Good afternoon, and welcome to Shoe Carnival's Fiscal Year 2015 Second Quarter Earnings 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 to not to place undue reliance on these forward-looking statements, which speak only as of today's date.

The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release to reflect future events or developments..

I will now turn the call over to Mr. Cliff Sifford, President, Chief Executive Officer, Chief Merchandising Officer of Shoe Carnival for opening comments. Mr. Sifford, please begin. .

Thank you, and welcome to Shoe Carnival's second quarter fiscal 2015 earnings conference call. Joining me on the call today is Kerry Jackson, Senior Executive, Vice President, Chief Operating and Financial Officer..

On today's call, I'll provide a brief overview of the company's quarterly performance, Kerry will review the second quarter financial results and our guidance in more detail. Then we'll open up the call to take your questions..

We are pleased with our second quarter financial performance. Our strong 84.6% increase in quarterly earnings to $0.24 was driven by a combination of higher merchandise margins and lower advertising expenses.

Second quarter comparable store sales of 0.5% were at the high end of our expectation and the guidance we provided on our earnings call last quarter..

Our second quarter comparable store sales were up mid-single digits through mid-July, and as we expected, major changes in tax-free holidays shifted approximately $7 million of sales out of the second quarter into the third quarter. We are pleased that our August comparable store sales were up high single digits, in line with our expectation..

As a reminder, last year in the markets we serve, 13 states had tax-free holidays that were observed at the end of July. This year, 9 states shifted their tax-free holiday to August. In the second quarter, due to the tax-free holiday and back-to-school shifts, store traffic and units per transaction were down.

However, average dollar transactions and conversion showed positive growth for the second quarter due to the strength of our inventory selection. We ended the quarter with inventory up approximately 2.9% on a per store basis, again which was in line with our expectations, primarily due to the shift in the back-to-school date and tax-free holidays..

We continue to be pleased with our strategic initiatives to drive growth across multiple channels. We added over 758 members to Shoe Perks, our loyalty program, and we continue to be pleased with this growth initiative.

Our Shoe Perks members spend, on average, 28% more per transaction than nonmembers and accounted for over 53% of our second quarter sales..

Our team has done a great job with our multichannel initiatives to position Shoe Carnival as a convenient choice for customers in terms of where and when they shop and by providing a robust selection of nationally recognized footwear brands..

We continue to be pleased with the performance of our online sales, and we are excited with our SHOES2U sales initiative launched in June. This creates an endless aisle for our customers to find the size, color and brand of footwear they are looking for when they need it.

The feedback from our store associates has been very positive, as it helps to increase store conversion by opening our full inventory selection to every store. For example, if a store does not have the particular size or style a customer is looking for, the store associate can order on the spot and ship it directly to the customer's home..

We continue to make improvements in our multichannel capabilities, and our next steps will include the options for customers to buy online and pick up in store and the ability to buy directly from our Shoe Carnival app with direct-ship..

Turning now to real estate. In the second quarter, we opened 5 stores and relocated 1 store and closed 6 stores. This is in line with our plan to focus on strong trade areas for growth and to take our underperforming stores that have minimal opportunity to improve and either renegotiate lease terms or relocate or close a store.

We ended the quarter with 400 stores in 34 states and Puerto Rico. We recently hosted a major grand opening event in Philadelphia, our latest large market, with 7 stores total in the Philadelphia market today. In addition, we announced, in the second quarter, our plan to launch a new complementary small-market store concept.

We believe there is a tremendous untapped opportunity to expand into new and fill in existing markets within an approximately 5,000 square-foot store, less than half the size of our current locations.

This will provide customers in the local communities a convenient shopping experience that builds upon Shoe Carnival's strong track record of delivering moderately-priced branded footwear for the entire family.

Our real estate team is currently working with landlords, and we look forward for opening our first 2 small-market stores in the second half of 2015 with consistent expansion over the next several years. In total, for the remainder of the year, we plan to open an additional 9 stores, all in existing markets, and close 3..

Moving on to merchandise. As I said earlier in this call, we started off the quarter strong, and then in this last half of July, we were impacted by the shift in back-to-school dates and tax-free holidays to quarter 3 from quarter 2.

Despite the shift in the second quarter, we were very pleased with our sandal sales for both the women's and kids department. In addition to sandals, we experienced a nice double-digit increase in canvas for men, women and kids. [Indiscernible] sales by department for a moment. Women's was essentially flat.

