very daunting number when you're relying on somewhat upon change in seasonal weather. So, we are a little conservative in our planning for September. We feel a little bit better about October, as we get closer to fall, cooler weather and start to sell boots at even a faster rate than we have so far in August. So, we're just a little bit -- I don't want to make it sound like we're leery of increased comps, but certainly we're seeing a 6% increase through the first part of August and against an 11% increase last year, so I think it's prudent to expect somewhat similar expectations in September and October.

Very understandable. Just going further on the boots, I believe you said on the last conference call that you were planning boot inventories up high single digits for the back half. Is that still your thoughts and maybe it seems positive you're already seeing strong boot sales given the pretty warm weather and very early in the season and whatnot?

We are seeing strong boot sales. We still feel very strong about boots not only for women, but for men and children yet. We haven't taken delivery of many children's boots as of yet, but the deliveries we have had in the men's category and in the women's category we're very pleased. Especially in the junior boot category, which the customers are buying for back-to-school. So, we still feel strong about a high single digit, mid- to high single digit increase in boot sales.

Okay . And then just last quick question, your thoughts on the BOGO promotions and whatnot, how did they run in the second quarter versus last year? And then, maybe going forward what you project the competitive environment for

Our promotional cadence really didn't change in the second quarter from last year's second quarter, so I didn't see a whole lot of -- we didn't see a whole lot of change there. We're not seeing it in the third quarter to date, and we anticipate being pretty much on a par with last year as far as promotional cadence in the remainder of the third and fourth quarters as well. So, we don't see a whole lot of change.

All right. Thank you.

Mr. Lemond, at this time there are no further questions. I'll turn the conference back to you for any closing remarks you may have, sir.

Okay. Thank you. I would like to thank our Shoe Carnival associates first of all on their execution in the first half of 2010. It's been record results both in the first quarter and a record second quarter result, and I'd like to show my appreciation to all Shoe Carnival employees for that. I'd also like to thank our vendors for their support during the first half. We've really enjoyed the support of some great vendor relationships. We've increased that vendor category with the additions of DC and Crocs and a few others. So, real happy about the progress that our merchandise staff has made in getting the new product in. We're excited about the price points and the way they're increasing, the way we expect them to increase with better product from our largest vendor, Nike. It's nice to see the mid-tier sell price points in excess of $100 and we think that will continue as long as the demand is out there for the right products. So, we're happy to see that as well. Thank you for joining us today, and we look forward to talking to you again in November. Thank you.

And once again, ladies and gentlemen, this does conclude our conference. We do appreciate your participation.