Shoe Carnival Inc (SCVL) 2010 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome to the Shoe Carnival fiscal year 2010 fourth-quarter and full fiscal year earnings conference call. This call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with a discussion of risk factors included in the Company's SEC filings and in 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 would now like to 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. Good afternoon and welcome to Shoe Carnival's fourth-quarter and fiscal year 2010 earnings conference call. Joining me on the call today are Kerry Jackson, Chief Financial Officer; Cliff Sifford, EVP and General Merchandise Manager; and Tim Baker, Executive Vice President of Store Operations.

Following my opening remarks, Cliff will review our merchandise performance; then Kerry will review the financial results in more detail. We will then open up the call to take your questions.

We are extremely pleased to report that our 4.6% increase in comparable store sales for the fourth quarter, combined with higher gross profit margins and controlled expenses, produced the second highest fourth-quarter earnings in the Company's history.

Total net sales increased 5.3% to $179.9 million for the fourth quarter. These sales results were in line with our fourth-quarter expectations for net sales in the range of $178 million to $182 million and comparable store sales in the range of 4% to 6%.

Our early category strength in women's boots in the third quarter continued through the fourth quarter of 2010. And in line with our historical trend, November and December were still our strongest volume boot months. By month November was a very strong sales month, and December and January were slightly weaker than anticipated due to the weather in the Midwest and the lack of early tax refund loans.

Strength in women's, men's and children's boots and the women's casual sport category helped us achieve a 130 basis point improvement in the gross profit margin to 30% in the fourth quarter compared to 28.7% in the fourth quarter of last year. Selling, general and administrative expenses increased 5.6% or $2.5 million; however, as a percentage of net sales, we were able to maintain SG&A at a level equal to last year at 26.1%.

The quarterly gross profit margin expansion expansion and controlled SG&A expenses resulted in a 130 basis point operating margin increase as compared to the prior year period. As a result, we recorded a 71% increase in net income and a 65% increase in earnings per diluted share to $0.33 in the fourth quarter of 2010 compared to $0.20 per diluted share in the fourth quarter of 2009.

Our consistent positive operational and financial execution throughout the fiscal year reflects the strength of our business model and the ability of our entire Shoe Carnival team to focus on certain fashion trends currently driving consumer footwear demand. We continue to enhance the way our stores communicate those trends to best meet the needs of our customers in terms of value, fashion and family footwear needs.

Following record results through the first three quarters, our fourth-quarter performance enabled us to generate record comparable store sales and earnings for the full fiscal year. Comparable store sales for fiscal 2010 increased 8.2%, and earnings-per-share increased 71% to $2.05 from $1.20 per share in 2009.

In 2010 we ended the year with $60.2 million in cash and cash equivalents, and we remain free of interest-bearing debt. We continue to be intently focused on generating free cash flow.

We completed our store expansion plans for this year by opening four stores in the third quarter for a total of 10 new store openings in fiscal 2010. We did not open any stores in the fourth quarter. We closed two stores in the fourth quarter for a total of seven store closures in fiscal 2010, and we ended the year with 314 stores in operation.

For fiscal 2011, we expect to ramp up our store expansion plan. We continue to anticipate opening approximately 20 new stores, the majority of which will be in existing markets. We constantly evaluate our unit profitability and when economically feasible close stores that underperform our cash flow expectations. Currently we plan to close five stores in 2011. This would result in a net store growth of 15 stores and would represent a square footage increase of approximately 4.6% or 157,000 square feet in 2011.

Looking forward, we are optimistic that fiscal 2012 will yield even greater new store growth opportunities.

During fiscal 2011 we will relocate nine stores to better locations in the same markets. We will continue to review opportunities to upgrade our store locations in existing markets in future years as leases come up for renewal.

Please keep in mind our expected store closings for 2011 may change depending upon the resolution of recent 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 improves.

