Shoe Carnival Inc (SCVL) 2011 Q3 法說會逐字稿

Good afternoon and welcome to Shoe Carnival's fiscal year 2011 third-quarter earnings conference call. Today's call is being recorded and is also being broadcast via webcast live. 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 materially differ 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. Cliff Sifford, Executive Vice President and General Merchandise Manager of Shoe Carnival, for opening comments. Please go ahead, sir.

Thank you and welcome to Shoe Carnival's third quarter fiscal 2011 earnings conference call. Joining me on the call today are Kerry Jackson, Chief Financial Officer; and Tim Baker, Executive Vice President of Store Operations. Unfortunately, Mark Lemond, our President and CEO, is under the weather today and will not be able to join us. Kerry and I will be working together to provide you information on our performance for the quarter as well as our outlook for Q4. We will then open the call up to take your questions.

For the third quarter we reported the highest quarterly sales and earnings results in our Company's history. These results were achieved despite the fact that our strong sales results during the back-to-school season were partially offset by a decline in comparable store sales resulting from lower than expected store traffic trends in late September and October. We believe the unseasonable warm weather during the quarter was a factor in tempering consumer demand for fall footwear.

Our positive start to the third quarter enabled us to achieve a net sales increase of 5.4%. Comparable store sales increased 2.8%, which follows a 7.2% comparable store increase in Q3 of last year. Our sales growth, combined with our ability to deliver merchandise margins equivalent to the prior year, enabled us to drive the gains in net earnings. Traffic and conversion were flat while average transaction was up low-single digits compared to the prior year period.

As I stated earlier, merchandise margins were flat due primarily to the higher realized margins in children's shoes and a double-digit comparable store increase in accessories, which was driven by the fashion side category. The decline in sales of toning footwear continued to have an unfavorable effect on our overall comparable store sales in the quarter. Total toning sales for the quarter were down in excess of 60% on a comparable store basis from third quarter 2010. Comparable store sales for the third quarter excluding the toning category would have been up 5.4%.

We ended the quarter with inventory up 3.8% on a per-door basis do to the increased depth on key categories such as running, basketball, boat shoes and sport sandals as well as e-commerce. Aged inventory remains low and we are well positioned for the fourth quarter sales period.

Now I would like to review each merchandise category to provide you with better clarity on our sales performance in the third quarter. In our women's non-athletic department, comparable store sales were up low-single digits. Average unit retail in this department was up mid-single digits and unit sales declined at a low single-digit rate. Molded footwear, athletic sandals, boat shoes and canvas casuals were the key categories of strength for the quarter. Due to the unseasonably warm weather in September and October, boots ended the quarter down high-single digits. We have confidence the boot business will rebound strongly once a more seasonal weather pattern begins.

In our men's non-athletic department we ended the quarter with a mid-single digit increase on a comparable store basis. Unit sales increased by double digits while average unit retail declined by mid-single digits, primarily due to the strong sales of athletic sandals and soccer slides. We are also pleased with the performance of boat shoes, canvas casuals and traditional hikers.

Our children's business ended the quarter with a low single-digit comparable store sales increase. Unit sales decreased by low-single digits while average unit retails increased by mid-single digits. The average unit retail increase was due primarily to the increase in children's athletic. The unit decline was due primarily to the decrease of girls' vulcanized ornamented canvas. Key categories of strength for the third quarter included girls' boots, boys' and girls' running and boys basketball.

In adult athletic, comparable store sales increased low-single digits for the quarter. Units increased by low-single digits while average unit retail decreased by low-single digits. The toning category within adult athletics experienced a comparable store sales decline of over 70%. This was driven by both a unit decline in excess of 50% and a decline in average unit retail in excess of 40%. Inventory ownership of toning in this department is down in excess of 70% versus the end of third quarter last year, which is in line with our expectation.

Comparable store sales in adult athletic excluding the toning category would have increased high-single digits driven by a mid-single digit unit increase and a low single-digit average unit retail increase. As anticipated, our adult athletic sales for the quarter were driven primarily by the men's and women's running category with a combined comparable store sales increase in the teens, trail, performance running, which includes lightweight product, and technical running categories were the key strong classifications in the quarter. The strength of these categories is very important due to the high average unit retail they deliver, helping us overcome the loss in toning. In addition to running, we continue to see double-digit increases in skate for men and women along with men's and women's vulcanized canvas.

