Shoe Carnival Inc (SCVL) 2011 Q1 法說會逐字稿

Good afternoon, and welcome to Shoe Carnival's fiscal year 2011 first-quarter earnings conference call. Today's call is being recorded. And it's also being broadcast via live broadcast. 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 remarks. Mr. Lemond, please begin.

Thank you, and welcome to Shoe Carnival's first-quarter fiscal 2011 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 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 will open the call up to take your questions.

Last year's first-quarter earnings of $0.72 per diluted share were the highest ever recorded in Shoe Carnival's history. I am pleased to report that our Shoe Carnival team has broken that record in the first quarter of this year.

First-quarter net sales increased 4.7% - $198.5 million from the previous first quarter record of $189.5 million last year. Our comparable store sales increase of 3.4% was in line with our previous guidance, and was on top of the record 13.1% we recorded in the first quarter of last year.

Our sales increase, combined with a solid gross profit margin and improved leverage of selling, general and administrative expenses, resulted in a new quarterly earnings record of $0.75 per diluted share. This was 4% higher than the previous quarterly record of $0.72 per diluted share that we reported in the first quarter of 2010.

This record earnings performance coupled with our consistent emphasis on controlling inventory and fixed assets, enabled us to generate cash flow of $8.9 million, and we ended the first quarter with $69.1 million in cash and equivalents. Over the last four quarters, we have generated about $18 million in free cash flow.

And we achieved these first quarter results despite some unusually harsh weather patterns in the United States, particularly the winter snowstorms early in the quarter, and the more recent storms that produced significant flooding and a record number of tornadoes across the Midwest and South. Now, focusing on our first quarter results in more detail.

As previously mentioned, our comparable store sales increase of 3.4% was in line with our expectations for the quarter. Our customers continued to respond 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 1 exception, every operations region delivered a comparable store sales increase for the first quarter as compared to the same period last year. As most of you remember, last year's first-quarter sales were driven largely by toning product.

We actually sold more pairs of toning shoes in the first quarter of 2011, however, due to the decline in the realized price, net sales of toning products were down about 36% on a quarter versus quarter comparison. Despite the significant decline in toning sales, running shoes more than made up that sales shortfall, and we were able to generate an increase in the average price of not only our athletic product, but the entire footwear category as well. Cliff will provide a more detailed merchandise review in a few minutes.

In the first quarter of 2011, our gross profit margin decreased 20 basis points to 31.1% from 31.3% in the first quarter of last year. Our merchandise margin declined by 40 basis points, due in part to the decline in the gross profit margin of toning 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 20 basis points. Our management group continued to do a good job controlling selling, general and administrative expenses. SG&A expenses for the first quarter increased by $1.3 million, and as a percent of sales, decreased 40 basis points, compared to the first quarter of 2010.

Finally, as I mentioned earlier, we continued to improve our balance sheet over the prior-year period. Our cash position increased to $69.1 million, and we remained free of interest-bearing debt at the end of the first quarter of 2011.

We ended the quarter with inventory up about 7% on a per-store basis, in line with our plan to increase inventory in categories where we see strength, in order to maximize our business during fiscal 2011. Our continued improvement of key financial metrics reflects the strength of our business model, and the commitment and the ability of our entire team to execute on certain fashion trends currently driving consumer footwear demand.

Turning now to store expansion. In the first quarter, we opened 4 new stores to end the quarter with 318 stores, operating in 31 states. I want to reiterate, our management team will continue to review our annual store growth rate, based on our view of 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 retail real estate market improves over the next several years.

Including the 4 stores we opened in the first quarter, we now expect to open a total of 20 new stores this year, all but 3 of which will be in existing markets or smaller markets within our current footprint. We also plan to close 5 stores this year. Therefore, we expect to end fiscal 2011 with about 329 stores.

Please keep in mind, the amount of stores we actually close depends upon further negotiations with our landlords. In addition to the new stores, we also relocated 5 stores in the first quarter, to better locations in their respective markets.