We will continue to enhance our store productivity with investments in our existing store base, focusing on in-store visual graphics, including signage updates to focal walls and end caps. Additionally, in fiscal 2011, we plan to remodel approximately 30 stores or 10% of the chain. We continue to believe reinvestment in our existing store base, combined with strong marketing and advertising campaigns, will continue to make Shoe Carnival the destination of choice for the entire family footwear needs.

At this time, I would like to update you on an initiative, a very exciting initiative, that we are developing and plan to implement later in fiscal 2011. We have not previously sold our product over the Internet, but an e-commerce platform offers a tremendous opportunity for Shoe Carnival to reach an increasing number of new and existing customers with our broad assortment of value-priced footwear for the entire family. Our management team has worked diligently to develop an e-commerce plan that will be operationally and financially advantageous to Shoe Carnival. We plan to use a third party for fulfillment, and we anticipate capital expenditures of about $1.4 million for the year, primarily for software costs.

We also expect to incur expenses equivalent to about $0.01 per share in each of the first two quarters. We are extremely excited about the launch of Shoe Carnival's e-commerce platform and look forward to providing you with more details in coming quarters.

Our consistent financial performance gives us the confidence to remain optimistic about our first quarter of fiscal 2011 outlook, despite the fact that we are up against difficult comparisons. We believe our business model of providing the right product assortment for the entire family at a compelling value is especially effective in this current economic environment.

Combined with increased store growth and our management team's consistent focus on managing the controllable aspects of our business, we are confident that this business model will continue to generate long-term profitable growth and free cash flow. Therefore, for the first quarter of 2011, we expect comparable store sales to increase in the range of 3% to 5% and earnings to range from $0.72 to $0.75 per share.

Last year in the first quarter, which was our best quarter ever, we achieved a 13.1% comparable store sales increase and earnings of $0.72 per share.

In a few moments, Kerry will provide further detail on our first-quarter guidance. Now I would like to turn the call over to Cliff for more details on the merchandise performance.

Thank you, Mark. As Mark stated, our total comparable store sales for the fourth quarter of 2010 were up 4.6%. In addition, traffic was up 1.3%, and we experienced increase in both conversion rate and average transaction size. Every merchandise category drove comparable store sales increases for the quarter.

We also reported increases in total units sold, average unit retail and each category as our customers responded positively to our fourth-quarter merchandise mix. Although we enjoyed a benefit from the toning business, our comparable store sales still would have increased more than 4% for the quarter, excluding the toning category. Most importantly, even though we experienced a significant drop in margin in the toning category, our overall merchandise margin for the quarter increased by 130 basis points primarily due to higher margins in women's nonathletic footwear.

Now I would 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 nonathletic category, comparable store sales were up double digits. This increase was driven primarily from the boot and sport casual categories with tailored casuals, molded footwear and vulcanized canvas all selling well. In women's boots, we enjoyed nice increases in shearling or fur-lined boots, as well as tailored dress, Western and weather boots.

In our men's nonathletic category, we ended the quarter with a low single-digit comparable store increase. This is on top of a double-digit increase last year. Sales continue to be driven by boots with a high single-digit comparable store increase. This increase was driven primarily by sport boots, hikers and cold-weather boots.

In addition to boots, the key casual categories, including vulcanized canvas and sandals, also performed well.

Our children's business ended the quarter with a mid-single-digit comparable store sales inquiries, just like third-quarter increases were driven from girls fashion canvas and a double-digit increase in both girls and boys running. In addition to those categories, we enjoyed strong double-digit growth in both girls and boys boots, including fashion and casual boots, along with Western and weather boots.

In adult athletic, comparable store sales were slightly positive for the quarter as the weather during the month of December had a negative impact on overall athletic sales. Our business for the quarter was driven primarily from men's and women's running with performance running and trail running categories for both men and women generating strong increases.

In the toning category, we experienced double-digit growth in sales, although at a substantially lower average unit retail than the fourth quarter of 2009. Our focus is to continue to bring our inventory position in line with customer demand and to treat the category as we would all other important categories. Despite of the fact that the average unit retail and toning declined for the fourth quarter, our total Company average unit retail, including toning, increased by low single digits.

