Shoe Carnival Inc (SCVL) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen; and, welcome to Shoe Carnival's fiscal year 2012 second-quarter earnings conference call. Today's conference is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the Company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward looking statements, which speak only as of today's date. The Company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press statement 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 second quarter fiscal 2012 earnings conference call. Joining me today are Kerry Jackson, our Chief Financial Officer; Cliff Sifford, Executive Vice President and General Merchandise Manager; and Tim Baker, Executive VP of Store Operations. Following my opening remarks, Cliff will review our merchandise performance, and Kerry will review the financial results for the quarter in more detail than I give. I will then provide some closing remarks and will open up the call to take your questions.

I would like to begin this call by saying, there are a lot of good things happening at Shoe Carnival today. We are very pleased to report our second quarter earnings results exceeded the expectations we conveyed to you this past April. Additionally, we are excited about our accelerated store expansion strategy, continued free cash flow generation, and the recent initiation of a quarterly cash dividend program.

Before I review our financial results, I would like to remind everyone that this past April we completed a three-for-two stock split effective as a 50% stock dividend. Consequently, the Company's shares outstanding increased from approximately 13.6 million to approximately 20.4 million shares. Shoe Carnival's historic earnings per share and additional share information were restated so that all periods presented reflect the stock split.

Despite a significant increase in store opening costs in the second quarter compared to last year, we recorded a 5% increase in net earnings to $2.9 million from net earnings of $2.7 million in the second quarter of 2011. Due to a slight increase in shares outstanding in 2012, aside from the effect of the stock split, earnings per diluted share were $0.14 in each quarter. This exceeds our original guidance of $0.08 to $0.11 per share. Second quarter net sales increased approximately 9.3%, or $15.5 million, to a record $182.2 million from the previous second-quarter record of $166.7 million last year. Our comparable store sales for the quarter increased 3% over the prior-year period. Both net sales and comparable store sales results were at the high end of our second-quarter guidance.

On a comparable store basis, a low-single digit decline in footwear units sold was more than offset by a mid-single digit increase in the average unit retail price. The decline in units sold was attributable mainly to a decrease in women's non-athletic sales, as we elected not to chase merchandise shortages in categories that over sold our expectations in early spring, particularly sandalized footwear. The increase in the AUR reflects our commitment to increasing price points through enhancing the quality of our merchandise and shifting our product mix to key categories of athletic product. With the vast array of color in athletic footwear, especially in running shoes, this is the hot fashion category of this year. The ability to shift our merchandise emphasis is a reflection of the strength of our broadly assorted family footwear retail model. We were able to achieve a 90 basis point increase in the gross profit margin for the quarter compared to last year, due in part to a reduction in women's liquidation sales and higher athletic product margins. Looking ahead, a reduced level of inventory in women's sandals at the end of the second quarter should benefit margins in the third quarter as well.

SG&A expenses for the second quarter increased by $5.4 million to $47.6 million, or 26.1% of sales, from $42.3 million, or 25.4% as a percent of sales, in the second quarter of 2011. Besides the added cost of opening and operating more stores in the quarter compared to last year, we incurred an increase of about $2.3 million in cash and equity compensation costs pursuant to formal incentive plans with specific annual earnings targets. We continue to improve our balance sheet over the prior-year period. Our cash position increased to almost $53 million, compared to $44 million at the end of last year's second quarter, and we remain free of interest-bearing debt. Whereas we ended the quarter with inventory up 5.8% on a per-store basis compared to the end of last year's second quarter, our merchants continued their focus on shifting our inventory mix to the seasonally important product classifications.

We are also very excited to announce the initiation of a quarterly dividend strategy during the second quarter, with a $0.05 cash dividend paid on July 16. This dividend followed the three-for-two stock split I mentioned earlier. Our primary purpose for cash accumulation remains the growth of the Shoe Carnival chain. However, we believe we can open new stores at an annual rate, consistent with this year's growth, and still generate free cash flow and return a portion of that excess cash flow to our shareholders.

We believe Shoe Carnival is well-positioned for growth as our focus on value-priced family footwear resonates well with today's consumer. With a current store count of 346 stores in only 32 states and Puerto Rico, we feel we have significant domestic growth opportunity in future years. We currently expect to open 7 more stores and close 1 store during the remainder of the year and thus end fiscal 2012 with 352 stores in operation. Preliminarily, we plan to open new stores in 2013 at the same pace as our current year expansion, about 30 new stores.