Cliff will speak more on our e-commerce flan plan in a few minutes, but I would like to say I am excited by the progress we have made in such a short period of time. We still expect to launch the Shoe Carnival e-commerce site in the second half of 2011. Not only will e-commerce provide a new platform for sales growth, it will enable national branding of the Shoe Carnival concept. We believe this added awareness will enable us to more quickly ramp up the sales in stores we open, in new markets.

As we look forward to the remainder of 2011, we are encouraged by our momentum, particularly when you consider the unusual weather patterns during late winter and early spring. While certainly there are certain strong economic headwinds facing consumers, we remain optimistic about our outlook for the summer, and especially the back-to-school season.

Therefore, we currently expect second quarter comparable store sales to be in a range of flat to an increase of 2%, and net sales to be in a range of $169 million - $172 million. Our comparable store sales increase in the second quarter of last year, was 8.3%. With our current expectations of net sales, we expect second quarter net earnings to be in the range of $0.27 - $0.31 per diluted share.

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 merchandise performance.

Thank you, Mark. As Mark stated, our total comparable store sales for the first quarter of 2011 were up 3.4%. In addition, we experienced increases in traffic, conversion rates, and average transaction size. We also recorded increases in total units sold and average unit retail as our customers responded positively to our overall merchandise mix.

As expected, we saw a decline in our overall toning sales, but we were more than able to overcome this loss with a strong assortment of trend-right running shoes for both men and women. Merchandise margins decreased by 40 basis points, due primarily to the margin decrease in the toning category.

For the next few minutes, I'm going to take you through each merchandise category, and 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 mid-single digits. Molded footwear, sandalized wedges, sport sandals and vulcanized canvas were all drivers in our overall sales increase.

I'm proud of the way our buyers have successfully targeted these key fashion trends in women's. They executed our plan to shift dollars from the dress categories into more trend-right casual lifestyle product, which became more important with Easter falling later in the calendar. This inventory shift enabled us to drive more pairs, with a higher out-the-door retail, and higher margins on a comparable store basis compared to the first quarter of 2010.

In our men's non-athletic category, we ended the quarter down slightly on a comparable store basis. This performance was going against a comparable store increase in the mid-20% range in the first quarter of 2010. As in women's, sales were driven with casual lifestyle product, like sandals, boat shoes, vulcanized canvas and traditional hikers.

Our children's business ended the quarter with low single-digit comparable store sales increases. A later than normal Easter drove sales increases in sandals for both boys and girls, and this year's new colorful athletic product drove double-digit gains in both boys and girls running.

In adult athletic, comparable store sales were up mid-single digits. We were able to experience these increases in spite of a comparable store sales decline in the toning category in the mid-30% range. As a reminder, the first quarter of 2010 was our largest volume and margin producing quarter for the toning category.

Our merchants have done an outstanding job of shifting dollars from this category into higher demand categories, such as running. Our adult athletic business for the quarter was driven primarily by the men's and women's running categories, with comparable store sales increases in the mid-20% range. As we have stated in the past, the commercials, magazines and news stories promoting the toning category have heightened demand for the entire athletic department.

For the family channel, not only did this excitement drive the customer into our stores, but it proved to the vendor community that if the product is right, and the message is clear, our customer will pay for new technology. Our results for the first quarter bear this out, as our performance running product posted a high double-digit increase for the quarter.

In addition to running, we continue to see increases in skate for men and women, along with men's performance basketball. These 3 categories are historically our best back-to-school categories, and the fact that they performed so well in the first quarter indicates that our assortment will continue to be trend-right for that all-important time period.

Our overall inventories ended the quarter up 6.6% on a per-door basis, primarily due to increased unit cost. Toning sales for the first quarter were in line with our expectations, and we are on target with our previously-stated goal of having toning inventories aligned with sales by the end of the second quarter.

Aged inventory remains low, and we are well positioned for the summer and back-to-school sales period. Looking toward the back-to-school time period, as I stated earlier, the first-quarter sales performance not only in our athletic department, but also key casual categories and both men's and women's non-athletic, give us confidence that we are well-positioned to take full advantage of this most important time period. As of today, there are no major shifts in tax-free days which would affect the second quarter.

