Shoe Carnival Inc (SCVL) 2012 Q3 法說會逐字稿

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

This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in 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 of 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 Cliff Sifford, President and Chief Executive Officer and Chief Merchandising Officer of Shoe Carnival. Mr. Sifford, please begin.

Thank you, and welcome to Shoe Carnival's third quarter fiscal 2012 earnings conference call. Joining me on the call today are Kerry Jackson, Chief Operating and Chief Financial Officer; and Tim Baker, Executive Vice President of Store Operations and Real Estate.

Before we begin today, we would like to take a moment to acknowledge and thank Mark Lemond for his 25 years of service and his 16 years of leadership as Shoe Carnival's President and CEO. His contributions have helped make Shoe Carnival the successful and innovative retailer we are today. As many of you are aware, Mark retired at the end of October, and we definitely wish him all the best.

This afternoon, I will begin with an overview of our third quarter financial and merchandise performance. Kerry will then review the financial results for the quarter and our guidance for the remainder of fiscal 2012 in more detail. We will then open the call up to take your questions.

First, however, while I have met many of you through my years here as the Executive Vice President and General Merchandise Manager, there are some of you I have not had an opportunity to meet. I would like to take a moment to tell you a little bit more about myself. I have been in the footwear industry for more than 30 years, and more importantly, with Shoe Carnival for the past 15 years. I have had the opportunity to experience the growth and evolution of Shoe Carnival from 88 stores in 1997 to 352 stores in 32 states and Puerto Rico as well as online. I am very passionate about footwear and the excitement this fashion-driven industry presents to us. Since my arrival at the Company, I have led the merchandising strategy; however, with my recent promotion we are actively conducting a search for a new General Merchandise Manager, who will report directly to me.

As CEO, I will oversee all aspects of the Company, but I will be focused intensely on growing this Company into a nationally recognized footwear chain. I enjoy working with our ambitious, enthusiastic team and believe that Shoe Carnival is better positioned than ever before to expand our brand deeper in existing markets and enter new markets with our business model of providing the right product assortment of name brand footwear for the entire family at compelling value. I am extremely excited to be CEO and look forward to speaking with many of you over the coming months.

Now, on to the business at hand. In the third quarter, we continued to execute on our key strategic initiatives, which includes capitalizing on fashion trends currently driving consumer footwear demand, and aggressively opening stores in new and existing markets to increase sales. We were well-prepared to meet customer demand as we headed into the key back-to-school sales season. As a result, comparable-store sales increased 6.2% as compared to the third quarter last year. This sales increase helped us generate record third-quarter earnings of $0.60 per diluted share, which was at the high end of our outlook.

Traffic for the quarter was up low single digits, and conversion was down slightly. Both average transaction and average unit retail increased mid single digits as compared to the prior-year period. Merchandise margins increased 60 basis points, due primarily to selling fewer units of low-margin toning product, compared to the same time period last year, and a lower inventory ownership of spring sandals going into the back-to-school selling period.

Turning now to store expansion -- in the third quarter we opened 6 new stores, including our third and fourth store in Puerto Rico, to end the quarter with 352 stores operating in 32 states. We continue to be pleased with the grand opening of these new stores, as Shoe Carnival's assortment of family footwear at compelling value increasingly resonates with today's consumer looking for the footwear brands they desire. In early November, we opened the last new store for the fiscal year and just recently closed one store. One additional store will close late in the fourth quarter, ending the year with 351 stores.

Looking to fiscal 2013, we plan to open an additional 30 to 35 stores by backfilling existing markets or opening in smaller new markets where we can have immediate brand awareness. By backfilling the large markets we opened this year, we expect to leverage our sales and marketing efforts in those markets next year. The effort of our entire Shoe Carnival team, from our corporate headquarters to store-level associates, continue to be tremendous as we execute on our growth strategy. We believe our strong unleveraged financial position leaves us well-positioned for additional square-footage growth over the next several years.

Now, I will provide you more information on our merchandise performance in the quarter. In our women's non-athletic department, comparable-store sales were up low single digits for the quarter. This increase was driven entirely by average unit retail, as we sold fewer units of sandals and more units of higher unit retail categories, such as boat shoes, boots, and casual flats, on a comparable-store basis than last year. In addition to these categories, we also saw a comparable store increases in vulcanized canvas and molded footwear. Although dress shoes were still trimming down on a comparable basis, we are seeing double-digit increases out of our traditional pump classification, driven not only by average unit retail, but also in units.

In our men's non-athletic department, we ended the quarter with a low single digit sales increase on a comparable-store basis. As in women's non-athletic, this increase was driven entirely by average unit retail, as we sold fewer units of sandals on a comparable basis than last year. Categories that achieved both unit growth and average unit retail growth were boat shoes, traditional pennies, driving mocs, and sport hikers.