As we move into the fourth quarter, I believe that boots for women, men and children will be the key driver of sales once a more seasonal weather pattern begins. In addition to boots, we expect sport shoes, including molded footwear, boat shoes, trail running and trail hiking, to continue to grow. In addition, performance running will continue to perform well and we remain excited about the basketball business as our assortment from our two most important basketball brands has improved dramatically as compared to the same time last year.

Based on third-quarter results, we expect toning sales for the fourth quarter to be down about 70% based on lower unit sales and lower unit average retails as compared to the fourth quarter of 2010. We believe that toning unit sales will be down approximately 60% compared to the fourth quarter last year, but the average unit retail and gross margin will remain relatively flat to what we achieved in the third quarter of 2011. Thus, we expect the drain on gross profit to be less in the fourth quarter than what we experienced in the third quarter of this year. We believe the running category for men and women and the basketball category for men will make up the expected loss in sales we will experience in toning.

Lastly, we launched our e-commerce store on September 28. The new site not only represents an additional long-term growth vehicle, but it also provides us with an opportunity for national brand exposure. ShoeCarnival.com offers our customers an opportunity to see a very large sale of product in all categories with a depth of sizes and colors that may not be reflected in some of our smaller stores. We are using the site to test new brands and styles, and through strong analytics will help us in the future as we merchandise our stores on a customer-centric basis. Our site reflects the excitement and spontaneity that is a vital part of our brick-and-mortar stores' DNA with special promotions, limited time sales along with relevant fashion stories featured on the home page. We believe the increased brand awareness derived through our e-commerce initiative will enable us to leverage our marketing spend on new store openings and adds one more vehicle to introduce Shoe Carnival to new customers and new markets.

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 third quarter, followed by information on cash flows, store growth and sales and earnings guidance for the fourth quarter of fiscal 2011.

Our net sales for the third quarter increased $11 million to $215.5 million, a 5.4% increase over the prior year third quarter net sales of $204.4 million. This increase was primarily due to a 2.8% increase in comparable store sales and a $6.6 million increase in sales generated by new stores opened since second quarter last year. These increases were partially offset by a $1.2 million loss in sales for the six stores closed since the second quarter of last year.

Gross profit margin for the quarter increased 0.1% to 30.2%. This increase was attributable to the leveraging of our occupancy cost against higher comparable store sales.

Our selling, general and administrative expenses increased $1.2 million in Q3. However, as a percentage of sales, these expenses decreased to 22.4% compared to 23.0% in the third quarter of 2010 due to the leveraging associated with our comparable store sales increase. During the third quarter of fiscal 2011, we incurred an additional $2.3 million of incremental expense as compared to the same period last year to support our sales growth and an expanded store base. This increase of store selling expense was partially offset by a reduction in performance-based incentive compensation. We recorded $1.3 million less in incentive compensation as compared to the third quarter last year, when record-breaking financial performance drove material increases.

Store closing costs and selling, general and administrative expenses were $96,000 for the third quarter this year as compared to $141,000 for the third quarter last year. Preopening costs were $178,000 in Q3 this year as compared to $128,000 in Q3 last year.

Our effective tax rate for the third quarter was 37.8% as compared to 36.7% for the third quarter last year. The tax rate for both quarters was below our expected norm due to a reduction in income taxes resulting from the favorable resolution of certain tax positions. Net income for the third quarter increased $10.5 million or $0.78 per diluted share compared to $9.1 million or $0.70 per diluted share for the third quarter last year.

Now a transition to year-to-date results -- our net sales for the first nine months of fiscal 2011 increased to $580.6 million compared to $559.3 million for the first nine months of fiscal 2010. This increase in sales resulted primarily from a $14.8 million increase in sales generated from new stores opened since the beginning of fiscal 2010 along with a 1.9% comparable store sales gain. These increases were partially offset by a $3.9 million loss in sales resulting from the 10 stores closed since the beginning of fiscal 2010. Year-to-date, the gross profit margin increased to 29.8% from 29.9% in the prior-year period. The merchandise margin decreased 0.1%, and buying, distribution and occupancy expense remained unchanged as a percentage of sales.