Over the past several weeks, we have received new toning styles with running-based technology, which have delivered great sell-throughs at higher average unit retails.

Our overall inventory ended the quarter up 6.8% on a per door basis, including toning. Excluding toning, inventories were up mid-single digits on a per door basis, which is in line with our non-toning sales trend. Aged inventory remains low, and we are well positioned for the spring and summer sales period.

Looking to the spring season, our strategy for our later than usual Easter was to shift dollars from the men's and women's dress categories into the sport casual and sandal categories. Although it is still early, we are very encouraged by the early performance of sandals, particularly sandalized wedges, athletic sports sandals, and slides.

In our athletic categories, we shifted dollars from toning to running, specifically the performance running category. This has allowed us to maximize sales on lightweight running and other higher unit retail product categories. Early results are favorable, and we believe the trend will be an important part of our business throughout the remainder of the year.

Also, as Mark mentioned, we will be launching our e-commerce business in the second half of the year. Over the past 18 months, we have increased our marketing investment in the digital space, driving customers to our website where they have been able to pre-shop for their favorite brands and styles. We have created Web-based offers that our customers can print out and bring to their local store for discounts and specials. Our tracking information, along with the increase in our customer database, shows that we already have a loyal fan base visiting our site regularly.

The next step in our strategy is to launch our e-commerce store. We have done a lot of due diligence to study how to launch our site with the Shoe Carnival D&A. We want the fun and exciting environment of our brick-and-mortar stores that our customers experience every day to be the same experience online. We will offer our online shopper a full breadth of styles and brands to choose from. We have selected ATG as our e-commerce platform and Amplifi Commerce as our strategic partner for implementation.

We are very excited about this opportunity to not only better serve our current Shoe Carnival customer, but to also reach an expanded audience.

Lastly, I would like to also thank the buying and marketing teams for a job well done. I'm very happy with the way our buyers identified key brands and items and bought into them in a meaningful way to maximize our sales. They accomplished this while controlling overall inventory levels and keeping aged inventory in line. Our marketing team took those brands and items and brought them to life, not only in our direct to consumer programs but in store as well. I believe the improvements we have made to our in-store environment over the past several years have played a very important role in our overall improved performance.

And now I would 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 fourth-quarter and fiscal 2010, followed by information on cash flows and then our outlook for the first quarter of fiscal 2011.

Our net sales for the fourth quarter increased $9.1 million to $179.9 million, a 5.3% increase over the prior year's fourth-quarter net sales of $170.8 million. This increase was primarily due to a 4.6% increase in comparable store sales and a $4.5 million increase in sales generated by new stores open since the third quarter of last year. These increases were partially offset by a $3 million loss in sales from the 13 stores closed since the third quarter of last year.

Gross profit margin for Q4 increased 1.3% to 30% due to an increase in the merchandise margin. Buying distribution occupancy costs were flat as a percentage of sales. Our selling, general and administrative expenses increased $2.5 million in Q4, but were flat as a percentage of sales when compared to Q4 last year. The significant individual increases in SG&A expense were $937,000 in advertising, $487,000 of store operating costs, and a $481,000 increase in incentive and equity compensation. These increases in expense were partially offset by a $514,000 reduction in healthcare costs.

Operating income for the quarter was $7 million compared to $4.4 million in Q4 last year. Our operating margin for the quarter improved to 3.9% from 2.6%. Our effective tax rate for the fourth quarter was 37.8% as compared to 41.9% for the fourth quarter last year.

Net income for the fourth quarter increased 70% to $4.4 million or $0.33 per diluted share compared to $2.6 million or $0.20 per diluted share for the fourth quarter last year. As Mark stated earlier, this represents the second highest fourth-quarter EPS in our history, trailing only the earnings per diluted of $0.37 achieved in the fourth quarter of fiscal 2006, which was a 14-week quarter.