Lastly, we are still on track to launch our e-commerce platform in the second half of the year. It is very important to us that we retain the DNA of our brick and mortar stores, which offer our customers not only an exciting environment in which to shop, but also a full breadth of style and brands to choose from. We are well on our way to accomplishing our goal, and our site will be unique from other online retailers.

As I said on our last call, since the 2009 back-to-school season, we have increased our online marketing investment, which is driving customers to our website. This technology enabled our customers to pre-shop for their favorite brands and styles. As part of our marketing strategy, we create web-based offers that our customers can print and bring to their local stores for discounts and specials.

Our tracking information, along with the increase in our customer database, shows us that we already have a loyal fan base visiting our site regularly. Our unique shopping experience, along with the traffic we are already driving to our site, should provide us with the platform to have a successful launch. We are very excited about this opportunity to better serve our current Shoe Carnival customer, and to also reach an expanded audience. Now I'd like to turn the call over to Kerry Jackson, for details on our financial results.

Thanks, Cliff. Let me begin by discussing the results of our first quarter fiscal 2011, followed by information on cash flows, and then I'll add some details on our outlook for the second quarter. Our net sales for the first quarter increased $9.0 million - $198.5 million, a 4.7% increase over the prior year's first-quarter net sales of $189.5 million. This increase was primarily due to a 3.4% increase in comparable store sales, and a $4.0 million increase in sales generated by new stores, opened since the beginning of last year. These increases were partially offset by a $1.4 million loss in sales from the seven stores closed since the first quarter of last year, along with 2 stores that closed in early May this year.

Gross profit margin for the quarter decreased 0.2% - 31.1%. A 0.4% decrease in the merchandise margin was partially offset by leveraging our buying, distribution, occupancy costs by 0.2%. Our selling, general and administrative expenses increased $1.3 million in Q1, but decreased 0.4% as a percentage of sales when compared to Q1 last year.

Included in the first quarter SG&A last year are 2 individually significant items that I'd like to mention. We recorded a non-cash asset impairment of $1.1 million related to certain underperforming stores, while no impairments were recorded in the first quarter this year.

We also recorded $729,000 less in incentive compensation as compared to the first quarter last year, when our record-breaking financial performance drove material increases in performance-based compensation. Pre-opening costs included in selling, general and administrative expenses were $415,000, or 0.2% of sales for the first quarter this year, as compared to $175,000 or 0.1% of sales for the first quarter last year.

Also included in SG&A expense for the first quarter is approximately $100,000 related to the implementation of our e-commerce platform. These expenses relate primarily to consulting and software maintenance fees.

Operating income for the quarter increased 7.6% - $16.1 million, compared to $15.0 million in Q1 last year. Our operating margin for the quarter improved to 8.1% from 7.9%. Our effective tax rate for the first quarter was 38.4%, as compared to 38.1% for the first quarter last year. Net income for the first quarter increased to $9.9 million, or $0.75 per diluted share, compared to $9.2 million or $0.72 per diluted share for the first quarter last year.

Now, let me discuss the information affecting cash flows. Depreciation expense was $3.5 million in Q1. Capital expenditures were $6.9 million in the first quarter, with approximately $2.5 million spent for new stores and $3.7 million for remodeling and store relocation activities. Cash lease incentives received from landlords were $1.2 million.

Capital expenditures for the remainder of 2011 are expected to be between $14 million - $15 million. We intend to open an additional 16 stores, at an expected total cost of about $5 million. To relocate an additional 4 stores at an expected cost of $1.2 million, and to spend up to $6 million on remodeling activities.

The remaining capital expenditures are expected to incur for various other store improvements, the continued implementation of our e-commerce platform, along with investments in technology and normal asset replacement activities. Lease incentives to be received from landlords are expected to be approximately $3.5 million to $4.5 million.

We currently have authorized a $25 million share repurchase program. However, we did not repurchase any shares during Q1, nor have we repurchased under the program to date.

Let me now transition to adding a little color to the second-quarter earnings estimates Mark articulated earlier. The $0.32 we earned in the second quarter last year are the highest second-quarter earnings we've ever achieved. Included in those results were items that benefited those results, which we don't expect to be able to repeat in Q2 this year.