Our selling, general and administrative expenses increased $4 million in the nine months of fiscal 2011 to $136.2 million. However, as a percentage of sales, our gain enabled us to leverage these costs by 0.2% to 23.4%. Our effective tax rate for the first nine months of the year was 37.5% as compared to 36.3% in the first nine months of fiscal 2010. Net income for the first nine months was $23.1 million or $1.72 per diluted share compared to $22.5 million or $1.73 per diluted share in the first nine months of last year.

Now let me discuss our cash position and information affecting cash flow. Our cash position increased $9.7 million to $53 million, and we remained free of interest-bearing debt at the end of the third quarter. The fourth quarter is always a period of cash generation due to liquidation of inventory. We currently project our year-end cash balance to range from $72 million to $75 million. The high end of this range represents $5.70 of cash per diluted share.

Depreciation expense for the quarter was $3.7 million and for the first nine months $10.7 million. Depreciation for the full year of fiscal 2011 is expected to be approximately $14.4 million. We have expended $17.8 million in cash year-to-date in fiscal 2011 for purchase of property and equipment, of which $5.1 million was for new stores, $1.7 million was for the e-commerce initiative, $8.5 million was for remodels and relocations and all other additions were $2.5 million. Cash lease incentives received from landlords were $4.1 million. Capital expenditures for the remainder of fiscal 2011 are expected to be in the range of $3 million to $4 million.

We intend to open one additional store and undertake remodeling activities prior to the end of fiscal 2011, which collectively should total about $1.1 million. The remaining capital expenditures are expected to be incurred for various other store improvements, investment in technology and asset purchases and construction costs for 2012 new and relocated stores. Additional lease incentives received from the landlord for the remainder of the year are expected to be approximately $1.8 million. We remain confident in our ability to continue to expand our retail footprint as our focus on value priced footwear for the entire family consistently resonates well with today's consumer. We opened seven stores and closed one in the third quarter. During the fourth quarter we will open one store and close one store. This will bring our total new store openings for 2011 to 17 with four store closings. We will end the year with 327 stores.

As we have previously mentioned, it has been an aggressive year for us with respect to store relocation and remodeling activities. In the first nine months of this year we have relocated nine stores and remodeled 19. We expect to remodel an additional six stores by the end of the fourth quarter.

We continue to believe our strong unleveraged financial position provides a solid platform for additional square footage growth. For fiscal 2012 we currently expect to open approximately 30 new stores, close five stores and relocate six stores. Net store growth of 25 stores will represent a square footage increase of approximately 8% or 300,000 square feet in 2012. Furthermore, we are very excited to share with you today that we plan to enter two new markets -- Dallas, Texas, and Puerto Rico. We will enter the Dallas market in the first half of 2012, opening eight stores during the full year. This will be followed in the second half of the year by expanding our footprint to include Puerto Rico with approximately four stores. We believe our competitive pricing strategy and trend-right assortment of family footwear will continue to attract today's value-oriented consumers.

My final comment today will focus on sales and earnings expectations for the fourth quarter of fiscal 2011. We expect fourth-quarter net sales to be in the range of $186 million to $190 million with comparable store sales in the range of positive 1% to negative 1%. Earnings per diluted share in the fourth quarter of fiscal 2011 are expected to be in the range of $0.33 to $0.36. In the fourth quarter of last year, comparable store sales increased 4.6% and earnings per diluted share were $0.33. Included in the high end of our EPS guidance is the expectation that our merchandise margin will decline by approximately 50 basis points and our buying, distribution and occupancy costs as a percentage of sales will be flat with Q4 last year. We expect our SG&A dollars spent to increase about 2.5% over Q4 of last year.