Our children's business ended the quarter with a mid single digit comparable-store sales increase. This increase was driven by the children's athletic business, which came in with a high single digit comparable store increase, as a result of both higher unit sales and higher unit retail. Key product categories were girls' and boys' retro fashion, skate, running, and infants athletic.

In adult athletic, comparable-store sales were up high single digits. As in children's athletic, this increase was a result of both higher unit sales and higher unit retail. The classifications of product driving these gains in adult athletics for third quarter were men's and women's basketball, men's and women's skate, men's and women's running. Color remains a key driver for both men's and women's running.

We ended the quarter with inventory up 5.1% on per-door basis, primarily due to increased unit cost and increased depth on key categories such as athletic. On-hand footwear units were down 2.6% on a per-door basis at the end of the third quarter. Aged inventory remains low, and we believe we are well-positioned to capitalize on holiday sales in the fourth quarter.

Moving to the fourth quarter, although comparable store sales quarter-to-date are slightly negative, as we all know, the current week is one of the largest sales week of the fourth quarter. On Black Friday last year, we felt that we were outpositioned in both opening times and promotions. We have worked very hard this year to make sure that we are in a position to capitalize on this important retail day. We will be open five hours longer than last year, and our promotions are spot on as compared to the circulars we have already seen on blackfriday.com. Our stores are ready, and our associates are excited to take on the number one sales volume day of the quarter.

As we move out of this week and move into the more traditional holiday time period, the Americana trend we spoke of during the last two conference calls will continue to grow. We view Americana as nautical, western, bucks, and riding boots, just to name a few. Additionally, we still believe that the athletic sales trend that we have experienced all year will continue with fresh color and exciting technologies. Lastly, we expect a positive but promotional performance in our boot categories, as we begin to experience a more seasonable weather pattern versus what we experienced last year.

Focusing on e-commerce, we are pleased with our current sales trends. During the third quarter, we launched mobile technology; and as expected, traffic from mobile and tablet is now accounting for over 20% of our overall traffic to the site. Our next digital opportunity is a kiosk test that we are launching in some of our smaller stores at the end of fiscal year 2012. This test will allow our customers the opportunity to see the broad assortment found online while shopping our smaller stores that often do not carry our full footwear assortment.

In addition to e-commerce, we continue to focus on signing up new loyalty members, utilizing both our brick-and-mortar stores and our e-commerce site. This is a huge opportunity for us, as our loyalty members account for over 10% of our total sales, which is a tremendous increase from earlier in the year. These loyal shoppers on average spend 30% more per transaction than the Company average. We started well behind some of our closest competitors, but our store personnel, marketing, and e-commerce teams are focused in executing on the goal of increasing our loyalty members threefold in the next 12 months.

In closing, I would like to thank our entire team for their extraordinary efforts as they executed our key initiatives by successfully opening 31 stores in the US and Puerto Rico, and ensuring our stores are merchandised with a broad assortment of trend-right footwear for the entire family, while raising average unit retails in a difficult economy. We have incredible associates at every level of the Company who are committed to making Shoe Carnival best-in-class in the family footwear channel. Our team looks forward to driving organic growth and generating increased cash flow to enhance shareholder value long-term.

With that overview, I would like to turn the call over to Kerry Jackson for details on our financial results and outlook for the remainder of 2012.

Thank you, Cliff. I will discuss our third-quarter and year-to-date financial results in more detail, followed by information on cash flows, and conclude with our outlook for the fourth quarter of fiscal 2012.

Our net sales increased $29 million, or 13.4%, to $24.4 million (sic - see press release "$244.4 million") during the third quarter of fiscal 2012, compared to the prior year's net sales of $215.5 million. This increase was primarily due to an $18.9 million increase in sales generated by new stores opened since the beginning of the third quarter last year, as well as our e-commerce site, which we launched in September 2011, and a 6.2% increase in comparable-store sales. These increases were partially offset by a $2.9 million loss in sales from the seven stores closed since the beginning of the third quarter fiscal 2011.

The gross profit margin for the quarter increased 1.1% to 31.3%. Our merchandise margin increased 0.6%, and our buying, distribution, and occupancy costs decreased, as a percentage of sales, by 0.5%. The decline in buying, distribution, and occupancy as a percentage of sales, was primarily due to improved leverage on our occupancy costs associated with the higher sales in the quarter as compared to last year.

Selling, general, and administrative expenses increased $7.6 million in the third quarter of fiscal 2012 to $55.9 million from $48.3 million in the third quarter of last year. As a percentage of sales, these expenses increased 0.5%. The increase in SG&A was primarily due to a $5.1 million increase in expenses for new stores, net of expense reductions for stores that had been closed. In addition, we experienced an increase in incentive compensation of $1.8 million due to the Company's improved financial performance.

Total pre-opening costs for Q3 were $830,000, an increase of $475,000 over the third quarter last year. Of the total pre-opening costs incurred in Q3, $523,000 is included in SG&A and $307,000 is included in cost of sales for pre-opening rent and freight. In Q3 last year, we incurred $355,000 in pre-opening expense, of which $178,000 was in SG&A and $177,000 was included in cost of sales.