First, toning was a substantial contributor to our Q2 sales and margins last year. While we believe the strong sales of technical running product will help offset the sales loss from toning, just like in the first quarter, we will have a difficult time replacing the strong margins from toning sales. However, having said that, at the high end of our guidance we expect our gross profit margin in Q2 to be slightly better than Q2 last year, though the decrease in toning will him limit our upside.

Second, being self insured for healthcare costs, we see significant volatility in the expense by quarter. In Q2 last year, our healthcare costs were significantly below our typical expense. Built into our Q2 guidance is the expectation of a typical quarter of expense which will be a $600,000 increase in healthcare costs over Q2 last year. This increase in expense equates to about a $0.03 reduction in EPS compared to Q2 last year. Third, due to the favorable resolutions of state tax positions in Q2 last year, our effective tax rate was 30.8%.

While we expect a favorable tax rate of approximately 36% in Q2 this year, the 5% lower tax rate last year increased last year's Q2 EPS by about $0.02, when compared with the tax rate we expect to pay in Q2 this year. Additional items of variance in Q2 this year will include about $500,000 less in equity compensation, but about $250,000 more in expense for our e-commerce initiative.

When comparing any 2 quarters, there will always be favorable and unfavorable variances between the 2 periods. The items that I have described are the most significant variances between the 2 periods.

My final comments today will be on the status of the repairs of the roof of our distribution center. As many of you may know, in late April, a portion of the roof of our distribution center, located in Evansville, Indiana sustained damage during a severe windstorm. Temporary repairs were made in cooperation with the landlord and our facility only lost one day of production.

We continue to operate with the temporary roofing in place and anticipate that permanent repairs will be made no later than the end of the second quarter. We do not anticipate any material interruptions to production while these repairs are underway. Our financial exposures is limited to a maximum of $100,000, representing the deductible of our property coverage, which was included in our distribution center expense for the first quarter of fiscal 2011.

This concludes our first-quarter financial review. Now I'll turn the call back over to Mark.

Thanks, Kerry. I will conclude our prepared remarks by saying we are very pleased with our record earnings in the first quarter of 2011. I would like to thank our Shoe Carnival associates on their achievements to date, and I thank our valued vendors for their continued support. As I mentioned earlier, our outlook for the remainder of 2011 is positive, and we look forward to delivering continued improved financial results. Operator, we're ready to now take the Q&A.

Thank you. (Operator Instructions) We'll take our first question from Mark Montagna with Avondale Partners.

Let's see. The price increases, wondering if you have put price increases through, and if you had seen any price resistance with those?

Mark, this is Cliff. We haven't experienced many price increases with the branded guys, out of men's or athletic at this point. But we did see our price average unit retail go up significantly, in the single-digit range in women's. And our costs didn't go up quite that much, but we were able to achieve a high single-digit price increase in women's, and I think that's a fair indication of being able to pass along the price increases we anticipate, or that we're seeing for fall.

Okay. Then, when you look out to the fall, regarding athletic, are you most optimistic about basketball, or do you feel that lightweight running can maintain its trajectory?

I think running in total will continue its trajectory, lightweight running being the fastest-growing part of that category. But we also are very bullish on basketball and think basketball will not only be a strong category for back-to-school, but will gain momentum as we go through fall.

Is the lightweight technology spreading to some of the other product lines like basketball or cross-trainers?

It is, and we are seeing that, and we are buying it. In fact, we have lightweight cross-training in stock right now and selling. So the lightweight technology is crossing categories.

Then just the last question I have. So you're expecting lightweight basketball for back-to-school then, I would guess?

Yes. Not a large selection, but we are expecting it, yes.

Okay. Just the last question I have, just dealing with the demographic, you did so well with toning and it brought in this higher-price customer. Did you also see a younger demographic come in, because a lot of younger people will pay up for athletic. Just wondering if that brought younger people in, and if you're doing things with online media to try to target these younger people?

The answer to your second question is yes, we are targeting -- our core consumer is young. I mean, we take care of customer from, as Mark likes to say, from 8 to 80. But the fact is that we have a very, very strong junior business and a very strong athletic business, and it tends to run fairly young. And from an online marketing campaign, when we market, we market from 18 to 40.

