Good afternoon, and welcome to Shoe Carnival's First Quarter Fiscal 2016 Earnings Conference Call. Today's call is being recorded. It is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited..

Management's remarks 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.

Forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's earnings 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 discussed on today's conference call or contained in today's press release to reflect future events or developments..

I'll now turn the call over to Mr. Cliff Sifford, President and Chief Executive Officer of Shoe Carnival, for opening comments. Mr. Sifford, you may begin. .

Thank you, and welcome to Shoe Carnival's First Quarter 2016 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 our first quarter performance and give you an update on our 2016 guidance. Kerry will review the financial results, then we'll open up the call to take your questions..

We had a strong start to fiscal 2016, fueled by a combination of unseasonably warmer weather and a continued benefit from our multichannel sales initiative. At the end of the first quarter, we had approximately 9.8 million Shoe Perks members, which helped us achieve record net sales for the quarter.

And when combined with our team's efficient management of our expenses, led to record first quarter earnings per diluted share of $0.56 or an increase of 7.7% as compared to the same quarter last year..

Athletic footwear remained a key merchandising category of strength. This contributed to the first quarter of comparable store sales of 2.7%, our seventh consecutive quarter of comparable store sales growth.

Our ability to drive consistent growth demonstrates our entire team's commitment to execute at the store level and across our entire business model from identifying footwear trends and merchandise categories by thoughtfully managing the controllable aspects of our business..

I would now like to provide additional color on our sales performance in the first quarter of fiscal 2016. On our last earnings call, we discussed that we experienced warmer-than-normal temperatures in the month of February or early in the first quarter.

From an inventory perspective, we are well positioned with athletic product that takes advantage of the later tax refund season, which was delayed several weeks into mid-February. This resulted in a very strong start to the first quarter.

Cooler weather patterns became a norm as we approached the Easter selling season, which had a negative impact on our nonathletic product categories. .

The timing of Easter holiday can shift from year to year, and we have historically reported Easter on a combined basis for both the months of March and April. Even though we experienced a cooler and wetter Easter time period, comparable store sales for March and April were up 1.2% on top of the 6.7% increase for the same time period last year.

Athletic shoes were up mid-single digits while nonathletic was down low single digit. .

Even though Easter sales were impacted by winter weather, we were pleased that once more seasonable conditions returned late in the quarter, we generated positive momentum across our business..

Now as we begin the second quarter, we expect to further benefit from our assortment of casual sandals in addition to the continued strength in athletic footwear..

In the first quarter, we benefited from a combination of higher conversion rates, average sales per transaction and units per transaction. These positive results were partially offset by a mid-single-digit decline in traffic. .

We ended the quarter with inventory up approximately 1.9% on a per-door basis, which was in line with our expectation. We remain focused on appropriately supporting our growth in athletic..

Merchandise margins were down 90 basis points, due primarily to our increased promotional activities in reaction to a slower-than-expected Easter selling season. BD&O as a percentage of sales decreased 40 basis points, due primarily to the lower distribution expenses. Kerry will give more detail on the financial results in his prepared remarks..

Our team remains focused on our multichannel strategic initiatives, and we want to provide you with an update on our progress as we start the fiscal year. We added approximately 950,000 members to Shoe Perks, our loyalty program, in the first quarter. This represents the single best quarter we have ever had for member enrollment..

As I referenced earlier in my remarks today, this record enrollment brings our total membership to about 9.8 million members who, on average, spent 24% more than nonmembers and accounted for 65% of our sales in the first quarter. .

Shoe Perks has become a very important and effective tool for communicating special promotions and sales events to our customers. We recently made a new addition to our team with the appointment of a director of customer relationship management, who will help us progress from member acquisition to personalized member management.

We are excited about taking our customer engagement activities to the next level..

On a go-forward basis, we plan to better mine our customer data into certain segments and categories, and then be able to market special offers and communications to them based on their Shoe Carnival shopping habits. We believe this will help us increase shopping frequency and average order value across our most loyal customers. .

Over the past several years, we have made tremendous progress in creating a seamless, endless-aisle experience for our customers. In the near future, we'll also plan to launch additional enhancements to our online store by providing Shoe Carnival customers the option to buy online, pick up in store and buy online, ship to store.

This complements the redesign of our launch of our Shoe Carnival app at the end of fiscal 2015. .

We believe our multichannel efforts have helped better position Shoe Carnival for growth over the long term as consumers' shopping habits evolve and have led to our consistent ability to achieve 7 quarters of positive comparable store sales growth..

We ended the first quarter with 404 stores in 34 states and Puerto Rico. During the quarter, we opened up 3 stores and closed 4 stores. For fiscal 2016, we currently expect to open 20 stores and close approximately 10 stores.