With Mark's retirement, a one-time retirement and severance payment of $1.4 million was authorized by our Board of Directors and was included in our quarterly results of operations. Our quarterly results also included expense reductions for amounts previously accrued for him under our performance-based executive compensation plan and forfeiture of his non-vested stock awards. The difference between the payment and the accrual reversals was not material.

The effective income tax rate for the third quarter of 2012 was 40.2%, as compared to 37.8% in the same period in fiscal 2011. The increase in the effective income tax rate between the comparative periods was primarily attributable to a non-deductibility of compensation attributable to Mark's retirement. The effect of the increase in tax rate reduced earnings per diluted share by approximately $0.025.

Now, let me briefly discuss our year-to-date financial performance. Net sales during the first nine months of fiscal 2012 increased 11.8%, or $68.7 million, to $649.3 million, as compared to the same period last year. Comparable-store sales increased 5.7%.

Net earnings for the first nine months of fiscal 2012 were $26.1 million, or $1.28 per diluted share, compared to net earnings of $23.1 million, or $1.15 per diluted share, in the first nine months of last year. On a percentage basis, net income increased 13%, and diluted earnings per share increased 11.3%. Included in year-to-date earnings is a $2.4 million pre-tax increase in store pre-opening costs. This increase reduced diluted earnings per share by approximately $0.07.

Now, let me discuss our cash position and information affecting cash flow. Depreciation expense was $4 million in Q3 and $11.8 million on a year-to-date basis. Depreciation expense is projected to be approximately $15.9 million for the full fiscal year.

We expended $20.8 million in cash during the first nine months of 2012 for the purchase of property and equipment, of which $17.7 million was for new stores, remodeling, and store-relocation activities. The remaining capital expenditures were used for continued investments, technology, and normal asset-replacement activities. Cash lease incentives received from landlords were $4.7 million during the first nine months of 2012. Capital expenditures for fiscal 2012, including actual expenditures during the third quarter, are expected to be between $25 million to $26 million. Approximately $13.6 million of our total expenditures are expected to be used for new-store construction, and $7.6 million will be used for store relocations and remodels. Lease incentives to be received from landlords during fiscal 2012, including actual amounts received during the third quarter, are expected to be approximately $6 million.

We currently have $25 million authorized under our share-repurchase program, and during the third quarter of fiscal 2012, we repurchased 81,300 shares for $1.9 million.

My final comments today will focus on sales and earnings expectations for the fourth quarter of fiscal 2012. We expect fourth-quarter net sales to be in the range of $215 million to $220 million, with a comparable-store sales increase in the range of 2% to 4%. Earnings per diluted share in the fourth quarter of fiscal 2012 are expected to be in the range of $0.19 to $0.23. In the fourth quarter of fiscal 2011, comparable-store sales decreased 3%, and the Company earned $0.16 per diluted share. Included in the earnings, at the high end of the estimates for the fourth quarter, is the expectation that merchandise margins will be up approximately 50 basis points and buying, distribution, and occupancy cost, along with SG&A, will show slight leverage.

The fourth quarter this year will include 14 weeks, compared to 13 weeks in the fourth quarter last year. The extra week is worth about $15.8 million to $16.8 million in sales, and increases diluted EPS by about $0.03 in Q4 this year. The extra week is not included in the comparable-store sales calculation for the quarter.

For fiscal 2012, we expect net sales to be in the range of $864 million to $869 million, with a comparable-store sales increase in the range of 4.8 % to 5.3%. Earnings per diluted share for fiscal 2012 are expected to be the highest in the Company's history and be in the range of $1.47 to $1.51. This is a 12% to 15% increase over the prior-year diluted earnings per share and includes a reduction in diluted EPS of approximately $0.07 due to an increase in store pre-opening costs. For fiscal 2011, comparable-store sales increased 0.7%, and earnings per diluted share were $1.31.

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

(Operator Instructions)

Sam Poser, Sterne Agee.

I have a bunch of questions about guidance. I guess number one, last year in the fourth quarter, gross margin was down 168 bps, and you are expecting, it sounds to me, to get about 70 bps back on the best on the high side, after picking up 103 off a 15% -- 15 bp increase last year. Can you give me some idea why you're not expecting more gross-margin recovery off of such a low gross margin last year?

Sam, -- good afternoon, by the way, Sam. The best reason I can give you is that our business has been rather soft for four out of the past five weeks. Other than athletic -- our athletic business has been good, but the brown-shoe business has not been where we wanted it the past, like I said, four out of the past five. And that's a little concerning, and until we see a little better run rate and we get through this weekend, we really wanted to plan conservatively. We think there is -- I will tell you, Sam, there is opportunity there, but we feel best at this point, until we can see what the customer participation rate is going to be as we move further in the quarter, before we can look anymore positively at it.