Now transitioning to fiscal 2010 annual results, our net sales for fiscal 2010 increased $56.8 million to $739.2 million, an 8.3% increase over the net sales of $682.4 million for fiscal 2009. This $56.8 million increase was primarily due to an 8.2% increase in comparable store sales, along with a $17.9 million increase in sales from new stores opened since the beginning of last year. These increases were partially offset by a $14.3 million loss from the 16 stores that were closed since the beginning of last year.

Our year-to-date gross profit margin increased to 30% from 28.4% in the comparable prior year period. The merchandise margin increase 1%. Volume distribution occupancy costs decreased 0.6% as a percentage of sales due to leverage associated with the comparable store sales increase.

Our selling, general and administrative expenses increased $10.7 million for fiscal 2010 to $179.2 million. However, our sales gain enabled us to leverage these costs as a percentage of sales by 0.4%. The more significant changes include increases of $5.8 million in incentives and equity compensation, $2.9 million in wages and benefits, $2.1 million in advertising, and $1.3 million in store closing and impairment expense. These increases were partially offset by a $2.2 million decrease in healthcare and a $1.4 million decrease in depreciation.

Operating income for the year was $42.4 million compared to $25.1 million last year. Our operating margin rose to 5.7% from 3.7%. Our effective tax rate for fiscal 2010 was 36.6% as compared to 39.3% last year. Included in income tax expense for fiscal 2010 was a $937,000 benefit related to favorable resolution of certain tax position. This cumulative benefit significantly lowered our effective income tax rate for fiscal 2010 as compared to same period last year. We expect our effective tax rate for fiscal 2011 to be approximately 38.5%. Net income for the year increased 77% to $26.8 million or $2.05 per diluted share compared to $15.2 million or $1.20 per diluted in fiscal 2009.

Now let me discuss the information affecting cash flows. Depreciation expense was $3.5 million in Q4 and $13.7 million for the full year. Capital expenditures were $14.4 million in fiscal 2010 with approximately $3.7 million spent for new stores, $5.9 million for remodeling and store relocation activities, and $1.4 million for redesigning certain elements of the material handling system in our distribution center. The remaining capital expenditures for fiscal 2010 were used for continued investment in technology and normal asset replacement activities. Lease incentives received from landlords this year were $3 million.

Capital expenditures are expected to be between $21 million and $23 million in fiscal 2011. We intend to open 20 stores at an expected cost of $6.8 million, to relocate nine stores at an expected cost of $2.4 million, and to expend up to $7.4 million on remodeling activities. The remaining capital expenditures are expected to be incurred for various other store improvements, the implementation of the e-commerce platform, along with continued investment in technology and normal asset replacement activities. Lease incentives to be received from landlords are expected to be approximately $5 million to $6 million.

We currently have authorized a $25 million share repurchase program. However, we did not repurchase any shares during Q4 nor have any been repurchased year-to-date.

Our final comments today will focus on sales and earnings expectation for the first quarter of fiscal 2011 and certain metrics for the full year. We expect first-quarter net sales to be in the range of $198 million to $201 million and comparable store sales to increase in the range of 3% to 5%. Earnings per diluted share are expected to be in the range of $0.72 to $0.75. Earnings per diluted share in the first quarter of fiscal 2010 were $0.72, which is the highest quarterly earnings in our history.

Included in the high end of our EPS guidance is an expectation of a small decrease in our gross profit margin. In Q1 last year, we saw a 2.2% increase in our merchandise margin, partially due to the strength of toning sales. In Q1 this year we expect a decline in our merchandise margin to be partially offset by the leveraging of our buying distribution occupancy costs. Additionally we expect our SG&A expense to increase 4% or less over Q1 of last year.

While we are not giving specific annual guidance, we would like to share with you certain general thoughts on the year. In fiscal 2011 we expect to achieve possible comparable store sales for the year, but at a more moderate pace from the record 8.2% we achieved in fiscal 2010.