Our store growth plan continues to focus on the strong trade areas within our current footprint and to take advantage -- to take our underperforming stores that have minimal opportunity to improve, and either renegotiate lease terms, relocate or close a store. .

As a reminder, we will not enter into any new large markets during fiscal 2016 as we continue to fill in larger markets we have entered over the past several years..

We opened an additional small-market store in Litchfield, Illinois, bringing our total to 3 at the end of first quarter. We are pleased to report that all 3 of our small-market stores are trimming well above our expectations.

We currently have approximately 5 additional small-market stores out of our total 20 new store openings planned for the remainder of the fiscal year. .

If strategic opportunity for additional small-market stores presents itself, this number could change. We continue to expect consistent small-market unit growth over the next several years as we expand into new and built-in existing markets..

Moving on to merchandise. I would like to take a moment to review our first quarter sales by department. Women's nonathletic ended the quarter down low single digits last year on a comparable basis.

While traditional dress shoes and women's boots were down, we were pleased with the mid-single digit increase in sandals, vulcanized canvas casuals and junior dress shoes, whose performance was driven by some of the junior brands we added to the assortment over the past several years. .

Men's nonathletic ended the quarter down low single digits, while men's casuals, in particular, boat shoes, were disappointing, we did experience a mid- -- a nice mid-single digit increase in men's sandals..

Children's shoes were up mid-singles, driven primarily by canvas, basketball and skate, along with kids sandals and boys and girls running. .

Adult athletic were -- was up mid-single digits on a comparable basis, driven by men's and women's canvas, men's and women's running, and men's and women's retro styles..

As I mentioned earlier, inventory was up 1.9% on a per-door basis at the end of the quarter. We are pleased with the content of our inventory, and we believe our inventory is well positioned in the right categories for the second quarter.

We expect to further benefit from our assortment of casual sandals as warmer weather arrives, in addition to the continued strength in athletic footwear..

Now I'd like to give a little color on our expectations for fiscal 2016. The second quarter got off to a cool and rainy start, which was -- has suppressed the sale of sandals and other key spring categories. We do believe, with warmer seasonal weather, this sales trend will turn around on our sandal performance in the first quarter. .

We continue to be pleased with the positive athletic trajectory across footwear industry, and we believe that this will continue to be fueled with the Olympics beginning in the third quarter of fiscal 2016..

As many of you may know, this is the first time since 1996 that the Olympics are actually taking place in our time zone, which means more customers watching live and being inspired to become more active..

Looking a little further out to fall of 2016, we have completed our boot ties [ph] and are pleased with the content and balance between [indiscernible] height and fashion versus utility. We believe we once again can plan fashion boots up slightly for the fiscal year. .

Based on our performance to date and these expectations, we are reiterating our previous guidance of full year net sales in the range of $1,007,000,000 to $1,027,000,000, with a comparable store sales increase in the range of 1% to 3%. .

Earnings per diluted share are expected to be in the range of $1.58 to $1.65. Included in the earnings per diluted share estimates for the fiscal year are that at the high end of our guidance, gross profit margin will be flat, with buying, distribution and occupancy costs slightly leveraging, offset by the growth of our multichannel initiatives. .

We expect SG&A will decrease slightly as a percentage of sales..

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

Thank you, Cliff. First quarter net sales increased $7.7 million, $260.5 million, compared to the first quarter last year. The net sales increase was driven by a $5.6 million increase in sales from the 23 new stores opened since the beginning of the first quarter of fiscal 2015 and a $6.5 million increase in comp store sales.

These increases were partially offset by a $4.4 million loss in sales from the 19 stores closed since the beginning of fiscal 2015..

Our gross profit margin for the quarter was 29.0% compared to 29.5% in the first quarter last year. This decrease was driven by a 90 basis point decrease in our merchandise margin, partially offset by a 40 basis point decrease in buying, distribution and occupancy expenses as a percentage of sales.

The decrease in buying, distribution and occupancy expenses as a percentage of sales resulted primarily from the leveraging effect of higher sales and a decrease in freight costs. .

As you may recall, the company incurred additional freight cost in Q1 last year due to the West Coast port congestion..

SG&A expenses increased $612,000 in the first quarter of fiscal 2015 to $58.3 million. As a percentage of sales, these expenses decreased to 22.4% compared to 22.8% in the first quarter last year.

For the quarter, the increase in expenses for new stores was more than offset by expense reductions for stores that have closed, resulting in a $272,000 decrease in noncomp store selling expenses..