Okay, thank you. Just to clarify, the revenue number that you have given us, does that include the additional $16 million or not?

Yes, it does. The revenue number, the top-line sales includes the extra week, but the extra week is not included in the comp-store percentage increases.

Correct, so you are looking -- so, your new-store productivity, it sounds like -- so, you're looking for new-store productivity about 90% to 110% is that because of the stores in Puerto Rico? Because, those guys (inaudible) basically?

No, I think you are overestimating in your -- if that is what your model is coming out, I think you are overestimating our new-store productivity. We have been pleased with our new stores, how they have come out, and we have talked about that the Puerto Rico stores have been a very nice surprise. Plus, Dallas has come out of the box well because of the way changed and open more stores in a higher concentration, but they are not achieving that -- as a group, they are not achieving that level of a mature store, yet.

Okay. Then, I am just a bit confused because if you back -- and, you said it is $0.03, so on the low end, basically, at the low end of your guidance, you say that you are going to earn $0.01 more than last year, and last fourth quarter was bad. I understand you started off slow. Is this something you may think of rediscussing at ICR, or something, if things change?

Actually, we made -- in the fourth quarter, we made $0.16, and we are guiding at the low end to be $0.19 for (multiple speakers).

But, then you have got $0.03 of that is the extra week, so you are flat on the low end?

Yes, but you have the extra week; and then, you also have Mark's severance, or the tax rate of that playing into that, so it is a wash.

What is the tax rate we should be using for Q4?

The effect to the tax rate from the retirement severance package is going to be about $0.005 in the fourth quarter. It was $0.025 in Q3; it will be $0.005 in Q4, so your point is correct.

We are looking for flat earnings on the low end, when last year was about as bad as it could get. I guess, even with the slow start, and I would argue probably less than the first three weeks of the month, or where we are so far month to date, are less than -- especially given the extra week are probably less than 7% or 8% of the month -- of the quarter, excuse me. Given how strong --?

It gets back to, Sam, as we said, we are -- even though last was difficult, we are actually slightly negative on comps, so for the first three weeks of November, even though that it was a difficult November last year, also. So, we're a little concerned on the trend; however, we think we are much better positioned for the day after.

However, if you look at, as Cliff said, all the other people at Black Friday are advertising boots, also. We think we are very well positioned for boots, fresh looks at aggressive pricing; however, we feel at that promotional-boot category is going to be promotional in the fourth quarter; and therefore, that's where we have somewhat tempered our previous expectations. We have given qualitative expectations up to this point, but because of what we are seeing in the marketplace, this is where we -- this is the guidance we'll feel comfortable right now.

Now, we may end up being proven that the assortment that we selected is very strong and our promotional pricing is going to drive the people in our stores; however, what we're doing is saying -- taking a more of a middle-of-the-road approach and leaving some opportunity for over achievement, but we want to be a little cautious going into it based on the trend.

Are your margins -- are your margins -- I'm sorry.

Go ahead, ask the question.

Are your margins to date ahead of last -- are your margins to date, even with the negative comps, running ahead of last year?

Sam, we are not going to talk about margins quarter to date. I will say this, we are hearing in the marketplace, and I do believe it is to be the case, that boots are going to be a very promotional category as we move through the quarter. That is built into our guidance at this point. If boots are not as promotional as what we're hearing in the marketplace, then there's opportunity, but boots are such a large percentage of our fourth-quarter sales guidance that when you hear, and when you see, and I encourage you to take a look at the inserts online on the website I mentioned, and you will see what I am talking about. And from what we hear, that is going to continue through the fourth quarter.

Sam, to be fair to other analysts, if you had one more question, we'll take it, but we need to (multiple speakers).

Thank you, no, I'm all done. I'll -- thank you very much.

Jeff Stein, Northcoast Research.

Cliff, congratulations on your promotion. That is terrific.

Taking a look at, again, to follow-up on Sam's question, it seems to me everybody in the industry bought boots down this year compared to last. So, it would seem to me that, unless everyone has suddenly recognized that even that is too aggressive, I'm a little bit confused as to why the industry would be so promotional and maybe -- again, this is stepping back from Shoe Carnival for a moment. Can you, perhaps, provide us with a little insight into why that might be?

I would be glad to, Jeff. We also bought boots down. We planned all along, and talked about it most of the year, that we would sell fewer units of boots at a higher retail. And, that's the way we bought it, that's the way we own it, and that's the way we planned it for the fourth quarter. And, I believe that other retailers planned pretty much the same thing.

There's one category or two of boots that aren't working, and in fact, those boots -- the shearling kinds of boots that were so bad last year are even worse this year than they were one year ago. The promotion with those kinds of boots start, maybe not at the top because they're protected, but in the middle and all the way down, from a price-point standpoint. Then, what we are seeing is, not only a promotional cadence on those kinds of boots, but we are seeing promotional cadence on riding boots, which we had planned to sell at a higher retail. We are seeing promotional cadence on western boots, if you look in some of the inserts that are posted online, you will see western boots selling for $19.9 to $25 and not in cheap stores, but in full-line department stores. We are concerned about the promotional cadence and the way that other retailers are reacting to their boot business.