We are planning a slight decline in our gross profit margin due to the strong gross profit margin recorded last year. While we expect our store selling expenses to increase due to opening more stores, we should see flat to lower G&A costs than last year due to lower incentive and equity compensation and impairment expense. In total, we expect to leverage our SG&A expense in fiscal 2011. Higher sales and controlled expenses, albeit with lower gross margin, should lead to a moderate increase in our net earnings and EPS for fiscal 2011.

This concludes our fourth-quarter financial review. Now I would like to turn the call back to Mark.

Thanks, Kerry. Operator, we are now ready for the question and answer portion of the call.

(Operator Instructions). Jessica Bornn, Sterne, Agee.

It is Sam Poser at Sterne, Agee. Just a couple of questions. Where are you running quarter to date right now in same-store sales?

We don't disclose that -- the exact number during the quarter. But it is pretty close to the high end of our range.

And when you look at your athletic business up against toning and so on, did that turnaround once the weather started to cooperate? Is that running at or above that level right now?

Sam, as we have always said, that we felt we could comp positive in athletic going against toning because of two reasons. One, the toning category proved to the athletic world that we could sell, the family channel could sell higher-priced athletic products. And along with that proof came better product for us, whether it was lightweight running or what we refer to as performance athletics. That product did improve as soon as the weather improved, and as the weather even got warmer, our athletic business has comped positive.

Okay. Great. And then in the guidance, Kerry, in the guidance for the first quarter, does that include the $0.01 for -- (multiple speakers). So you have $0.02 of nonrecurring charges, which is within your guidance. So basically if you take that out, the range would be $0.73 to $0.76?

I'm only -- what $0.02? $0.01 for the Internet -- we were -- what Mark said, $0.01 --

Right, $0.01 for the -- (multiple speakers). Right, right. So it would be $0.70 -- instead of $0.72 to $0.75, it would be $0.73 to $0.76 because you (multiple speakers) on a non-GAAP basis (multiple speakers). Okay. I just want to make sure I'm understanding that. Okay. All right. Well, thank you very much. Thanks. Continued success.

Jeff Stein, Soleil Securities.

A couple of questions for you. First of all, Kerry, is the $21 million to $23 million of CapEx, is that a gross number or is that net of landlord allowances?

That is gross.

Okay. Got it. And the SG&A, I'm just kind of curious, it would seem to me that if you get a 3% to 5% comp in the first quarter, even if you set aside that $0.01, one would think that you should see a bigger percentage increase in earnings. I guess my question then is, is the -- it would seem to me that you're looking for maybe more than just a 10 or 20 or 30 basis points degradation in gross margin. Would that be correct?

Yes, we are. On a net-net basis, merchandise margin will decline more than that, but the net effect after leveraging of the buying and distribution costs will be at the higher end of what you were just talking about.

Okay.

If you're running your models, you will find that.

Okay. How many -- I'm just kind of curious what kind of BOGO events you are planning for the first quarter. One of your competitors earlier this week suggested they are not planning any, and I'm wondering if you guys have anything on the calendar?

You know, Jeff, we truly don't like talking about perspective promotional events, our promotional events on a prospective basis. So all I can tell you is that last year we comped our promotional activity from the year before.

Okay. And can you talk a little bit about inventory levels later in the year. As cost of goods have gone up, most folks are planning some increase in inventories, but there is this elasticity in this trade-off between units and price, and I'm kind of curious as to how you see that playing out for your business.

We are planning -- due strictly to the fact that we will be bringing our toning inventory in line, we are planning our inventories to be flat to slightly down. Obviously units will be down further. We believe that -- we do believe that with the comp increase that we are planning and the price increase that we are seeing out of China, that we will sell fewer pairs but at a higher retail.

Got it. Okay. Great. Thank you.

Chris Svezia, Susquehanna Financial Group.