Finally, let me provide you with some color on our guidance for comparable store sales. While we typically don't discuss comparable store sales on a monthly basis, it is important to do so to understand the underlying reasons for our comparable store sales guidance. Due to the unseasonably warm weather throughout most of our geographic locations and a mid-teens comparable store sales increase in November last year, we expect comparable store sales in the current year to decrease mid-single digits in November. As the weather invariably cools down in December, at the high end of our guidance we expect that pent-up demand will help drive our comparable store sales up mid-single digits in December and January. This is in contrast to relatively flat comparable store sales in December and January last year, a mid-single-digit decline in comparable sales in November, followed by a mid-single increase in comparable sales in December and January, will result in a comparable store sales increase of about 1% for the fourth quarter.

When combining our Q4 guidance with our year-to-date performance, we expect net sales to be in the range of $767 million to $770 million and comparable store sales to increase in the range of 1.2% to 1.7%. Earnings per diluted share for fiscal 2011 are expected to be in the range of $2.05 to $2.08. For fiscal 2010, comparable store sales increased 8.2% and earnings per diluted share were $2.05.

This concludes our third quarter financial review. Now we will open up the call for questions.

(Operator instructions) Mark Montagna, Avondale Partners.

I was wondering just about your clearance levels of merchandise. Can you tell us where they are this year versus last year in terms of up or down on a per-store basis and whether that's on plan?

Mark, any time you have clearance -- this is Cliff -- anytime you have clearance, it's always on a week-to-week basis versus last year in a timing situation. So at the end of the third quarter we owned a few more clearance shoes than we did a year ago. But we are moving through shoes nicely.

So then, with that, looking at the fourth-quarter guidance, are you trying to play a little catch-up in terms of your inventory commitments that you made and trying to catch up in terms of sales? Therefore, it sounds like you might be promoting a bit more than you had originally planned back a few months ago.

I think that would be correct. First of all, as I said in my prepared remarks, the boot business was not as good in November this year as it was last year. Last year in November, the weather patterns were just perfect for boots, as it was in October. And -- excuse me -- as I said in my prepared remarks, the October boot business was not as good as it was last year. And that was really due to the weather patterns. In November of this year we decided that we would be a bit more aggressive in the boot category to help drive that business. And over the past week or so we've seen good results out of that strategy.

Okay, so then, within the boots, is there more weakness in the more basic like utilitarian boot, work boot, or how would that compare to, say, the more fashion-oriented boot?

It's not that there's a single classification of boots that's weak, because that's not the case. It's the fact that -- again, it's hard to explain, but if you have -- one year, you have very cool weather patterns and you have a tremendous boot season early like September and October, the way we did last year, and you don't repeat those weather patterns, it affects all classifications of boots, not just a single classification. So I can't pinpoint any classification of boots. Again, once we saw cooler weather come in over the past week or so, and we did get just a bit more aggressive in that classification, we have seen good results out of that classification, out of that department.

Okay, that sounds good, thank you.

Scott Krasik, BB&T Capital Markets.

Don't tell Mark I said this, but it's the best presentation you've ever done.

Well, he caught a little bug, and we told him we didn't want them spreading it around the office, so stay home and we will do better than you. So thanks.

I get that, that was good. So just a couple questions -- you're obviously guiding your margins, your merchandise margins down this quarter because of, it seems like, the more promotional stance. I know you don't want to give guidance for next year yet, Kerry, but maybe talk about how you think of merchandise margins for next year. Is that a category that you can drive improvements in?

Well, from a very broad perspective, I think we will continue with the thought process we've had in the second half this year. If we are going to see significant increases in costs through inflation coming out of China, then we are going to be more cautious with our belief that our merchandise margins will increase -- or we will model them, at least, up front for them to increase. If we have strong fashion trends, that could definitely overcome any type of inflation and customers will buy it. But I think just from a broader perspective we are going to think about where they inflation is coming at and being more flattish.

Okay, that's helpful. And then, Cliff, remind me. Do you guys have customer counters as you walk in? And to the extent that conversion -- has the weaker boot business or the warmer weather impacted total traffic, or has it impacted conversion or both?

It's almost entirely out of traffic. The weather patterns have affected traffic almost to the point of where our business trends are.

Okay. And then just remind us what percent of the quarter's sales are actually done in November.

It's right around 30, just slightly over 30%.

Okay, I'll jump back on, thanks very much.