Our best-performing categories were junior dress wedges, ladies pumps, casual sandals and boots. Men's was up low single digits, driven primarily by men's casuals and work shoes. Kids was down mid-single digits, driven entirely by the shift of back-to-school and tax-free holidays.

Adult athletic was up low single digits, driven by canvas, women's fashion and athletic and men's basketball. For the month of August, our performance was strong with comparable store sales coming in with a high single-digit sales increase. This was led primarily by athletic, which was up double digit in total for both kids and adults.

Women's boots were up high double digits, women's sandals up in the teens, and the men's casual boots where up low double-digit..

As I mentioned earlier, we are pleased with our comp sales performance in August, which is in line with our expectations for the quarter. The result for August is included in our guidance for fiscal 2015 with store sales positive 3%.

However, it is early in our third quarter, and we are really excited about our selection of boots for the family as we head into the fall and winter season.

We believe we have a great merchandise assortment and favorable inventory position to generate strong sales as the weather gets cooler and believe there is a potential for us to outperform our guidance, that we see similar weather patterns to last year..

But as Kerry will review, we chose to be conservative and reiterate guidance as we think about the back half of the year given the tough compares in the second half of last year..

With that overview, I would like to turn the call over to Kerry. .

Thanks, Cliff. Second quarter net sales increased $5.7 million to $227.8 million as compared to the second quarter last year. The net sales increase was driven by higher sales of $9.2 million from the 36 new stores opened since the beginning of the second quarter of fiscal 2014 and a $1 million increase in comp store sales.

Partially offsetting the net sales increase were the $4.5 million loss in sales from the 18 stores closed since the beginning of the second quarter of fiscal 2014. Our gross profit margin for the quarter increased 110 basis points to 29.1% from 28.0% in the second quarter of last year.

This was driven by a 110-basis-point increase in the merchandise margin, while buying, distribution, occupancy expenses remained flat as a percentage of sales..

As we mentioned on our call last quarter, for the past 2 years in Q2, our merchandise margin declined a combined 90 basis points due to tepid response by customers to our spring merchandise and higher levels of clearance product. However, our customers' positive response to seasonal product this year helped us more than recapture the 2-year decline..

Selling, general and administrative expenses increased $442,000 in the second quarter of fiscal 2015 to $58.4 million. The small dollar increase in SG&A expenses was primarily due to a $2.6 million reduction in advertising expense for the second quarter. As a percentage of net sales, SG&A decreased 50 basis points.

Preopening costs included in both cost of sales and SG&A decreased $1.5 million in the second quarter of fiscal 2015 to $355,000. Store closing and impairment charges included in both cost of sales and SG&A in Q2 this year were at $593,000 compared to $326,000 in Q2 last year..

The effective income tax rate for the second quarter of fiscal 2015 was 38.8% as compared to 38.9% for the same period in fiscal 2014. For fiscal 2015, we continue to expect our tax rate to be between 38.5% and 39%. Net earnings for the second quarter were $4.8 million or $0.24 per diluted share.

For the second quarter last year, we reported net earnings of $2.6 million or $0.13 per diluted share..

Now turning to our cash position and information affecting cash flow. No purchases have been made this fiscal year under our share repurchase program. We currently have $25 million available under our existing share repurchase authorization..

Depreciation expense was $5.0 million in Q2. We continue to expect depreciation expense to be approximately $23 million for the full fiscal year. We expect capital expenditures for fiscal 2015, including actual expenditures year-to-date, to be between $26 million and $27 million.

Approximately $10 million of the total capital expenditures are expected to be used for new stores and $8 million will be used for store relocation or remodels, and we continue to expect lease incentives in the range of $5 million to $6 million for the year..

My final comments today will focus on adding a little color on our sales and earnings expectation for the third quarter this year. We expect our Q3 comp store sales to be up mid-single digits.

In Q3, we expect to deleverage our SG&A, primarily due to a $3.5 million increase in advertising cost, primarily based on the shift in back-to-school and tax-free dates.

Additionally, we expect our Q3 gross profit margin to increase slightly and expect the decline in our merchandise margin will be offset by leveraging of our buying, distribution and occupancy expenses.

This decline in merchandise margin is due to a combination of the shift in back-to-school and tax-free dates as well as expenses related to our multichannel sales initiatives..

Based on our view of the second half of the year, we believe we're on track to achieve our fiscal 2015 financial guidance, and as a result, we are reiterating our guidance for fiscal year net sales to be in the range of $977 million to $991 million, with comparable store sales increase in the range of 1.5% to 3%.