Okay. Thank you.

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

Good afternoon, guys. Nice job on the quarter.

Thanks, Chris.

Just from a toning perspective, I was just wondering, maybe you could talk about in your first quarter if you could just talk about excluding toning, maybe how much of a drag it was to the comp. And on that inventory piece being up 6 and change per store, if you took out toning, what would the inventory be? Just give us some idea.

Inventories would be up mid-single digit without toning, Chris. We're bringing the toning inventory in line rather rapidly. We'll be there by the end of the second quarter.

From a sales increase, without toning, really doesn't change that significantly. We're getting that number for you, if you give me just a few moments.

All right. Let me ask you this about inventory, then, Cliff. When you think about the inventory in the areas that you're building an inventory position, where you feel very comfortable about, could you maybe talk about some of those areas. Obviously, athletic seems to be a key focus, casual continues to be a focus, any other areas you can talk about?

Well, we saw nice increases out of our kids area, and we see that as a strong performer as we move forward. But any time you have an Easter that moves as late as it did this year, which is highly unusual, you see a strong bump in your casual business. Without getting specific to classifications within casual, many of our casual classifications showed real strong increases in both men's and women's. Within athletic, as I mentioned to Mark earlier, we saw increases in performance basketball and the running categories. And I'm not ready yet to talk about classics, although we are seeing a little rebound there, but I'm not ready to talk about that too much.

You asked about our comps without toning. Our comps without toning would have been up just under 6%.

Okay. Good to hear. And then when we think about pricing, as you get to the back half of the year, given the strength in a lot of these athletic categories, strength in basketball, you have very clean inventories. Just thinking about how we should think about overall footwear ASPs, factoring in obviously input cost pressure. But it seems like, as you mentioned on the women's side, you're seeing high-single digit increases in pricing, the costs aren't up that much, and obviously it seems to be going through. Maybe you could talk about how we should think about conceptually your pricing in the back half of the year, just ASPs.

Part of the way to get the average unit retail up in the second half, or in any particular season, is the way we were able to do it in our women's area, which is offer the customer more value in the product that they're buying. You can't offer them the same thing this fall that you offered them last fall, and expect to get 10% more for it. So we make sure that we buy fresher product, we don't go back necessarily to the same exact thing that we had last year. We make sure that we update it. We put more bells and whistles or whatever, more glitz and glamour, if you would, in our women's product.

And then in the athletic area, what we've done there is just taken the technology up. We don't buy as many opening price point product, as much from an opening price point standpoint, and make sure that we're giving the customer a little more technology, a little more color, and a little more excitement, and they have been willing to pay up for that.

Okay. So overall, is it fair to say, is it a low to mid-single-digit overall price?

It's going to be somewhere -- we'll achieve right in line with a mid-single-digit increase in average price for fall.

Okay. And then -- .

That's our goal.

Okay. And then 2 last questions here. Just any thoughts on the boot business as you think about fall, in terms of how that might play out, and how you're planning that. And then lastly here, just on the e-commerce piece, any thoughts or how we should think about -- are you making any assumptions for revenue for this business or any other -- how should we think about the back half of the year in terms of what it might bring to the table, revenues, any thoughts about that. Obviously, you're going to flip the switch. How should we think about how this might flow as we go into the back half of the year?

We're not prepared to give our sales plan for e-commerce publicly. Let me just say this. We are excited, and we believe that we'll do well in the e-commerce platform.

Your first question had to do with boots, and I'm more than willing to address that. We're looking for a low-single-digit increase in boots, and the way that's going to be driven is primarily through price increase. We'll sell a few less pairs of boots this coming fall than we did last year, but the price will definitely be up. That's where the price increases hit us the hardest, hit everyone the hardest, not just Shoe Carnival. So the way we plan that business is pairs slightly down and price up.

Thank you very much, guys. Best of luck.

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

Good afternoon. If you could talk about your first quarter, the EPS came in at the high end of the range, but your comp was slightly toward the lower end. Could you talk about what was that variance there?