Jeff Stein, Northcoast Research.

Kerry, first just a quick housekeeping questions. In your release, you didn't include average share count. And I'm wondering if you could tell me what that is and also what your assumption on average share count is for Q4.

(multiple speakers) for the third quarter, it was $13.2 million, and for the fourth quarter we expect it to be around $13.3 million.

Got it, got it. Can you talk a little bit about the e-commerce launch in terms of -- can you discuss at all what kind of sales that you saw for the quarter, and also, perhaps, what kind of costs you are incurring to get that initiative off the ground, how that may have impacted SG&A?

Jeff, we are not going to separate sales out from e-commerce. I will tell you that we are ramping up very nicely and very pleased with the way that it's ramping up. From a cost standpoint, it cost us about $0.02 in the third quarter and somewhere between $0.01 and $0.02 in the fourth quarter.

Okay. And, beyond that, will those costs -- the way you are modeling, will they abate or will you still be incurring startup costs as you roll into next year?

We don't -- as part of the model for next year, and at this point, we don't think there will be any dilution to earnings.

Cliff, entering Q4, approximately what percent of your inventories at this point would be toning compared to last year?

It's a very small percentage. I don't have the inventory number in front of me. I can get it for you. But it's a much smaller percentage. Again, we are down over 70% from a year ago. And a year ago at the end of the third quarter is when we peaked in toning product. And as you know, toting started slowing down in August of last year, actually in July of last year and we were able to get out of a good many orders on a go-forward basis. But some of the orders we could not stop, and so our toning inventories peaked at the end of the third quarter and they have been coming down steadily since. And today, we are down in excess of 70%.

Okay. And the lightweight running category -- has it been meeting your expectations? I know that that was supposed to displace some of the lost sales from toning. And I'm wondering, has it been meeting your expectations? And what kind of maturity curve are you looking at right now or do you think we will see for that particular line of performance footwear?

I'm really glad you asked me that question, because yes, first of all, it has met our expectations. It has added a lot of excitement in the aisles with all the exciting color and just gives the customer something new they don't have in their closet. The reason I think it's going to continue is that all the vendors, and it's -- whereas toning was really just two vendors and two brands, here every brand is updating product and changing product to make it even more exciting. And we have just got back this past week from a pre-line with our number one brand, Nike, and very, very excited about what they are bringing to the table from not only running but from other categories, training and basketball as well for the back-to-school season next year.

So it just keeps improving, Jeff, and I think that's why it's so exciting, is that, whether it's Adidas or Nike or any of the big boys, the product just keeps improving.

And final question -- are you seeing any pushback on price? How much price increase have you been able to get through this year kind of on a blended basis across the store? And what kind of elasticity are you seeing? In other words, prices go up 10%, units go down 10% -- what is the equation there?

It's hard to measure what the unit -- it's hard for me to tell you what the unit decline is based on the price increases. I can tell you that we have planned -- in women's, let's talk about that department, because that's where we saw the largest cost increases. Our costs are up significantly, a little over, right at a double-digit rate. And our average retails are up a little higher than that. So we are able to pass that onto the customer, and I'm talking strictly from the third quarter. But we were able to pass that onto the customer, and I think we can continue to do that. Pairs are going to be down. We planned pairs to be down because we knew that there would be some price resistance. But as long as we can continue to generate the higher retails, we feel good about it.

Got it, thanks a lot.

Jill Caruthers, Johnson Rice.

You talked about with the weather impact, the women's boots were down I believe high-single digits in the quarter. And you said you assume some recovery in the fourth quarter. Could you maybe talk about where you expect boots to come out in the fourth quarter? I assume that maybe units might be down, AUR, talk a bit about that?

Exactly right. First of all, the fashion boot business -- the work boot business and hiking boot business in men's, as I mentioned in my prepared remarks, were up. And the kids' business, the boot business was up. So that's a good thing. One of the reasons the kids' boot business was up is we were a little low on inventory on that in the second quarter -- excuse me -- in the third quarter of last year. But we expect to see women's boots increase in the mid-to upper-single digits for the fourth quarter, and that would be driven almost entirely from a unit retail standpoint. Pairs will be down.