One other aspect to this is the weather. As bad as the weather was last year, and I didn't get a chance to say this to Sam, but as bad as the weather was last year, from a warm trend, it is as bad this year. When I look at our weather boots, and we are down double digits in weather boots as compared to last year, that creates an issue as well. We, again, our plan all along was to sell fewer units at a higher average retail. We believe that we are going to -- we are definitely going to sell fewer units, but those fewer units are going to be sold at slightly higher retails than what we planned -- slightly lower retail, excuse me, than what we planned.

Okay. Cliff, away from boots, are there any other issues within the brown-shoe categories that you can call out -- any areas of weakness?

The only area that we are concerned -- the only area that is still weak is women's dress shoes. I mentioned that in my prepared remarks. This is -- we are going on the second -- getting ready to go on the second year of down-trending dress-shoe sales. Now, we have positioned some of those dollars out of dress shoes and into other categories that are retailing well, like molded footwear, we are doing well with boat shoes, doing well with other sport shoes. Flats, women's flats, are not selling as well as we had expected, and that is one area of slight concern. We don't expect to sell a lot of flats this time of year anyway, but that is an area of slight concern.

I mentioned it to Sam, and I need to reiterate one last point, Jeff, is that outside of the brown-shoe business, which is driven -- the negative comps in the brown-shoe business is driven by negative comps in boots, month to date, our athletic business is trending ahead nicely.

Good, very good. If I can, one last question, are you guys including e-commerce sales in comps? And if you are, what affect did it have on third quarter, and maybe, is it a large enough at this point to start calling it out in terms of its contribution to top line?

It was not comp in the third quarter, Jeff. It just went comp in the fourth quarter.

Okay. Will it be included in comp-store sales on a go-forward basis?

It will be included in comp-store sales, but we will not call it out separately.

Got it. Okay, thank you very much.

Scott Krasik, BB&T Capital Markets.

Thanks for taking my questions, and Cliff, congratulations as well.

Thanks, Scott.

Just a little bit more commentary, you made a statement the last-year November wasn't strong either. Can you go back a little bit, maybe say what was happening last November, or what wasn't hitting as well? Then, as far as December and January go, any big differences one year ago?

The issue with last November and last fourth-quarter period, as Sam was calling out, is the fact that we had a very mild fourth quarter over the entire country, and it affected our boot sales. We are experiencing, somewhat, the same trend this November. Now, it doesn't mean that that trend is going to continue forward, we don't know -- we're not very good weathermen, but we have seen that same pattern, actually, probably a little milder this November than last, and that has affected the boot sales and (multiple speakers).

Cliff, I'm sorry, but if you look at the minus-three comp in the fourth quarter last year, or maybe the monthly progression, was it worse than that in December and January? Was it better than the minus three you reported in November?

What we saw, Scott, was that November was the worst of the month. We had, kind of what we saw now, kind of a weak start to the month; but really, November is all about the day after and that weekend. And, that weekend was extremely tough for us because -- Cliff's talked about it that we think we were out positioned, and we weren't open as early as other retailers were, and we got -- we were out positioned that way. That won't happen to us this year.

We did have a very difficult day after and the Saturday following, and we ended up down just into double-digits decline on comps in November. After that, we decided that we had to get aggressive because the weather wasn't -- we were too far into the season, and we had to get aggressive on markdowns, and we ended up out of December and January rather flattish.

Okay. That's helpful, actually. Then, Cliff, the non-athletic trends, Americana, the boat shoes, similar to what you said about the boots, you have been talking about them for a while. I know you planned boots down on a unit basis -- should we assume that a lot of these non-athletic trends that have been around for a while are going to be tailing off in the next season or so?

From a boat-shoe perspective, because we have been talking about boat shoes now for several years, what's happening in boat shoes is that it started in the south -- started, actually, in the Gulf Coast region and it has worked its way north, and now it is expanding into newer northern markets. So, we see that as an opportunity, at least through back-to-school, to show nice increases as new markets get onto this boat-shoe trend. The markets that began the boat-shoe trend are running increases, they are just not running the kind of increases that the northern new markets are running.

From a western standpoint, because we also look at that as Americana, we see that continuing on. And, it is actually performing well for us today, and we see that as something that will continue in through the spring. Riding boots will still be strong through the fourth quarter; but obviously, as we going into first quarter, we won't see riding boots play much of a part of our business. What I think is that that whole trend, not only in womens, but it is also happening in mens with boat shoes and pennies and I mentioned that -- and, I know you have seen bucks everywhere, and we think that is going to gain in momentum as we head into spring and toward back-to-school.