Earnings per diluted share are expected to be in the range of $1.42 to $1.48. This represents an increase of 12% to 17% or a fiscal 2014 earnings per diluted share of $1.27..

This concludes our quarterly review. Cliff and I are now available to take your questions. .

[Operator Instructions] We'll go first to Eddie Plank with Jefferies. .

I guess, Cliff, maybe if you could talk a little bit about the trends. You touched on athletics starting off the quarter strong and being excited about boots. I know that compares [indiscernible] from here.

I guess how do we think about it playing out over the next few months? Do you have the inventory to drive against those comps? And then, secondarily, how might we think about AUR trends over the next couple of quarters?.

So Eddie, we expect -- let me take the first -- last question first. We expect AUR to continue to climb through the second half of the year.

We're also very pleased -- I think I mentioned this in our prepared remarks, but very pleased with the performance of our athletic business during the month of August, and we still believe we -- all of our schools are not going back, so we still believe we have back-to-school sales yet to go for athletic.

As far as boots are concerned, we've been very pleased with boots actually all year. But then in the back-to-school season or during the month of August, we actually grew double-digit comp increase in our women's and kids' boot categories. So I'm pretty excited about that [indiscernible].

Now, of course, it's really early in the season and the quarter to state that it only takes one bad day in the month of November to wipe away the increase you have in the month of August. But the fact is that we have double-digit increase in the month of August last year in boots and this year, we were comping up double-digit on top of that. .

Kerry, I just wonder if you could give us a little bit more clarification. I mean the color on the third quarter is very helpful. Maybe how you think about merchandise margin you have in the fourth quarter, because you have a similar opportunity.

I don't think it's as big as the 90 basis point 2-year decline you had in the second quarter, but it's pretty meaningful.

I guess maybe how to look at it in the context of the tougher compare?.

Well, because we do we have -- we did have a down merchandise margin in Q4. We are expecting to see a rebound in that margin in Q4. So in Q4, we expect to get a benefit of a positive merchandise margin or gross profit.

On top of that, we don't expect to incur the additional costs we did for the port slowdown issues, and therefore, we expect the leverage of our BDNO, so we expect to leverage that nicely on the mid-single -- on an increase in comps because of lower expense structure. .

And we'll go next to Chris Svezia with Susquehanna. .

I guess -- first, I'm just curious.

August, how important is August relative to the third quarter? And can you just remind us when the business really began to accelerate last year just sort of your comp cadence maybe by month in the third quarter last year?.

Yes, August is the most important month of the year. Kerry will get you the percentage in just a second, but for the second -- for the third quarter last year, we were up almost 1% in the month of August, up 4 3 in September and 2 6 in October. .

We expect August to represent a little under half of our sales for the quarter and that's a little higher than typical because of the shift in back-to-school. .

Okay. And the reason why the product margin goes down is because of the mix shift, the promotion plus the higher cadence of athletic product in the third quarter, that being August specifically versus last year.

Is that why?.

Yes, the largest week of the year moved out of the last week of July and into the first week of August. .

Okay. And then just -- I guess, Kerry, for you, number one, I'm surprised you were able to leverage BDNO on a flat comp.

If you do a mid-single in Q3, why couldn't that be 50 basis points or more, something along those lines? Could you maybe talk about why it was so easy to have a flattish percent of sales and why that couldn't be up -- get significant leverage in the third quarter on a mid-single digit comp?.

Well, we should see some nice leverage in the third quarter. We're seeing a -- we're going see some decent dilution in our merchandise margin, like we said in the third quarter because of the shift of back-to-school and our omnichannel initiative, like we said all year long, will put some pressure on the top line.

So we will see some nice leverage against that because of the higher sales that are shifting in the quarter. And the Q2 leverage really came at a lower cost structure where we were able to be a little more efficient in our buying [indiscernible] costs against the prior year. .

Okay, just last question on this. I'm just curious, I mean your guidance -- I mean I was going to say, hey, your guidance in the back of the year for the balance of the year is sort of assuming flat, sort of no earnings growth.

I know what you're saying, there's some shifting going on between the SG&A expense component, but that still wasn't sort of dry, with a improvement in comp and you're comfortable about product and what can unfold potentially for upside in the third quarter and fourth quarter.

So maybe just sort of help us understand where you're really being conservative, where really the opportunity is, if you could at all?.

We said in our press release -- and Cliff said it in his remarks, I should say, is that the opportunity is that if we have big comps that will go again starting October, tail end of September through the end of the year. So we're being a little cautious on that thought process.