And could you highlight --

Not to interrupt you, Jill, but that is the way we planned the boot business all seasons, is for units to be down and average price to be up.

Okay. And then I guess you did call basketball. Are you seeing -- or fear of any impact with the NBA work stoppage?

No. Personally, I think that -- we've talked a lot about that internally. I think that affects the mall a little more than it does us. And the reason I'm excited about basketball is not necessarily because of the NBA or even college, but the reason I'm excited is because we have got so much new product has been brought to the table by Nike and Adidas, and this is a product that we haven't had in the past. It's a product that in some cases is exclusive to us, going to be marketed, and we are going to be able to market it. And I see that as a great opportunity as we move through the fourth quarter and into the first quarter.

Okay. And then just last question on whether -- could you talk about maybe some less sensitive merchandise products? Did they see such a swing from August through September-October with the weather, or -- versus more of the weather --

In general, just to give you an idea of what's going on, because I know I've talked to you a lot about the weather, and I don't like to do that on a normal basis. But the athletic business and the sandal business, along with the boat shoe business -- you just take those categories -- that really drove our business in the month of August and in the early weeks of September. The business was positive going into -- in fact, we were positive in September going into the very last week. And that's when -- that's why I'm so convinced this weather, when you look at the weather patterns from a year ago that it got cool in the last week of September and remained cool through the end of October going into the first week of November. And when that weather didn't repeat itself this year, all the sport shoe categories, all the shoes that you would expect to where for fall slowed down. And as I said, I think you Jeff or Scott, a few minutes ago, over the past week to 10 days, once we have seen a little cooler weather, we have seen a turnaround in our women's boot business and we're beginning to see a turnaround in the other closed-up categories as well.

Okay, I appreciate the comments, thank you.

Sam Poser, Sterne Agee.

Just a couple things -- how big -- you talked about November being about 30% of the quarter. But how big is the two days after Thanksgiving relative to the rest of the month? If you have a strong last two days, that could be a game changer as well, I would assume.

The largest week of the month, the biggest week of the month is next week, no question about it. And the biggest weekend of the month is next week. (Multiple speakers) and I guess this is what you are alluding to, what we see is the customers do come out at need or for special events and special opportunities. So we will see.

But you are not expecting a big change, so that's not in those numbers just yet? Is that a fair statement?

No, it is not.

Okay. Kerry, what is your margin outlook for -- what margin assumptions are you making? You had pretty good, very strong gross margins in Q4 2010. How are you looking at it a little bit with the early clearance, your margins are maybe down a little bit?

Yes. I said in my prepared remarks we expect Q4 merchandise margins to be down about 50 basis points. That's built into the guidance I gave, and we expect volume distribution and occupancy to be relatively flat. So -- and part of that, you've got to keep in mind what happened with Q4 last year. Our merchandise margins -- we had a great boot season, weather performed admirably. And our merchandise margin increased 130 basis points. So we are still maintaining a higher -- we are not giving back even a significant portion of that, but we will get back 50 basis points of it, we think, because of the slower start to the third quarter -- or fourth quarter with weather not cooperating with us.

Okay, thank you. You talked about how strong Nike was, and you alluded -- can I assume that the molded -- since you mentioned the brand, I can ask about other brands. Do you assume that the molded footwear -- is that alluding to your Crocs business and your kids -- the kids -- what did you call it?

Ornamented canvas.

Ornamented canvas -- can we allude that is Skechers?

I think you are probably on the right track, Sam.

Okay. And the molded footwear that I won't even mention any more names, but the molded footwear -- as you look at that business, it was new this year with your largest vendor. How do you look at that going forward? And do you have fall goods in from them as well? And how are they doing?

We do have fall goods in, and for the most part, as long as we have updated patterns and we don't repeat items from year to year we are seeing nice increases. On patterns that you repeat from year to year, the business is flattish. There's not an increase, but not a decrease. So we feel good about it.

I'll tell you where we feel the best about it is right now in kids, because that was -- even though we were growing our adult athletic -- excuse me -- our adult molded footwear business last year -- we'll call it Crocs -- even though we were growing that last year, we did not grow or did not go after the kids business. This year, we did, and beginning actually for the third quarter. So we have not had an opportunity yet to really expand that business as much as we think we will on a go-forward basis.