Okay. Any of this commentary around -- or your traffic was up last quarter, but at least relative to November and what you're expecting, any big difference the fact you are an off-mall operator versus on mall? Are you just not able to attract the traffic at these big promotional periods, other than back-to-school?

We truly believe, Scott, that our issue last year was twofold. One, we didn't open up with the competition. We opened up later than the competition, and that was a miss on our part. Number two, the department stores were much more promotional than we expected on the day after, and we weren't as prepared for that as we should have been.

This year, we are prepared for both of those two issues. We will open up with the department stores, and we will be -- actually, if not as promotional, more promotional as they are. So, we feel like we are very, very well positioned for Friday's sales.

Okay. Lastly, Kerry, the comp that you accounted for in Q2 this year, the $780,000 or so, and you had talked about potentially reversing that in Q3 or Q4 if you didn't hit an EPS target, where do we stand with that?

Based on the guidance we gave, that is one of the factors that was taken into account on the expense side of it. Previously, we had talked about that it would be difficult for us to leverage Q4 from an SG&A standpoint, but I said in my prepared remarks, we are going to expect slight leverage on that. Given the sales and margin trends we are looking at, we have been aggressive about trying to control expenses in the fourth quarter. And, if we hit those numbers, we would not be able to vest that stock, so that's included as a reversal in some of the cost savings in helping to leverage the SG&A in fourth quarter.

Okay, so your current sales and margin outlook assumes that you wouldn't hit it, so you are assuming a reversal in that Q2 charge?

Yes, that stock would only vest -- it was at a higher level of EPS than $1.51.

Okay, that is helpful. Thank you, guys.

Jill Caruthers, Johnson Rice.

Question, I'm wondering if you would quantify the percentage of boots that make up fourth quarter? I know they are a significant category for you.

Jill, I have that number -- you can give me one minute to get it for you.

Last year, Jill, if this will give you a reference, our men's, women's, and children's boots, all types of boots, were about 27% of our total business.

For the year or for the quarter? For the quarter?

For the quarter.

Okay. Then, I guess, just speaking on inventory, how are you feeling about that on the boot side? It sounds as though you are getting more promotional to be competitive with the department stores. Just some more commentary about how you feel about the inventory right now, today?

We feel good. Our inventory, from a [peer] standpoint is down from one year ago on a per-door basis, which is exactly where we planned it to be. And as I have said, we have fully expected to sell fewer boots than we sold one year ago, just at a higher retail price, due to the fact that we felt weather last year was such a factor and the fact that we had to mark down our boots to get them to move. And, that primarily happened in December. If weather cooperates, then we will be able to drive even higher retail prices out of the boots that we own.

Okay. And last question, with two more months under your belt in Dallas and Puerto Rico, could you talk about any new findings, opportunities there?

We are, as Kerry mentioned, we are very bullish on both Puerto Rico and Dallas. Next year, we are looking to open up, in Puerto Rico, an additional two to four stores. We can't get specific at this point because we're still in the negotiation stage, and the same in Dallas, two to four additional stores.

Okay, thank you.

Mark Montagna, Avondale Partners.

Just wanted to hit on the boots like everybody else, when -- you mentioned third-quarter comp was, obviously, quite strong, and it sounded like boots were okay, but did you have to promote the boots in the third quarter to get the pretty good comp out of those?

Actually, we didn't, Mark. The boot sales came, actually, earlier in the quarter instead of later in the quarter. That's why we felt like that, and we still fill like, that if the weather cooperates that we have opportunity there, but -- we were selling, early in the quarter, for back-to-school, and as we went through the first two weeks of September, we were selling western boots at really good rates and riding boots at a really good rate, which is something that we expect to continue to be good as we go through the fourth quarter.

But when you say a good rate, do you mean pace of sales, or are you talking the gross margin rate was -- would you say the --?

Both, I'm talking about from an increasing sales standpoint and from a gross margin. We have not taken markdowns; in fact, we did not have to really promote boots that much in the third quarter at all.

Okay. But, it sounds like, obviously, you are going to promoting them now, and even if the weather did cooperate, you are kind of -- just with the marketing already in the chute, it would be hard to retrench from promoting the boots at this point.

No, that is not the way we operate. We will promote boots on the day after, that is baked into our plan, has been since the first of the year, and we bought to that. The way we operate our business is that we hang signs on the product based on the way the product sales. So, if boots continue to be -- if boots pick up, the signs come off -- either off the product, or the signs go up. We don't -- the marketing that we do from after the day after through the end of the year is not item specific. So, it gives us the flexibility to reach a higher retail on a category that is hot, or gives us the flexibility to take markdowns on a category that is not.

Okay. Then, are you able to rebalance inventory going forward to, perhaps, put a greater emphasis on athletic? Would you have to relay some of the store in order to do that, or do think you are going to have to rebalance more towards athletic?