During the first half of this year, we opened two new large markets -- Dallas, Texas and Puerto Rico. As we told you in the last quarterly update, the Dallas stores opened very strong. Unfortunately, with the Texas market's school re-openings moving a week later this year, these stores are just now in the throes of their back-to-school period, so it is about one week or two premature to talk about their current performance. We are really excited about Puerto Rico. Both grand openings there were Company records. However, since it is a little too early to determine exactly how good these stores will perform after the honeymoon period, we are tempering our exuberance somewhat until we get a better read on the results going forward. We previously told you that we intend to upgrade our existing store base in 2012 by relocating 10 stores to better locations and remodeling 20 stores to our latest store format. So, in other words, we plan to touch approximately 9% of our stores with design enhancements this year. As of the end of the second quarter, we have completed six relocations, with the remainder of our planned relocations being pushed to 2013, due to the delayed completion of lease negotiations. We are on track with remodel program with about half the stores completed in the first half.

Now, focusing our outlook for the third quarter. We are pleased with traffic, sales, and gross margin so far in the back-to-school period. Month to date, we have generated a comparable store sales increase of about 6%, and the gross profit margin is running in line with last year. I have said many times, and I continue to believe, that when consumers have a need to buy, such as the back-to-school period, they are increasingly shopping at Shoe Carnival stores for the right product assortment for the entire family at a compelling value. Due to the strong start to the back-to-school period, we are expecting a 4% to 6% comparable store sales increase for the third quarter. If we get a good transition in fall weather patterns from this summer's extraordinary heat waves, we could see sales exceed that guidance. Therefore, we currently expect third-quarter net sales to be in the range of $240 million to $245 million, or up about 11.5% to 13.5%, over sales of $215.5 million in the third quarter of 2011.

At the high end of our sales guidance, we expect our gross profit margin to be up slightly, and we are looking for a slight deleveraging of SG&A expenses due to a year-over-year increase in new store pre-opening costs of $670,000, or $0.02 per share. The total pre-opening expense for the third quarter of 2012 is expected to be $1.025 million, compared to $355,000 last year. Of these total costs, we expect $650,000 to be included in SG&A costs this year, compared to $178,000 included in SG&A costs last year. The remaining costs are included in cost of sales. Finally, as a result of the above assumptions, we expect third-quarter net earnings to be in the range of $0.55 to $0.60 per diluted share, an increase of 6% to 15% over the $0.52 per diluted share we earned last year.

In closing, I would like to reiterate that, just as we have consistently done every quarter, our executive management team remains intently focused on managing the controllable aspects of our business for long-term growth, including our base focus on strong free cash flow generation.

Now, I'd like to turn the call over to Cliff for more details on our merchandise performance.

Thank you, Mark.

As Mark stated, our total comparable store sales for the second quarter of 2012 were up 3%. Although units per transaction were down low-single digits and conversion was down slightly, we were very pleased that traffic was up low-single digits, with transaction size up by mid-single digits. Merchandise margins increased by 70 basis points, primarily due to tight inventory management of our seasonal sandal categories and improved margin in our adult athletic department.

In our women's non-athletic department, comparable store sales were down low-single digits. Increases in athletic sandals, molded footwear, boat shoes, and casual flats were not enough to overcome the double-digit loss we experienced in dress shoes. As I mentioned in previous calls, for the first half of 2012, our merchants shifted inventory dollars away from the dress categories into more seasonally relevant casual categories. Therefore, dress shoe inventory is in line with our plan. We are encouraged by the recent improvement in sales of several of our dress shoe categories with pumps, both single sole and platforms, along with new microsuede wedges selling well.

In our men's non-athletic department, we ended the quarter with a mid-single digit sales increase on a comparable store basis. Soccer sandals, canvas casuals, along with boat shoes, were all up double digit. Our children's business ended the quarter with low-single digit comparable store sales increase. This increase was driven primarily with flats, canvas, molded footwear, and colorful athletic shoes in boys running, skate, and infants' athletic. In adult athletic, comparable store sales were up mid-single digits. The classification of product driving the gains in adult athletic for the second quarter were men's and women's basketball, men's and women's skate, and men's and women's performance running. As we mentioned last conference call, color is still the lead story in running shoes for both men and women.

We ended the quarter with inventory up 5.8% on a per-door basis, due to increased unit cost and increased depth on key categories, such as athletic. On-hand units ended up the quarter down 1.2% on a per-door basis. Our plan has been, and continues to be, to increase inventory in categories where we see strength, in order to maximize our business during fiscal 2012. Our team did a nice job of shifting the mix of inventory to the athletic category, which is the most important category for back-to-school. As a result, on-hand units for non-athletic product were down on a per-door basis at the end of the second quarter, while athletic units in inventory were higher than last year. Aged inventory remains low, and we are well-positioned for the remainder of the back-to-school and fall sales period.