And in the other vendor, how tied up are the inventories now, given that was your largest vendor in the toning category?

Those shoes have slowed down, but the fact is that they are still selling. They are selling at a nice price point. Just, they are not generating the kind of increases -- or actually, they are generating just small decreases right now but selling at great numbers. So I'm not worried about the inventory there. We are just not going to -- the decrease there is in the mid-single-digit range. So it's not running the kind of volume it was a year ago, but still selling.

Thank you very much, and good luck.

Eric Martin, MA Capital Management.

Good evening, guys, solid quarter, and I want to reiterate, [Scott], I thought the presentation was well done. Just curious -- as we look at cash and our cash build, and this may be a question that's more directed toward the Board, why are we not buying back shares?

Well, it has been a popular question over the past few quarters. And the best answer we can give you is that we haven't -- at this point, we really aren't going to disclose what our triggers are of when we would buy, when we would stop buying. We are really not going to disclose whether we're in an trading period or not. Really, I'm not going to be able to answer your question effectively like you would like, other than to say that we do have a program out there. And we just have not availed ourselves of purchasing shares at this point.

Just from an investor's perspective, we look at the valuation gap and the fact that you guys are performing -- it just begs the question of why we are not taking action. So I guess we will wait and stay tuned.

That would be fine.

Chris Svezia, Susquehanna Financial Group.

Good afternoon, guys, nice job. I guess Mark is never going to call in sick again. He's getting thrown under the bus on a conference call. I'm sure he's listening in and he's probably cringing like, what did I say wrong? Anyway, you guys did a good job. It was concise, so I guess that's the important thing.

So I guess I'm curious. What percentage of the boot business is done in Q3 and Q4 as a percentage of revenue?

You know, I don't have the answer to that at the tip of my tongue. But I know that -- I think that 40% was the number we had come up with at some point. I don't want to guess off the top of my head. We'll have to get that for you, Chris.

Okay, but it will be bigger, I guess, for this year? Does it swing to Q4, it becomes bigger versus Q3, just because of comparisons? Or -- how should we think of that?

Q4 is a much larger boot quarter than Q3, by far. So a mid- to high-single-digit increase in Q4 in boots is a significant number.

Okay. And then most of the other categories did reasonably well on the overall quarter. Any thoughts -- on the athletic side, it's just interesting -- any thoughts -- you talked about running and how you feel about basketball. Any thoughts about how you expect that to perform during the fourth quarter? Do you expect to see these comp gains out of the athletic? Even though it's a small percentage of the business, but any thoughts about that? Is that sustainable?

The comp gains of athletic for 4th quarter -- is that the question?

Yes.

I think, once we get into -- I do believe we will see some comp gains out of athletic, due mainly, again, to basketball and to running.

And I'm curious -- when you guys talk about -- two questions. On the skate category, is that just because you are getting a new brand? Or is there actually something -- I know it kind of ebbs and flows at times. I'm just curious. Can you talk more -- on more than one occasion skate is performing. So --

We added a new brand in back-to-school 2010. And we expanded that brand, DC, into all stores for back to school this year. And not only are the comp stores performing well with it, but the new stores are as well. I believe it brought us -- I think it brought us a new customer in our stores for back to school.

On the canvas side, is that -- how much of that is Chuck Taylor's versus other stuff.

The majority of it.

All right, that's helpful. And then I guess (inaudible) in terms of store growth, when you look at store growth for next year, any percentages between new markets and existing markets, more specifically?

Well, if you take what we said that we are going to --

So it's just Dallas and Puerto Rico is what is? Right? Are those really the new markets at the end of the day, and that's it?

Those are the two big new markets. That represents just under half of the 30 stores, so 12 of the 30. We will open up some new markets, but they will be small store markets, primarily, where you have one or two stores. But if you look at the remaining -- that's just a handful of stores. The remainder of the stores we are going to open are primarily going to be backfilled existing markets.