Jill, mainly what we saw was against what our original expectations were, that margins came in better. We were cautious about the toning product and the hit to margin we were going to come across. And we were pleased to see the toning or the lightweight running sell as well as it did, and we were able to mitigate that effect of toning fairly nicely. So while the merchandise margin was still down against our original expectations, it wasn't down as much. And we saw some SG&A savings throughout the quarter, through hard work of our operations people and our departmental heads.

Okay. And then, I know weather was very odd and not too favorable in the first quarter. Could you talk about maybe the flow of the quarter, and then how it's looking May to date?

Jill, this is Mark. The sales were all over the place in the first quarter, as you could well imagine. We had a lot of store closures in the first part of the quarter due to snow storms. And then business improved pretty significantly, for not only us but I think a lot of retailers into the March time period. And then late in the quarter when we had torrential -- more than torrential rain, it was big-time record flooding throughout the Midwest, which is the core of our business, as you well know. And a record number of tornadoes, and I think we've had everything but -- and not only us, again, but all retail's had everything but locusts this year.

It's been a horrible year from a weather standpoint. And that's why we're actually very pleased with our sales coming in within a range of what we guided to originally. Like Kerry said, where we improved from a net financial standpoint in the first quarter was our ability throughout those weather incidents to control the costs and actually reduce costs in a lot of areas.

Very impressive. Congratulations.

Thanks.

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

Good afternoon, guys. I have lots of questions.

You got 2, Sam.

Oh, all right. Well, I've got lots of 2s. You held on to the gross margins very well, as you just talked about. But how much of that was your management of the process versus getting vendor support? And how much vendor support was involved to mitigate the ASP offset in the toning product, and not kill your margins with that kind of reduction in the average selling prices?

Sam, you know that we don't talk about vendor support on a conference call.

Well, I'm just asking you to -- I'm not asking for -- .

-- (multiple speakers) any other way. I'm sorry.

Well, if you didn't get the vendor support, you couldn't have had the margins you had. Is that a fair assessment?

We don't talk about that on the conference call.

Hopefully you'll talk about it off the conference call. Also, you seem to be cautious on the boots from a unit standpoint. Are you cautious on a unit standpoint because of the ASPs, or are you concerned about the ammunition?

Not a bit concerned about the ammunition, let me say that up front. We think we've put together a very strong boot program. I've often said and not that I'm always right, but I often said that most trends in footwear or in fashion go for 3 years. We're heading into our fourth year in boots, and what we would rather do is plan boots a little conservatively, and then chase it.

If it happens and it happens early, Sam, we've proven in the past that we can get product. So plan the boot business [up] low singles. We have a very strong assortment. Yes, price is up, so therefore, we're going to plan pairs down a little bit to achieve that low singles, and if it comes out as some think it might, then we'll be in a position to get more boots.

Thanks. And then Mark, on the first-quarter call, you did give color to the full-year guidance. You really weren't specific, but you did provide some color. Can you give us some revised color on how the year is looking?

Like I said, we're still positive on the year. Our sales, as I mentioned, again, our sales in the first quarter were at the low end of our guidance. However, there was some mitigating factors I think that all retailers saw, particularly in Midwest and Northeast. So for full year, we're still planning our business the same way I talked about on our fourth-quarter call, this is the first-quarter call, so low- to mid-single-digit increases. We think that's achievable, and that's the way we're planning our business.

Based on the flow, and this is the last thing, based on the flow, you went from a -- you're talking about going from a 3, 4, to a 2, to a 0 to 2, and then would we expect the back-half comps to be slightly better than that, just based on the way you're talking about the entire year, given the entire year hasn't changed?

When you look at the product, like Cliff has talked about on the call, the product is -- what we sell best during our back-to-school period, which is far and away our biggest period of the year, as you well know. Even though we're planning boots conservatively, we think there is opportunity in the fourth quarter, given the product that we're starting to see from vendors, that we have seen from vendors now. So we're looking at the back-to-school period as we typically do every year, as being a big period when, as I said before on calls, that when the consumer has a need to shop during the back-to-school period, I think that they look at Shoe Carnival first in the mid-tier category.

So that means you would expect business to accelerate on a year-over-year look between Q2 and Q3. Is that a fair statement?