Now, I'd like to give you some insight to the exciting things we are experiencing thus far for back-to-school. To date for the month of August, comparable store sales were up approximately 6%, with every department running ahead of last year. As of today, two-thirds of our schools have gone back. As a comparison, this time last year a little over 80% of our schools had started back. Our buyers have done a good job of identifying trends and buying depth into those trends. Additionally, our marketing is spot on the young consumer, which is a reason Shoe Carnival continues to be top of mind as they start thinking of shopping for back-to-school shoes. Customers are still waiting to just before school starts, or just after school starts, to make their final decision. We have seen this trend for the past several years, and this year the last-minute trend continues.

As we approach fall, we still believe that strong athletic trend we have experienced all year will continue with fresh color and exciting technologies. In addition, the Americana trend we spoke of last conference call continues to grow. We view Americana as nautical, western, bucks, and riding boots, just to name a few. Also, in addition to athletic, color has found its way into new casuals, both in flats and wedges. Lastly, we expect a nice rebound in our boot categories for the fourth quarter if we experience a more seasonable weather pattern from what we experienced last year.

Moving to e-commerce, although we hoped to be further along, we continue to make good progress with our site, which has now been open for almost 11 months. We are continuing to make improvement in the overall performance of the site, including our soon-to-be released mobile site. Mobile is an important addition because mobile technology accounts for over 20% of all online purchases. Our next digital opportunity is the installation of kiosks in many of our smaller stores, allowing our customers the opportunity to see the broad assortment found online while shopping our smaller stores. This strategy will be another component in improving conversion and transaction size in those stores.

In addition to e-commerce, we continue to grow our loyalty members, utilizing both our brick-and-mortar stores and our e-commerce site. In fact, our loyalty members now account for over 10% of our total sales, which is a huge increase from just a few months ago. These loyal shoppers, on average, spend 30% more per transaction than the Company average. We realize we have a long way to go to catch some of our competitors in this channel, but our store personnel and e-commerce team are focused in executing on that goal.

In closing, I'd like to thank our entire team for their extraordinary efforts as they prepared for this back-to-school time period, while successfully opening 11 new stores, 2 of which were in Puerto Rico. It was truly a team effort from every department in the Company.

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

Thank you, Cliff.

Our net sales increased $15.5 million, or 9.3%, to $182.2 million during the second quarter of fiscal 2012, compared to the prior year's net sales of $166.7 million. This increase was primarily due to a $12.4 million increase in sales generated by our new stores open since the beginning of the second quarter last year, as well as our e-commerce site, which we launched in September 2011.

Our comparable store sales increase of 3% contributed $5.0 million. These increases were partially offset by a $2.0 million loss in sales from the nine stores closed since the second quarter of fiscal 2011. The gross profit margin for the quarter increased 0.9% to 28.7%. The merchandise margin increased 0.7%, while buying, distribution and occupancy costs decreased 0.2% during Q2, as our sales gain enabled us to leverage these costs. We realized an increase in pre-opening expenses included in distribution and occupancy, which was offset by an equivalent decrease in store-closing costs included in occupancy expense.

Selling, general and administrative expenses increased $5.4 million in the second quarter of fiscal 2012 to $47.6 million, from $42.3 million in the second quarter of last year. As a percentage of sales, SG&A increased to 26.1% from 25.3% in the same period last year. The increase in SG&A was primarily due to a $3.6 million increase in expenses for new stores, net of expense reductions for stores that have closed. In addition, due to our improved financial performance, incentive compensation, which includes both cash and stock-based compensation, increased $2.3 million in the second quarter of 2012 as compared to the second quarter last year. $789,000 of this expense is a cumulative catch-up expense adjustment for a tier of restricted stock that was previously determined to be unlikely to vest, but is now considered more than likely than not to vest this year. This restricted stock was granted in 2007 and will either expire or vest this year based on this fiscal year's diluted EPS.

Our strong performance in the first half of the year, along with our expectation of a continued acceleration diluted EPS in the second half, puts the performance targets of the restricted stock tier achievable at the high end of our expectations. However, at the low end of our expectations, we would not hit the performance targets and that tier would expire unvested this fiscal year, and the expense incurred in Q2 would be reversed in either Q3 or Q4.