Last question I have is, when companies start to accelerate growth, and I know you're not going to talk too much about 2012, but obviously it helps top line. It makes it a little bit harder to leverage when you start to grow and start to accelerate store growth. How are you guys thinking about the leverage ability of the business model 2012, going off your prior comment from Scott, give or take the gross margin for the most part potentially could hold steady. But how do you think about the leveragability of the business model when you start to grow faster?

Well, you are right about that. From the standpoint of when you accelerate your growth, you do get a penalty for your reopening cost and you are also going to incur some additional advertising cost. Dallas is going to be a great market, we feel, for us but it's going to be an expensive advertising market. Opening eight stores, we will be advertising beyond what a normal percent to the total sales would be, but we need to get that name recognition out there and then come back in '13 and fill it in with more stores.

So there will be a penalty. We are not in the position yet to give you guidance on sales. So we are not really in a position to be able to give you guidance on leverage other than the fact that leverage will be harder to come by as we accelerate this growth next year and particularly in opening those two markets of Dallas and Puerto Rico.

All right, well, best of luck to you guys, and we'll talk to you soon, thank you.

(Operator instructions) Steven Martin, Capital Management.

I'm glad somebody else asked the buyback question so I don't get abused for it. Does he know what the price for asking the question is? (Laughter). Terry, the cost of e-comm, you said, was $0.01 to $0.02 in the quarter and likewise in the fourth. When you aggregate it for the year, what do you think that number will look like?

What we said is that was is it's $0.02 in the third quarter and it's going to be between $0.01 and $0.02 in the fourth depending on sales volume. We've incurred about $0.01 in Q1 and Q2. So put it all together, we are looking at around $0.05, $0.05 to$0.06.

Okay, and which line item does that show up on, or does it spread out through the income statement?

Well, what we are really talking about now that we are incurring sales and profitability on those sales is what we would call a 4-wall store contribution type of a number. So part of those costs are in Q3 and Q4. We put them in there SG&A cost, but their sales, obviously, would be up top. And what Cliff and I both gave you for Q3 and Q4 are the net effects after our sales.

So like a lot of the other retailers, you are getting the profitability in growth and the expenses and SG&A?

Absolutely.

When you look out to next year, does that break even, or is it still a cost next year?

We are not ready to make a commitment from the standpoint of specific sales volume. Like Cliff said, we are very pleased with how it's ramping up. It still very new to us. Obviously, we are not far from being -- a continued sales increase could make that accretive next year. It's very likely to be accretive, if we continue to see these sales volumes. We are just not willing to make specific commitments right now until we put our guidance out for next year.

Okay. And when do you go live on drop ship from third-party vendors?

That will be in a future rollout, hopefully over the next 12 months. I'm not ready to tell you when that is. We have a couple of rollouts planned, and it's not in the first two.

Got you. Kerry, mathematically, the lease incentives per store look pretty rich. Is there something different this year versus last year?

Well, what we are finding is that we are able to better negotiate with the landlords. What you have seen is a flattening out of the decline in rents, but one of the ways they're compensating is by willing to give you more tenant improvement allowance. So that's what you're seeing now.

So from a P&L standpoint it's the same, but from a cash flow you're getting it up front?

Correct. They are helping to fix -- we will use those CIA monies to help fixture the store and offset our upfront cash expenditure. But you are right; you amortize that over the life of the rents, which would then benefit the P&L statement netting down the rent expense by the TIA that you get.

One last one -- you talked about the inventory and the state of the inventory. Mathematically, if you X out new stores, etc., what does the inventory look like on a per-door basis or however you are looking at it?

Well, we are up 3.8% on a per-door basis. 3.8% per door.

Okay, thank you very much.

Sam Poser, Sterne Agee.

It was just to -- I think my question was answered, actually. Thank you very much.

At this time we have no further questions in our queue. I will turn the call back to our speakers for any closing remarks you may have.

In closing, I would like to congratulate our entire Shoe Carnival team on generating the highest quarterly sales and earnings in our Company's history. We believe the launch of our e-commerce site and the expanding of our retail footprint into two new markets represent very exciting long-term growth opportunities for Shoe Carnival. Thank you again for joining us today.

Ladies and gentlemen, this does conclude our conference. We appreciate your participation.