I guess I just want to talk for one second. Just on the merchandise margin for Q1, given the fact you guys had good merchandise margin improvement in the fourth quarter, I guess that is just due to mix of product, I guess, boots and higher ASPs and toning not being as big of a percentage of the business? I'm just trying to make sure I understand why you expect merchandise margins to be down that much -- (multiple speakers)

Here is what happens in the fourth quarter. Athletic boots -- boots and sport shoes, especially in women's and men's, become a much higher percent of the total. And the business in those two departments, actually in those three categories, increased at really nice rates throughout the quarter. So it grew as a percent of our business. Whereas during snowy weather and cold, cold weather, athletic becomes a lower percentage of our total business.

So the short answer to your question is yes, toning became a smaller percent of our business. Boots and sport shoes became a larger percent, and that is what helped drive the margin up. We are not going to be any more promotional in the first quarter than we were in the fourth quarter on toning as it stands today. But as the weather warms athletic shoes and, therefore, toning will become a larger percent of our business.

Not larger as compared to last year. As the business will be a lower percent compared to last year, but still larger than it was in the fourth quarter.

Without being too specific to the second quarter, does it abate somewhat as you go into the second quarter in terms of the margin contribution? I mean is this -- in other words, first quarter is your most difficult comparison on the merchandise margin as it relates to toning. Is that fair?

It is. It is fair, but, as you go into the second quarter, we hope to have our inventories closer to the line so that we will be cleaning up the odds and the ends of the inventory. And so right now we're looking for our margins will be just slightly down in the second quarter.

Okay. And then, I guess, Kerry for you. When you think about the leverage ability of the business model and yes, you are making some investments this year on the online side, just -- and I know you're not going to give a specific comp number for the year -- but how should we conceptually think about SG&A? Is that leverage at a 2 comp and occupancy is it at a 1 comp or 2? I'm just trying to get some parameters around where those inflection points are this year.

Well, historically we have needed to leverage a 3% comp to leverage our occupancy cost. Right now with being more flattish on our -- we are just starting to accelerate our growth.

In the first couple of quarters, it should take a lower comp than that to leverage our occupancy cost. As we get into the back-half and we are opening more stores, you will see that incrementally need to increase slightly to continue to leverage that occupancy cost.

On a SG&A standpoint, a low single-digit, the way we are running our business and controlling our costs, a low single-digit comp should give us some leverage.

Okay. And last question, just on, Cliff, when you think about pricing average unit retail, I don't know if you can talk about by category or just broad strokes first half, second half or how you think about that. Obviously you're planning units down this year, but how you are thinking about average unit retail or ASPs for the business overall?

Well, for the first half of the year, we think ASP is going to be quite flat to down due to the fact that toning was such a strong category for the first half of the year. The second half of the year we are actually planning our average retails to be up somewhere in the mid-single digit range.

(Operator Instructions). Jill Caruthers, Johnson Rice.

You kind of touched on the quarterly progression in the fourth quarter. Could you talk about -- did you see you recaptured any athletic sales as the weather improved or as the tax refunds start to flow into consumers' hands?

What happens is November was -- we don't normally talk month to month, but November was a little warmer and drier than December and January, and athletic sales were really strong. And then as the weather deteriorated in December and January, we saw a second effect, which was the tax refunds not getting out as quickly as they did the year before, we could see that have an effect on the athletic business. But conversely, because of the weather, the boot and sport shoe business picked up.

Okay. And if you could touch on how the later Easter shift might impact first quarter?

Well, normally what you would expect to happen for a later Easter is that as weather warms, the later you get into the spring season, you should see a strong uptick in the women's sandal and the men's and women's sandal business. Additionally, as weather warms, the athletic business gets stronger. So retailers like late Easters. It is just all about the weather.

Scott Krasik, BB&T Capital Markets.

Kerry, did you say that you did not get any leverage on your buying and occupancy in the fourth quarter?

No, we did get leverage on our buying. No, no, let's see --

I mean because your merchandise margin (multiple speakers)

It was flat, yes. In the fourth quarter, it was leveraged for the year but flat for the quarter.