Total pre-opening costs of Q2 increased $795,000 to $1.2 million. This increase in pre-opening costs over Q2 of last year equates to a reduction in EPS of about $0.025 per diluted share. Of the total pre-opening costs incurred in Q2, $764,000 is included in SG&A and $482,000 is included in cost of sales for pre-opening rent and freight. In Q2 last year, we incurred $451,000 of pre-opening expense, of which $315,000 was included in SG&A and $136,000 was included in cost of sales.

The effective income tax rate for the second quarter of fiscal 2012 was 38.3%, as compared to 33.2% for the same period in fiscal 2011. Included in income tax expense for the quarter of fiscal 2011 was a benefit related to the favorable resolution of certain tax positions. This benefit significantly lowered our effective income tax rate in Q2 last year.

Now, let me briefly discuss our year-to-date financial performance. Our net sales increased $39.7 million, or 10.9%, to $404.8 million during the first half of fiscal 2012, compared to prior year's net sales of $365.1 million. Net earnings for the first half of fiscal year 2012 increased to $13.9 million, or $0.68 per diluted share, from net earnings of $12.4 million, or $0.63 per diluted share in the first half of last year.

Now, let me discuss our cash position information affecting cash flows. Depreciation expense was $3.9 million in Q2 and $7.8 million for the first half of fiscal 2012. Total depreciation expense is projected to be approximately $16 million for the fiscal year. We have extended $16.4 million cash during the first half of the fiscal year for the purchase of property and equipment, of which $14 million was for new stores, remodeling, and store relocation activities. The remaining capital expenditures were used for continued investment in technology and normal asset replacement activities.

Cash lease incentives received from landlords were $3.1 million for the first half of fiscal 2012. Capital expenditures for 2012, includes actual expenditures during the first half of the fiscal year, are expected to be between $24 million to $25 million. Approximately $12 million of our total capital expenditures are expected to be used for new store construction and $7 million will be used for store relocation and remodels. Lease incentives to be received from landlords during 2012, included actual amounts received during the first half of the year, are expected to be approximately $5 million to $6 million.

We currently have authorized a $25 million share repurchase program. To date, no shares have been repurchased under this program.

This concludes our financial review. Now, I'd like to open the call for questions.

(Operator Instructions)

Scott Krasik, BB&T Capital Markets.

Question, Kerry, can you help me understand -- I think you said last on the last call that the high end of your guidance was predicated on merch margins being flat, and then the comps came in in line with the high end and then the merch margin was up 70. Is that the difference between the $0.03 difference between the high end of your guidance and what you reported? Or, are there other moving parts in there?

It is almost exclusively the better margin we got during the quarter that allowed us to exceed our earnings estimates for Q2.

Okay. In terms of the drivers of the better merchandise margin, what were they?

Scott, this is Cliff, we saw higher margins out of our women's department non-athletic, mainly because we didn't -- we made a decision not to buy back into the sandal category later in the second quarter. We had a pretty good first quarter in sandals, and the first thought would be to buy back in, but we were concerned that we'd be just buying markdowns. So, we decided not to do that, and that helped our margin in the women's department and in our athletic margins, overall -- adult athletic margins were up.

Okay, good. Then, the drivers of the flat margins so far, quarter to date, is that just a function of a tough compare year-over-year? And, how do you view that as playing out then, Q3 in the merch margin?

Last year for August, we ran one of the highest margins we've ever run, and August is a promotional time period for back-to-school. And, we are running flat mainly because of the time period of the year. We look to improve that, as we move through the quarter, as we sell more seasonally, higher-margin product.

Okay, good. Then, I'll ask Kerry the same question then about the margin. How do you view to get to the high end of the guidance, what does that imply for merch margin?

Flat to slightly up is what we have built into the high end of our guidance.

Okay, great. Mark, in terms of -- you've got the new markets coming on line, are there other more important markets at this point? Is it more backfilling next year? How you view it, and can you get more umph out it because you're really starting to build some scale now?

The intent in 2012, Scott, as we have said is, we wanted to go into Dallas with a good number of stores, and we will have achieved that by the end of this year with seven new stores in that market. And, I think we've got even one additional coming on in the very early part of next year in the Dallas market. We should have eight by the end of the first quarter or second half, so we're really happy with that infiltration of Dallas.

Puerto Rico is the other larger market that we entered this year, and with two stores opening in the third and fourth -- actually, the fourth quarter, we will have four in that, on the island by the end of the year. We are real happy with that, as well, and we are looking for, obviously, for more stores next year, maybe not so obviously, for more stores next year. Those two stores that we opened up in July really opened up very strongly. As I mentioned, both of them were Company records. One of them was 8,000 square feet. So, we are really happy with that.