If we have the positive weather, which is really seasonable weather that we saw last year, then we -- as Cliff said, we should see some opportunity and it will really come from the top line and potentially from the margin of having better sales will typically lead to better margins. .

And we'll go next to Jill Nelson with Johnson Rice. .

Could you just talk about -- I know you mentioned that some of your markets are not back in school.

Could you maybe quantify that for us? I mean what percentage is not back in school yet?.

Jill, I don't have that number directly in front of me. I do have people here that can figure that out for me, however. It's roughly 10% -- about 10% to 12% of our stores and not -- that will go actually in another -- good lord, in another week or 2 -- a week or so. .

Okay, okay. It sounds like you're pleased with the launch of the SHOES2U initiative.

Could you maybe just talk a little bit more about that and kind of what upside you see with that initiative?.

The -- let me tell you the reason we're excited about it. First of all, it helps raise the conversion rate in our stores. So if the customer comes in, we can't find your size, we can't find the style, we can actually find the style for them right at the POS system and then complete the sale. So it raises the conversion rate.

I don't want to quantify that for you, I'm just going to tell you that from the omnichannel experience, the multichannel experience that we are creating at Shoe Carnival is going to be -- we feel is going to be accretive to our comp store sales as we continue to roll it out. .

Then just last quick one, on Texas, if you could talk about any variances of performance there just given what's going on with the energy market and what has... .

Texas is actually almost a tale of 3 states. You've got the border stores and with the strength of the dollar, we are seeing -- we're seeing some issues there. Then you do have the energy cities where with what's going on with oil prices, the stores there are not performing as well as the other stores that aren't as dependent upon.

I will tell you this that Texas as a whole is not near as bad as, I think, you guys think it is. It's not as positive as our total company, but it's doing okay. .

[Operator Instructions] We'll go next to Sam Poser with Sterne Agee. .

You answered some of my questions already. Can you give us some idea within the guidance -- within the range of the guidance that you've given? One, what mid-digit range means? Is it 3 to 6? Tell us what that is.

And then two, sort of on a base case, what's the range you're looking for, for Q4 in this number given the difficult comparison?.

The -- we consider mid-single, Sam, I believe we talked about this in the past, but 3.5 to 7. The second part of your question? I'm sorry [indiscernible]. .

What was the full -- what kind of range, given you're up against the difficult compare in the fourth quarter, in your current guidance, what kind of range are you looking for? Are you looking to be positive in the fourth quarter?.

We're absolutely looking to be positive in the fourth quarter in the mid-single digit range. .

Even with the difficult comparison?.

That is correct. We are very -- I'm telling you we're bullish on our boot assortment, we're bullish with what's happening with boots today. The fact that boots as a category is changing from a fashion standpoint. We know the shafts aren't as high. Lower shafts are working well today. We think mid shafts are going to be good.

We are very excited about where we stand in boots, even though we had a -- I think, we led the family channel last year in our boot increases, and we believe we have the option to do that again this year. .

Okay.

And then the later Labor Day, with all these moving parts, how big relative to last year is this week and next week?.

I don't want to get down to a week-to-week compare. I will tell you this, you are correct in the fact that the later the Labor Day is, the better it is for back-to-school sales. You are -- and I know that that's been a question on your mind as you've talked to other public companies, but you are correct in your thought process. .

And so September, on a -- compared to last year becomes a more -- much more important month because of this later Labor Day. .

The first 2 weeks will become a much important first 2 weeks. .

So the guidance that you're -- so these next 2 weeks move the needle much more than they did a year ago at the same time when you gave guidance?.

Certainly, that is the case, yes. .

And so you said you are going to delever the SG&A in the quarter because of the shift of the marketing spends. It's more practical from Q2 to Q3, but what kind of comp would it take to not delever the marketing in the third quarter? I'm asking about the [indiscernible] SG&A, not [indiscernible] SG&A in the third quarter, excuse me. .

I haven't calculated that specifically. I will leave it up to you to -- we've given you -- what our intent was to give the numbers and once you evaluate it, and I'm sure you can calculate that off yourself. .

So it's a pure $3.5 million that's moving, that we have to add in for the quarter. .

No, what I said was it was a decrease of $2.7 million in Q2, and we expect a $3.5 million increase in Q3 overall. The majority of the $3.5 million increase was related to the shift from advertising from Q2 into Q3 to follow those sales. I'm sorry, it's $2.6 million in Q2, not $2.7 million. .

And that $3.5 million is absolute dollar increase?.

Yes. .