What happens is in January and February -- the past two years, is athletic has been a very strong part of our business, and we planned that already. Our athletic business is, from an inventory standpoint, is planned up as we go into January and it's planned further up as we go into February, to fully execute or be prepared for the sales that we expect to come.

Lastly, in terms of the running shoes, when you mentioned the strength in athletic, running with the third one you mentioned, are you seeing a slowing in the running category?

No, please do not read into anything I said as in order of importance. Those categories -- Mark, I hate to even admit this, but I called out the categories in the order in which they show on my report, not in order of importance.

Okay, that sounds great. That was all I needed, thank you.

Chris Svezia, Susquehanna Financial Group.

Cliff and Kerry, congratulations to you both; and Mark, if you're listening, all the best. I guess first question I have is -- I guess first, Kerry, for you the -- just want to have this, the extra week, it is included in your revenue. It is included in your merchandise -- your occupancy and SG&A leverage assumptions as well? The extra week?

Yes, the extra week is included in all of our assumptions for the fourth quarter in revenue and expense.

Except comp?

Except comp because we are comparing 13 weeks against 13 weeks.

Right, no, I got you. Okay. And, not to beat this to death, but just so I understand this on the boot side for a second. You saw strength in the third quarter, riding and western-influenced boots. What you are seeing right now is, I guess you would characterize it as those categories have slowed, or is it also --?

No, not at all.

Okay --

Chris, not at all. Those categories are still trending way ahead, but we had also planned for dress boots and sport boots and weather boots to all be selling by this time as well, and those are the categories that aren't trending.

Okay. So Cliff, it is fair to say that the colder weather categories have really been more the underperforming than more the fashion piece?

Absolutely. That is exactly what is happening.

All right, that is helpful. Then, what gives you -- play devil's advocate -- what gives you the confidence you can do the 2% to 4% comp, given that you are trending down low-single digits right now? Is it the fact that you'll be opening up five hours longer, is it -- just walk us through why you have that level of confidence?

That is one of the reasons. I will admit that. We expect a big day on Friday. And, it is a large part of our, of not only this month, but as for a good part of our quarter.

That, plus the fact that we do expect, truly expect, to sell these boots that we own at a higher retail price than we sold them last year. And, when you factor this week into our plans and what's going on with athletics, which again, I am going to tell you is trending up this quarter, and along with selling boots at a higher retail than we had to give them away for last year. Remember, we had a very -- as Kerry mentioned, we had a weak day after last year, so all the boots that we had planned to sell the day after last year that we didn't sell, we had to take markdowns on. We don't see that continuing, so therefore, we should be able to sell those boots at a higher retail going through December and in January.

Okay. But, if you had to get more promotional on the cold weather --?

Chris, can I add just one thing to that commentary -- and that is exactly how we built the 2% to 4% comp increase, is we looked at the trend that we were running in all, what we call, buy groups, and then we took the boots that we expected to sell at the price we expect to sell them, and we came up with our comp guidance. We truly believe that these boots are going to sell slightly higher retail than we got last year.

Okay, even if you take into consideration you guys being promotional on more of the cold-weather products, reducing price there, you are still -- that is taken into that consideration?

Absolutely, because of the fact that, again, you have got to remember, we didn't sell them the day after last year -- that weekend, from Friday through Sunday, is a big portion of our fourth-quarter sales.

All right, fair enough. Okay, that's pretty much all have. All the best to you guys, thank you.

Harry Ikenson, Ikenson Research and Consultants.

Congratulations, Cliff and Kerry, and my best wishes to Mark.

On the boot category, could you give us an idea of what percentage is the weather of the category that is weak right now?

Right now, it's not a very large percentage --

Okay --

As a category, it really trends differently every year, based on the weather. And, it also trends -- you also have to ask yourself what you consider to be weather -- is that sport boots or is it true-weather boots, is it -- so, I don't know, that's a difficult percentage for me to give you from season to season. I will tell you this that it is a much larger percent in December than it is -- in November and December, than it is any other month of the year. And, I know that's not an answer, Harry, but I don't have the percentages --

Let me ask you a question on inventory. How are your inventories this year, as far as starting the quarter with percent of clearance versus last year? Then second, it sounds like you have much more newness this year the last year. Could you give us an idea of how much more newness you have this year than last year?

If you are talking specifically about boots versus our clearance overall -- our clearance overall is better this year than last year. So, let me just get that out of the way, whether it is boots or shoes or anything. Our newness factor is better than last year as well. It would be because clearance is down.

But the boots, we completely redid the boot category. We decided last year that we took such a hit in boots that we started from the ground up and cleared all those boots out, bought all new boots for this year, and up until the last two weeks of October, thought we had done a good job of identifying, and still think we have done a good job. I truly believe that what we have seen from a weather patterning over the last four weeks is what is going on with our boot category.