Next year, we intend to really focus our efforts back again on filling in existing marketplaces. Besides Puerto Rico and Dallas, we are continuing to look at Houston, we are to continuing to look at Cleveland, we are continuing to look at a lot of the markets that we've gone into, Phoenix, for example. We are going to enter into Tucson, and we'll look for back-up stores in that market. We are really looking at infilling strategy next year. In 2014, probably towards the end of '14 and '15, we will start looking at some major new markets, again.

That's a good understanding. Lastly, Kerry, so I think I missed it. How much did you say that employment-comp plan was in the quarter and the impact of reversing it later this year?

Well, obviously, it's potential, but it was $789,000 in expense we took in Q2. Now, if we hit the performance targets, that will not be reversed, obviously. But, if we get the lower end of our targets, then it would be reversed out in Q3 or Q4.

How -- why, just because if you're having such an amazing Q3, you know you'll hit it regardless, and that's why it would come in Q -- why wouldn't it -- why would it reversed in Q3 because there's always the chance --?

The restricted stock tier has a very specific EPS target, and if we hit that target on the fiscal year, then it vests. If we are $0.01 shy of it, then it won't vest and it will expire; and any expense associated with it, at that point, would be reversed out and taken back in into income.

Okay. I just don't know why then -- I mean, you always have the chance to earn it in Q4, right, so --?

Right, we're not -- yes. Well, you take the tier of the expense and you allocate the expense over the timeframe that the tier of restricted stock would be valid. Well, we only have until the end of this year, and this catch-up adjustment of $789,000 was from the date of grant. The accounting rules say from the date of grant, whatever the expense would have been, you have to pick up at the point in time that you now deem it, more likely than not, that it will vest.

Okay. I think I get it, thanks.

I don't get it.

Do you --?

Chris Svezia, Susquehanna Financial Group.

Sorry, Scott, you still don't get it. I don't get it too much either, so you're not alone. So, congratulations, guys. Good job on the quarter.

I just want to go back to gross margins for one sec here, just so I got this correct. You have stepped into Q3, the talk is kind of flattish product margins but an opportunity to show acceleration as you sell more seasonal product. If you think of about a 4 to 6 comp, wouldn't you get leverage on occupancy as well, if you moved up 20 bps in the quarter? So, could gross margins in the third quarter be up slightly? Or, just trying to nail down how we should think about that --?

Chris, we are -- yes, at the high end of our guidance, we are planning for a slight increase in gross margins, so you're exactly right. We should gain leverage on our buying distribution and occupancy costs, and hopefully, with the switch to athletic product, the way our merchants have switched the mix, we will see higher margins throughout the remainder of the third quarter, just the way we have seen in the athletic product category so far in the third quarter. So, yes, we do anticipate slightly higher margins going forward.

The one nice thing about not having as much clearance product in women's sandalized footwear, is the further we get into the third quarter, the less liquidation sales we will have to rely upon to get rid of the remaining piece of our women's sandalized product. On a relative basis to last year, since we don't have as much inventory to liquidate, we anticipate those women's margins to start to climb throughout the remainder of the third quarter.

Okay.

Then, Cliff, for you, just on the women's dress category, I think you referenced as you went into August the way your categories are comping positively. What do you -- is women's dress comping? What are you doing differently? What is changing in the assortments?

What I said in prepared remarks was that our women's -- that every department was comping positive. In women's, I have dress, I have casual, I have a sport, a casual, and boots. So, even though dress is still comping negative, I'm picking up the increase in women's in -- not only in my boot category, but in the casual and sandal category, as well.

Okay, I got that. And obviously, you just mentioned -- you referenced boots, so that was my next general conversation. So, far in terms of what you have seen, you have been pretty pleased with the bets that you're making, is that --?

For us, it is such a small month from a volume standpoint in boots, but we are seeing nice increases in the boot category. Western boots are selling well, and we think that is going to continue.

Okay.

Lastly, just on -- I'm curious, Puerto Rico, you like what you see. You referenced how strong those stores, in terms of how they opened. You've got a couple more to go, here. What is the market opportunity for Puerto Rico? How many stores can you actually put in that market, as you look out the next couple of years?

Certainly, our expectations may change pending where we open these initial half a dozen stores. And the -- after we open a store, we always take a look at what's the primary trade area that we are driving customers from into that particular location. We would will do the same analysis in Puerto Rico. Right now, we are anticipating somewhere between 12 and 15 stores.

However, I will caution you is that we will continue to take a look at that as we open stores. We don't want to cannibalize -- we don't want to take a chance on cannibalizing stores in Puerto Rico, except that if we see sales per square foot continue the way that we've seen sales per square foot of these two stores that we just opened, cannibalizing certain amount of those sales is not going to hurt us.