So if you have $59 million in SG&A, we should add $3.5 million to that and that's where you should be at the quarter -- for this quarter?.

Well, there are other ins and outs, that's why we -- that's why we gave you the color about the overall SG&A deleveraging. And we tried to identify the components that help to identify the deleveraging. .

So to what degree does it delever? By just a hair or by [indiscernible] you're not going to delever by very much. .

Sam, it is probably not the right place to try to work a model. We give you the general idea of how to build the model, and we'll let you build it from there. .

Can you just give us a little more color on some of the athletic trends and some of the other trends that you mentioned kicked off in the quarter? And could you just give us a little more color there, as to the type of things that are working, maybe fashion versus performance and so on?.

Well, our business is really no different from anyone else's. Fashion and athletic has been very strong. We see our running business, our basketball business led mainly by canvas and canvas product in general, all selling. It was a very strong athletic month.

In addition to being a very strong athletic month, we're -- again, I have to say it, we are pleased with the performance of our boot category and the fact that we saw double-digit increases there. So that gives us some reason to be positive about the fourth quarter. .

And it's booties and boots, is it mostly booties right now that are... .

Booties are definitely the strongest part of the boot category today, but we are seeing performance at our other boot categories. .

[Operator Instructions] And we'll go next to Chris Svezia with Susquehanna. .

I'm just curious.

While we're talking about boots and booties, I'm curious, the percentage of the business that comprises sort of the back half or in the third quarter or what it was last year? And would you just give us some thought -- your reference about how big that is?.

It's obviously much stronger in the fourth quarter than it is in the third. I'm not -- I don't want to give it to you as a percent of business for each quarter. I will tell you that we're planning boots up high singles for the second half. .

Okay, but I mean is it fair to say it's roughly 20% of your second half business for Shoe Carnival?.

It's not quite there, but the second half is -- and it's higher than that for the fourth quarter. .

Okay, that's helpful. And then I'm curious, your small box story, could you just maybe talk about the 5,000 square-foot box, what -- how do you plan to get the inventory in there? Or how do you plan to incorporate technology into that so people can still find products and you can get conversion? Just talk a little bit about that.

Is it backfilling the existing markets, et cetera?.

It's mainly backfilling the existing markets throughout the Midwest and the Southwest. We see this as a tremendous opportunity. We can put in -- we can go into a market with a 5,000 square-foot story. We have the ability, as you know, to merchandise a store based on the customer that's shopping in that store.

Not only do we have that capability, but with our shoes-to-you program, the customer comes in and we don't have a wide enough assortment for them, we open up the majority of the assortment of our entire company to them through our SHOES2U program. So that's -- that in itself separates us from our competition.

Then third, we have the ship-from-store initiative. So if we put items in that store that doesn't quite -- one of those stores where it doesn't quite work and resonate with the consumer, we just turned the levers up on our ship-from-store initiative and ship the product out to the customers who are e-commerce stores.

So it's all of the things that we [indiscernible] and most importantly, as the fact that we went national advertising this past year.

So you take all the initiatives that we put into place over the past 2 years to help drive our sales, which we believe have begun to pay dividends over the past several quarters, gets us very excited about the opportunity to open up smaller markets and to fill in larger markets where we've struggled to get fill-in opportunities. .

Okay.

And then, when you guys are closing stores, the amount of stores you closed, how is sort of the transfer of sales to either existing stores in those trade markets or the profitability? I know it seems early, but just any color around maybe how that's going given the number of stores you closed so far in the first half?.

It is early for us to tell that, Christopher. We do believe we're going to see transfer of sales. We believe we may have already seen transfer of sales. But our sales trajectory has actually been, other than the last 2 weeks of July when we transferred sales into August, our sales trajectory across our fleet has been pretty good.

So it's -- I can't tell you that's because of transfer of sales from one store to another. But that's something that we'll be studying as we continue to move forward. .

Okay, last thing, just e-commerce. Is this -- I think it was -- is it accretive? Just tell us, sort of [indiscernible] to deep into that but from a profitability perspective, where is it going, is it accretive? Just any color about that, please. .

We would prefer to talk about that as an omnichannel program, whether that's e-commerce or SHOES2U or any things that we're doing digitally. And yes, to answer your question, it is accretive. .

And there are no more questions at this time. I'd like to hand the conference back over to our presenters for any closing remarks. .

I appreciate your listening in today, and we look forward to talking to about third quarter results in November. Thank you. .

This does conclude today's conference. You may now disconnect and have a wonderful day..