Right. So on a 4, 6 comp, why did you not see buying and occupancy leverage?

We had -- what we are doing is chasing fuel costs right now is one of the big components. We shipped a lot of shoes to the stores, which caused freight costs to be up. On top of that, the fuel surcharges that we are seeing in the fourth quarter were ramping up pretty significantly over the year before.

Is there a chance that this happens, or your sales plan is enough, or you are planning so you will not have those types of things in 2011?

Well, fuel is probably going to be an issue all year long. It really depends on the actual costs that we have in our distribution center and the amount of miles we are traveling, which will vary by quarter depending on how we are shipping shoes into the stores.

Now we expect in Q1, like I said, to leverage our buying and distribution occupancy costs on that lower comp despite having those freight charges in there, the higher fuel surcharges. It is just the flow of the business that against the higher sales base, we will be able to leverage those costs and offset some of that decline in the merchandise margin.

Got it. In terms of how we think about probably not the third quarter, but the fourth quarter then in 2011, I mean should we think -- and is that a good number to work off the merchandise margin, or is there something odd? Should we model it differently in the fourth quarter of 2011 because of that?

Well, I'm not really in a position to discuss fourth-quarter numbers. It really depends on where fuel is going to go. If we continue to see oil prices continue to spike up, we will be having increased costs throughout the year. If we see them start to moderate, you will not see that as a big of an issue. So it is really hard to say right now.

Now but having said that, there has not been a significant change in the way we are operating our distribution center or our freight to the stores. So I would not read too much into a one period.

Okay. Cliff, are you guys still in? Are you interested in still being in the sort of first-generation rocker bottom toning business at whatever price point?

I need you to ask that question one more time. I did not hear it.

I'm sorry. Are you interested in being in the first generation chunky rocker bottom toning business going forward at some price point?

I think what you're asking me is whether we are going to buy closeouts on the first generation. And that is not our plan. Our plan is to update to test and react to new bottoms that the two main guys in the toning business come out with.

We are very -- actually we just delivered -- I said this in my prepared remarks, but we delivered some just several weeks ago that are working real well. Now we are not going to explode those out to the stores, to all stores, but we will increase the story count on that product over time, and as we see the product sale, we will fill into that product.

We look at this as another important category just like you would look at aerobics or crosstraining, and we will let that business seek its own level as we would any other important category.

I apologize if you answered it, but I was having audio problems. I was specifically asking about the older generation chunkier rocker bottom shoes.

Our goal there is just to rightsize the inventory, and we will have that -- we will inventory that product based on customer demand. Our number one goal is to update the product with new bottoms and new technologies. And, as I was saying, we had -- we delivered new bottoms this past month and have been very pleased with the performance of that product. And we will treat this category, the toning category, as we would any important category in the athletic business whether it is crosstraining or aerobics or basketball. And we will inventory that product based on customer demand.

Okay. Mark, you're starting to accelerate the store growth, which is great. Do you -- how do you balance -- you have a lot of new athletic styles and brands at higher price points versus where your core shopper, I think, used to be. As you think about opening stores, are you looking to get a more affluent shopper at those price points, or is your core customer going to be the same?

I think our core customer is going to be very, very, very close to what we have right now.

Okay.

And that core customer is, you know, there is African-American in that, and there are Hispanic customers that we do very well with and suburban Caucasian customers we do very well with. So we don't expect that any of the stores are going to shift the demographics of our core customers significantly any which way.

And Cliff, you said you expected prices to be up, I think, mid-single digits in the back half of the year. How do you view your cost inflation at the same time? Is it at the same rate?

It is at the same as pretty much at the same rate, just under that.

Steven Martin, Slater Asset Management.

I was a little surprised. The non-cash compensation expense and the loss on impairment, after all these years of closing stores, I would have thought the losses on impairment in a great year would not have been that great.

Well, Steve, the primary cost of the impairment for the fiscal year was incurred in Q1 where we announced that we did $1.7 million impairment in Q1 of 2010. So that is where the primary expense for the year came from.