Yes, I think that's fair.

Okay. Thanks. Good luck, guys.

Thanks.

We'll take our next question from Jeff Stein with Soleil Securities.

Mark, wondering, if you won't comment on the sales expectation for the Internet, would you expect it to be a drag during the start-up period?

Well, Jeff, it's a drag in the first, and we expect it to be -- well, it will be a slight drag in the second quarter, not significantly so, but we do expect start-up costs to be -- well, we are incurring start-up costs in the first and second quarter. As we move into the third and fourth quarters, it depends on exactly when the site gets up and running. So, even though we're not giving top-line revenue, we don't think that it's going to be a significant drag on earnings for the full-year.

Okay. So let's say worst-case scenario, it gets delayed, we get delayed, delayed, doesn't get launched until let's say sometime mid to late fourth quarter. Would it be immaterial for the year in terms of the drag on profitability?

Yes.

Okay. And how do you intend to generate traffic to the site? And maybe you can talk a little bit about the number of hits that you currently get on your site.

Cliff, you want to --?

We just brought on a Vice President of E-Commerce, and we brought him on because he can help us with this marketing online. We'll include our online store on every -- on all the marketing that we do for our brick and mortar stores obviously, Jeff, and then obviously we'll then go on digital space and market that way as well, through search or through affiliates or -- every way that basically you can think of from an online perspective.

Okay. And how about the number of hits that you currently get on a daily or monthly basis on the site?

Jeff, off the top of my head, I don't know the number of hits that we get on our website right now. I can tell you this, that based upon what we're seeing go to our website right now, we're all very excited about the possibilities for e-commerce, not only late this year but as we move forward into 2012, very definitely so.

Strategically, how are you going to price the product relative to Zappos and some of the others? Is the plan just to be in line with where they're at?

Jeff, we price all our product at manufacturer's suggested retail. We promote from that standpoint, because we do promote. And then based on the way the product sells at retail, our systems recommend price compression from that point. So we go out at recommended retail on everything we buy, and then the sell-through of that product dictates price.

How about the number of SKUs you plan to offer on the site compared to the stores?

We're going to offer approximately the same number of SKUs as our second-largest store. So if you think in terms of a large-volume Shoe Carnival store, it's going to look somewhat like that.

Okay. So something over 30,000 pair? 30,000, well, that's not correct. You have 30,000 pair in a store. How many SKUs would that be?

Well, we're going to -- I hate putting all of this out for my competition to hear, but we're going to -- we'll be in excess of 1,000 styles on that site.

Okay. All right.

Style color, excuse me.

A question with regard to margins. If you exclude toning in the first quarter, was your merchandise margin up to last year? Flat to last year?

If you exclude toning, our margins would have -- I want to make sure I'm telling you exactly right. Yes, our margins would have been up from last year.

Okay. And for second quarter, with regard to the outlook, you've obviously outlined a number of reasons why you expect second quarter to be down. It sounds like most of those items hit the SG&A line. Can you talk a little bit about expectation for merchandise margins during the second quarter, given the fact that it seems that toning will be even less of an issue in second quarter relative to first quarter.

Toning still is an issue. Our margins on toning were higher than our overall margins excluding toning last year in the second quarter, Jeff. So we didn't actually see a big decline in margin and toning until the latter half of the second-quarter last year, going into the third quarter, and the third quarter they were lower than our overall margins, excluding toning, if that makes sense. So we are still going to have a slight toning effect in the second quarter, so we're looking at merchandise margins being flat to just slightly down.

Okay. Thanks a lot.

There are no further questions at this time. I would like to turn the call back over to Mr. Mark Lemond for closing remarks.

Well, like I said before, I want to congratulate our Shoe Carnival associates on a record quarterly earnings. It's the second year in a row in the first quarter that we've done that. And like I said before, we're positive on the remainder of 2011, despite certain economic headwinds that consumers are seeing right now, and we expect to see in future quarters, but we are positive about the trends in the footwear industry. We're positive about the trends that we're seeing at Shoe Carnival. We look forward to speaking to you about the second-quarter results in August. Thank you very much for joining us.

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