The bottom line answer to that is, we will do a quantified polygon where we are driving customers from and base our anticipation of stores on that. Right now, we see 12 to 15 stores.

Can I just go back to Texas one sec, I know you don't want to comment just because of the timing on back-to-school and the shift later. But, when the stores had initially opened and you seeded it with marketing, can you had any color about how you felt when those stores opened at that point in time relative to the base, or relative to plan at that point?

Oh, when the stores opened?

Yes --

The Texas stores open very nicely. Yes, we were happy with the way those stores opened. Again, we went into the Dallas market with -- if that's what you talk about is Dallas --?

Yes.

We went into the Dallas market with six stores at one time in the spring, and we've never been able to do that in any, opening any new large market. We spent an inordinate amount of advertising in that market to generate those grand opening sales; but in the long run, we felt that was the best thing to do for opening that large new market.

Now we're coming -- then we got off of the advertising, subsequent to the opening, because they fell into our normal advertising pattern. Now, with back-to-school, we're increasing the amount of advertising that those existing Dallas stores are seeing, as well as the new store that we opened in the Wheatland area of Dallas, I think it grand opened August 4.

We will see advertising pick up now through their back-to-school date, which is about five days later than it was last year. That is why we are saying that, if you strictly look at the performance of the Dallas market in early August without any advertising, except for that new store, it's not as robust as it will be as we go back to the back-to-school period.

Got it.

We are expecting good things. The bottom line is, we are continuing to expect good things out of Dallas, but until we get through a very heavy advertising period, not willing to make that call.

Got it. All right, sounds good. All the best, guys.

Jill Caruthers, Johnson Rice.

Just followed on the last question, given the excitement on the success of entering the two new markets. Could you remind us, or have you thrown out a long-term store potential number out there?

Jill, I'm having a hard time hearing you. Can you speak up a little bit?

Sure, was wondering, have you thrown out a potential on a long-term target of store count?

Within the United States?

Yes.

We've repeatedly talked about a 700 store chain, with the current Shoe Carnival format and approximately the same size stores that we are operating today.

Okay. Then, just to touch on the comments you made about the loyalty program, granted, at 10% of the sales it is pretty small compared to some of your competitors. Could you talk about the focus on driving that initiative, and the outlook, going forward, on that program?

Well, we started -- as we are launching our e-commerce site, we will put a renewed focus on building the loyalty program. We felt that this was going to be a great way to drive our business on e-commerce. And obviously, once you build that loyalty membership, you start communicating with them through e-mail campaigns and whatnot.

We've seen, again, we've seen tremendous growth in the database of loyalty members, and with that, and the communication that we've made to them through our e-mail campaigns, we have seen an increase in sales. This is something that we are truly focused on. We, obviously, think that it can be a big driver of our Business on a go-forward basis.

All right, thank you.

Jeff Stein, Northcoast Research.

Mark, can you talk a little bit about a marketing? And, I'm just kind of curious, with the elections coming up, it's probably going to be a little bit more expensive to advertise. Some retailers I have talked to are doing a little bit more cable. I'm wondering, are you mixing your media any differently this fall than you have in a non-election year? And, maybe could talk a little bit about how you see your marketing spend in the back half as a percent to sales, if you hit your sales plan?

Let me answer the second question first. I don't have those specific percentages, and I probably wouldn't give those out for competitive reasons anyway. The answer to your first part of the question is, we don't do a lot of television advertising prior to the election period. So, for us to be preempted, we would have to make a mistake in placing that advertising in the first place, so we're not too worried about that.

When our advertising -- our big advertising push comes -- our next big advertising push, except for certain holidays, comes at the day-after-Thanksgiving period. As we get into holiday, obviously, we are by the elections, maybe not the aftermath of the election, but certainly by the periods where we would consider to be prime for preemption. And, no, we really don't have to change our mix of advertising to accommodate any kind of election-period phenomenon.

Okay. Can you give us some metrics in terms of how these new stores opened in Puerto Rico? In other words, what did you do in the first week, compared to what you would do in an average store opening here in the US?

No, we really don't want to get into specifics, Jeff. But like I said, we opened the stores. They were record in terms of sales. Not too far above the absolute record, but the record before that was pretty significant. It was opening a 25,000 square foot store in Jacksonville, Florida back in the early '90s.

We had a lot of advertising help, and a lot of promotional help with Jacksonville Jaguars at that point in time. So, it was a pretty significant record then, and the two stores in Puerto Rico slightly beat it, but they did beat it. Again, we are excited because one of those stores was in an 8,000 square foot outlet mall location, so --

So, you're saying an 8,000 square foot store, in absolute dollars, beat a 25,000 square foot store? I just want to make sure I understand that.