Yes, but when I look at the cash flow statement for the third quarter -- the fourth quarter versus the third, that was up almost $600,000, the loss on retirement and impairment.

We did take a -- there is -- there were several impairments that we took in the fourth quarter. Most of them were not that significant. And then there was some additional -- included in that we started a remodeling program. Typically when we remodeled a store, there are some fixed assets that need to be disposed of because they will not be carried forward and that also played into that in the fourth quarter.

I got you. So it was more the loss on retirement than the impairment itself?

Well, no, I think the impairment was the greater piece of it, but it was a combination. The write-off on the re-models was not insignificant.

Got you. And on the stock-based compensation, it was up year over year from $1.6 million to $5.5 million. When you look out in 2012, given your guidance for the year, what kind of numbers should we expect there?

Well, I think you need to stay at a higher level because there's other components that are playing into that. I mentioned on our stocks for the full year is that we should see flat to down G&A costs. And the reason is that we are going to incur less incentive and equity costs and less impairment costs. In 2010 we had a phenomenal year and had a significant amount of equity incentive compensation that hit because of the significant increase in EPS and operating earnings. Obviously we are not talking about those kind of increases in 2011; therefore, we're going to have a much more moderate amount of incentive compensation and equity compensation built into our expectations in 2011.

Okay. Mark, new stores, are they pretty much going to be in market, or are we dabbling into new markets this year?

For the most part, they are going to be in existing markets. I think there are -- if you split it out right now, there are 16 stores that are anticipated in existing marketplaces and four stores that would be smaller new markets.

Okay. And the 20 number, is that a good number, a conservative number, a book number, or are we likely to see upside to that?

It is as good a number as I can give you at this point in time.

And, as you said before, if there were more, you would do them?

Yes. And, again, we are going to be cautious from the respect of the type of real estate that we are looking at and cautious in the amount of new markets that we go into.

We could probably open a larger market. In fact, we have looked at it, opening a larger market in 2011. But from a financial sense, it does not really make sense to open it at the very end of 2011. We will look at some newer markets in 2012 and beyond.

Would you venture to share with us any of the new markets, or are those still under wraps?

Obviously they are under wraps.

Okay. And your planned marketing spend in 2012 or whatever you want -- 2012? 2011? (multiple speakers) -- the year we just started.

The year that we are in is fiscal 2011.

Okay. Good. I like that.

Okay. Marketing spend is going to be up slightly, but remember we have got more stores that we are going to be applying marketing to. From a percentage of sales standpoint, it is going to be up very, very, very slightly.

Okay, one other. Back to an old share buyback question, the stock -- you have got a lot of cash. Stock has sort of been, with the exception of a couple of spikes up to the 29 level, you have been trading at barely over 4 times EBITDA most of the year or just above or below. And you guys don't think that is an attractive price for buying back stock?

Steve, let me say this. There is a number of reasons why we would not buy stock back or a number of reasons why we would. We don't discuss those reasons individually or collectively except internally. So the fact of the matter is we did not buy stock back.

Okay. Because you know at a minimum, with a buyback, you are still getting option creep in your fully diluted and even in your basic.

Is that a question?

It is a statement, but the question would be, at a minimum, you ought to think about at least offsetting that since you're sitting with so much cash.

Steve, our Board of Directors goes through a number of considerations with respect to the capital side of the balance sheet, okay? What I am saying is for various reasons there was -- we did not buy stock back during the fourth quarter of this last year.

(Operator Instructions). With no further questions, I would like to turn things back over to Mr. Lemond for closing remarks.

Sure. Well, thanks, everyone, for joining us today. As we stated, we are extremely pleased with the consistent strength of our financial performance in 2010, and our outlook for the first quarter of 2011 is very positive. We will continue to conservatively manage our business, and we look forward to delivering continued increases in both sales and earnings on a year-over-year basis.

Thank you very much.

And we now conclude our conference call for today. Thank you for your participation. Have a great day.