Okay. Last year, you were not priced as competitively, and you are saying now you are equal to, or even more competitive? So, last year (multiple speakers) okay, were you maybe 10% higher than the competitors last year? Just to get an idea of difference of magnitude to this year.

It was more than 10%, Harry, it was --

Wow, okay --

More than 10%.

So, to me that explains why you feel confident that -- plus the other factor you mentioned. All right, that's it for me. Thank you very much.

Jeff Stein, Northcoast Research.

Kerry, just a clarification on the SG&A, you mentioned that the severance compensation was $1.4 million in Q3, but there were offsets to that, so the net effect was $0, is that correct?

The net effect was immaterial -- that is correct.

Okay, great. The other thing -- another comment, another question I have for you on e-commerce, I'm just curious, what percent of your business that's been coming in through the first nine months is coming from markets that would be outside of your core-store territory? So, in other words, are you getting business -- go ahead.

We are actually making sales in all 50 states. We looked at that the other day. But, the core part of our business from e-commerce is coming from where our stores are mainly located, but we have made sales in all 50 states.

Okay. Can you talk a little bit about average order size, and -- I know there were some issues with your e-commerce business earlier in the year, you weren't happy with it, you made some changes to the site itself, and I guess one of your vendors. Can you talk about how you're feeling about that business as the year comes to an end here, and as we head into next year, do see that as being an important driver for you in 2013?

You know, I don't -- it is not at a size yet, Jeff, that I think it's going to be a huge driver of our comps. We are happy with the way it is trending up. We are, actually, happy with the -- much happier with the site today than we have been at any other time during the year. We have begun to market the site more aggressively, but the volume is just not there yet to be a huge percentage or a huge boost to the comps.

Okay. And, you mentioned that about 20% of your traffic now is coming from mobile apps. Would that also mirror the percent of transactions that are coming to the site, or is it still --?

Not yet, but we didn't expect that to happen either, Jeff. We didn't expect it to mirror the transactions.

What you need -- the reason mobile is important is that when customers in our -- competitors are in their own store, and they see something that they like, and there are two things that can happen, either they can -- if the size isn't there, they can make the purchase online right there in the store, or if they are in a competitor store, they can comp shop right there with their mobile phone. And, that's why it's important for us to have mobile, to make sure that the customer, no matter where they are shopping, whether it is the mall or they are driving by or wherever, that they can see what is going on in Shoe Carnival.

Are you working with your vendors to carry the inventory for you? In other words, is there a consignment aspect to your e-commerce business?

Not yet. That is something that is on the list to get done, but that is not part of our capabilities yet.

Okay. And, final question for Kerry. Kerry, I know pre-opening expenses have been a burden this year, can you give us some guidance in terms of your thinking for next year, given the fact that next year is primarily a backfill year?

We should see a reduction, a significant reduction in pre-opening costs next year, even with opening more stores. And the reason is, we are not going to be opening the two big markets like Dallas and Puerto Rico, where we had to do a significant amount of investment spending in there. However, we will still continue to spend a lot of money in Dallas and Puerto Rico for regular advertising. So, what happens is the pre-opening costs that we are incurring this year turn into a base revenue -- or base-expense structure of those markets for next year.

However, we will have more sales to go against them because we are going to be opening more stores, and we will have the full-year effect of having those stores open the full year, particularly in Puerto Rico, since it opened in July of this year for us. I think what you are going to see, is the expense structure will be easier to leverage next year than it was this year because the pre-opening costs won't be as big a burden.

Okay, great. Thank you very much.

Sam Poser, Sterne Agee.

I have a what if question. Given that the month is going to be made as of Friday and Saturday, for all practical purposes, why didn't you wait until next week to do earnings, or the following week, so there wasn't all of this what if, then -- so you would have a much better handle on a lot more of your quarter in the hat and trend and how promotional things really are looking and where the customer really is -- just a question, as I was thinking about giving earnings three days ahead of Thanksgiving versus just after, when you have a lot more information at your disposal.

It's a good question, but we are reporting in line with our competitive set, and I think that if we would have announced that we are going open -- we are going to release earnings sometime in December, basically, that it might have worried the analyst, despite it, if we were the ones who weren't reporting. I think what we have to do is report on our normal cycles, as we typically do, and inform the shareholders and give them our best viewpoint at that point in time. If we find that we have significantly underestimated the opportunity, we will come back and communicate with the shareholders again. If we -- just as we would be good prudent managers of the business and communications to the street on top of it.

All right. Thank you very much, and good luck. And, I will be the last to congratulate you both.

Okay, thanks Sam.

Gentlemen, it does appear there are no further questions at this time. Mr. Sifford, I will turn the conference back over to you for any additional or closing comments.

All right, thank you.

I would like to, once again, congratulate our Shoe Carnival associates for recording another record quarter and thank our vendors for their continued support. We do appreciate you joining us today, and I look forward to speaking with many of you over the coming months. Thank you.

That does conclude today's teleconference. Thank you all for your participation.