It not only beat a 25,000 square foot store, it beat the best 25,000 square foot grand opening we ever had.

Okay. Well, congratulations on that.

Can you talk a little bit about product costs for the back half of the year, and your initial mark on going in. Are you passing it all along to the customer? Or, are you just trying to go in with a more modest IMU and hope to come out with a lower markdown?

Product costs are up, anywhere from low-singles to mid-single digit, and thus far for the year, and our plan going forward is to pass that cost increase on to the consumer.

Okay. And no resistance, so far?

We think that the way to not get resistance is to improve the product. So, in athletic, part of our cost increase is the fact that we're buying better product and that -- because when you buy a better product, it demands higher price and there's been absolutely no resistance there.

Got it. Okay, great. Thanks.

(Operator Instructions)

Sam Poser, Sterne Agee

It is [Ben Champs] here for Sam. On the store openings, you mentioned 30 store openings in 2013. Is that 30 net openings?

No, that's an estimated approximate number of new store openings.

Okay, but you'll have some closings, I'm assuming, there?

We will have some closings. At this point in time, I'm not in a position to say because we are still in negotiations with a good number of landlords regarding stores that we might anticipate closing.

Got it. Was there a shift in openings from third quarter into fourth quarter?

This year?

Yes.

Yes. A number of stores are going to grand open, or open, right at the beginning of the fourth quarter, right in the first week of November. We had a few stores, they may or may not get open the last few days of October, which is the end of the third quarter, but we're anticipating those stores, big push in sales at grand opening in the first week or two of November.

Got it, okay. Were there any -- anything shifting in terms of back-to-school from Q2 to Q3, given the late back to schools?

Not from Q2 to Q3 as much. Maybe a couple days out of second quarter into the third quarter; but on an overall -- in the overall scheme of things, it didn't dramatically impact -- it certainly is not going to dramatically impact the third quarter.

Got it, okay. Anything else -- anything in terms of trends by brands you're excited about, as we go into the back half?

As far as brands are concerned, all of the key brands that have been driving our athletic business continued to get stronger. In fact, as we are now previewing, and actually a vault first quarter in athletic and previewing second quarter, the key brands that have always been our key brands continue to improve. So, we're pretty excited about the athletic brands, and where we are going there. From a non-athletic perspective, there are no real key brands that I'm prepared to talk about on this call.

Okay, great. Thank you so much.

Mark Montagna, Avondale Partners.

Question about your comps for the second quarter. Is it fair to say that the comps were hindered by a lack of clearance?

From a total top line sales, maybe slightly, Mark, but it's not going to add -- it's not going to double it from three to six. But yes, we looked at our women's -- and again, we made a conscious decision not to buy into sandalized footwear that sold very well in the first quarter. So, potentially, yes. We look at it as if, okay, we didn't have a lot of sandals to clear, consequently, we sold some athletic product at better prices. That was the whole intent. So, it's hard to quantify what the opportunity cost was of some of the liquidation sales.

Okay. Well, it sounds like a pretty high-class problem to have, so --

The strategy worked.

Did you guys give a number in terms of what percentage the second-quarter ending clearance was down? I think you might have talked about total inventories, but I was curious if you could tell us anything about clearance dollars?

No, what we talked about -- what Cliff had mentioned, I think, and I mentioned it, is that our women's sandal inventory was lower in terms of units in the inventory on hand at the end of the second quarter. Consequently, we are expecting slightly higher margins out of that category in the third quarter. We did not give any quantification of that.

Okay. When you were discussing shifting inventory into, say hotter categories, how much lead time is needed for you to make that kind of shift?

To do it properly, you need approximately six months. Anywhere from -- dependent upon the vendor, anywhere from five to six months. But, you need -- that needs to be identified up front in order to shift the dollars so that the buyers can execute. Basically, what we had seen over the past, actually over the past year, is this increased demand for athletic products, especially in the running category. And, we made a conscious decision to shift dollars to that category and out of some of the other categories that we saw as struggling.

Okay. Then, looking at boots, I'm wondering if the initial average unit price on boots, I would imagine, you're expecting it to be a bit higher for the second half of this year versus last year?

Absolutely expect it to be higher. If you remember last year in the second half, the weather gods didn't actually smile upon us and in the fourth quarter we sold -- we ended up selling a lot of boots, especially in the month of December and January because we had to take dramatic markdowns on those, so we do expect to see higher unit cost and -- unit retail, excuse me, and higher margins.

And, I think Mark your -- let me clarify your question. Was it initial price points, or initial markup --?

Yes --

(Multiple speakers) price because we measure everything in realized price.

Yes, of course, the realized price should be higher, but I was wondering, just in terms of the initial pricing, I would anticipate that's also going to be higher than last year?

It would be higher based on increased costs.

Okay. And, that's the sole reason why it would be higher is just the costs?

Well, not necessarily, because there's actually been a shift in the product categories. So, some of the product categories that were supposed to be strong last year, or the year before, we've down shifted that product and increased the buy in other categories, which were better product and higher retail. So, it's a combination of higher unit cost and better product.

Okay. You had mentioned, it sounds like surf, skate is doing pretty well. Is that being driven by some sort of apparel trend, or is it just merely driven by denim sales, or can you actually talk about the --?

I'm sorry, I didn't hear the -- skate?

Yes, the surf, skate shoes --?

We don't do a lot of surf, skate, but the skate product, I did mention the fact that that was increasing for us, and I really believe that has a lot to do with color. When you look at our skate inventory, it's no longer just black and white, which has traditionally been the strong colors. There is a lot of exciting color in skate.

Okay. Lastly, back to Puerto Rico. Mark, you were saying that Puerto Rico could be 12 to 15 stores, but is that based on allowing no cannibalization, therefore, you open more stores? Or, allowing for some cannibalization?

That would probably be some cannibalization. As I've -- maybe I didn't make myself clear, as I tried to discuss, as we get more into -- or, as we learn more about where we are driving sales from; in other words, how far out each store is drawing customers from, we will have a better handle, a better qualification, on what potential cannibalization we do have.

We have identified areas on the island that we think are distinct, separate retail trade areas, and that is what we are targeting right now. Now, having said that, it is very possible that when we've got a 15,000, maybe even a 20,000 square foot store in certain locations, that we will draw from a wider population base, a larger population base, than what we originally intended. Especially, when we are talking about outlet malls.

So, that is why we are little bit hesitant to say exactly how many stores we think we can get on the island. We have identified all the really important retail hubs on the island, and we are working towards putting stores in those. Right now, we think that we could have 12 to 15 really viable stores on Puerto Rico.

Okay, that sounds great. Thank you.

Steven Martin, Slater Capital Management.

Most of my questions have been answered. On pre-opening, you have expenses of management and things like that traveling to Puerto Rico that are not included in pre-opening expenses, am I right?

No, we did. We included some of that in -- we didn't --

Would the non-included expense be something meaningful to talk about, or is there some way --?

Steve, what we do is we include store management, who are actually working in the stores that will travel from another store to work to get that store up and running, that is included in pre-opening costs. But, when Mark, Cliff, and I go to a store, we don't include that in pre-opening costs, because we are there to monitor and learn, not work in the store itself.

So, if you -- and that would include the trips you guys might have been making down there pre-the opening of the store? To find the store?

Correct, but we include that in regular operating costs in our general and administrative expenses.

Okay. Next year, assuming -- Mark made comments about, roughly 30 openings and no new markets, would it be fair to go to you -- let me ask the question differently, what --?

Steve, let me clarify -- before you ask the question, let me clarify, what I'm talking about is no new major markets.

Right. So, if we were going to go out -- if we were modeling for next year and -- what number do you guys use as pre-opening on a rough basis per store?

Steve, it goes all the way from, these Puerto Rico stores were more expensive because advertising is more expensive. You can go -- and, if you go into an existing market, pre-opening costs may be in the [$40,000] range; at the high end, it might be in the high-six -- or low-six figures. So, it really just depends on what is the circumstances of the market? What market is it? It has, literally, been all over the board.

Okay. All right --

But, a new market -- a large, new market is generally at the high end of that range.

Right, but if you didn't open a large, new market next year, and every -- as Mark just said, no major, new markets and the rest of the stores were all infill, what kind of number would be fair for us to use?

Probably the midpoint of that range would be something more reasonable than the high end of that range.

So, $60,000 a store?

Approximately.

Okay, thanks a lot.

Ladies and gentlemen, we have nobody else left in our queue. At this time, I'd like to turn the conference over to Mr. Mark Lemond for any additional or closing remarks.

In closing, I'd just like to reiterate that we are pleased with the back-to-school season thus far, and we are optimistic for the remainder of the third quarter. Our accelerated new store opening plan is right on track, and our financial results continue to validate the Shoe Carnival operating model.

Thanks for joining us today, and we look forward to speaking to you in November.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time.