Other significant changes in SG&A for the quarter were increases in wages, advertising and depreciation, partially offset by reductions in incentive and equity compensation and utilities..

Preopening costs included in both cost of sales and SG&A decreased $436,000 in the first quarter of fiscal 2016 to $281,000. .

Store closing and impairment charges included in both cost of sales and SG&A decreased $50,000 in Q1 this year to $119,000..

The effective income tax rate for the first quarter of fiscal 2016 was 38.2% compared to 38.8% in the same period of fiscal 2015. .

For the full year of fiscal 2016, we expect our tax rate to be approximately 38.5%. .

Net earnings for the first quarter of fiscal 2016 were $10.7 million or $0.56 per diluted share. For the first quarter of fiscal 2015, we reported net earnings of $10.4 million or $0.52 per diluted share..

Now turning to our cash position and information affecting cash flow. In the first quarter of this year, we repurchased 70,330 shares of common stock at a total cost of $1.6 million. The amount that remained available under our $50 million share repurchase authorization at the end of Q1 was $44.1 million..

Depreciation expense was $5.9 million in Q1. Depreciation expense is projected to be approximately $24 million for the full fiscal year. .

Capital expenditures for fiscal 2016, including actual expenditures during the first quarter, are expected to be between $19 million and $20 million, approximately $9 million of the total capital expenditure are expected to be used for new stores and $7 million to $8 million will be used for store relocations and remodels. .

Lease incentives are anticipated to be $4 million to $5 million for the year..

My final comment today will focus on adding more color on our earnings expectation for the second quarter this year. We expect Q2 comp store sales to be -- to increase low single digits. Additionally, we expect our gross profit margin and our SG&A as a percentage of sales to be relatively flat to Q2 last year..

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

[Operator Instructions] We'll take our first question from Jill Nelson with Johnson Rice. .

Cliff, could you maybe just talk about the real estate environment right now, what you're seeing, particularly given your entrance in kind of the small town markets, smaller store size?.

We're still early in our new cycle where we brought in some new players into our real estate, but we're very pleased on the initial read. We've replaced -- we brought in -- like I said, new talent. We changed our brokerage network significantly. This coming week is the big real estate show, ICSC.

We should learn a lot more about where we stand at that point, but we're pleased with where we -- on the stores we expect to see for next year. This year, we pretty much got buttoned up. We have 19 signed leases, so we're not done with the year.

We still expect to add on at least 1 more, like we said in our guidance, and there's an opportunity for possibly a few more than that. But that, we'll know more coming out of the ICSC and have a good understanding of what's available out there. .

Okay. And then if you could just address -- definitely, merchandise margins in the first quarter were hit more than what we were modeling for. If you could just talk about that pressure, and then expectations heading into the second quarter where you're looking for kind of flat gross margin.

And it looks as though year-over-year, you're facing a tougher comparison on the merchandise margin line versus -- first versus second quarter. .

Jill, the reason for the reduction in margin is we entered into the Easter time period and winter finally arrived, because you remember that December, January and the early part of February -- or most of February were much warmer than normal. But -- so winter finally arrived as we were entering into Easter.

And as you know, our #1 -- one thing we're really good at, and you have to give us credit for it, is that when product categories don't sell as we expect them to sell, we force the sale, we get aggressive. And that's exactly what we did.

So for the 2 weeks of Easter, our margins ran a little lower, and we got more aggressive both online and in our stores. As far as margin, as we go forward, the more we grow our multichannel initiatives, the more pressure it's going to put on margin, the shipping costs and just the cost of doing business online and with the multichannel.

Forget about just the e-commerce store, but the whole multichannel initiative is at a lower margin. .

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

I'm curious, just on categories. Sandals? Could you just -- maybe just talk about your inventory exposure in sandals right now and sort of what your thought process is as you go into the second quarter? Just kind of where that is relative to your inventory position. .

Actually, we feel pretty good about where we are today. Let me explain, because it might be counterintuitive for us to say that our margins were due to the fact that Easter didn't come the way we expect it, yet our sandal business was up mid-single digits.

We had an incredible February in sandals, and we had a really good last couple of weeks of April in sandals. The issue we had was during the March time period, when weather turned cool and the dressier sandals didn't sell. And that's where we got aggressive when we got through that product, both through our multichannel initiatives and in our stores.

So what we've seen with the customers is that whenever the weather cooperates, and so far in the second quarter, we've had -- we've struggled a little bit with that, the sandal business picks up and it picks up nicely, not just a couple of percentage points. It picks up really nicely. So we're very pleased with where we are.

You've got to remember that the #1 sell -- the #1 month for sale in sandals is June, and that begins next week -- or the week after next. And we have plenty of time for a back-to-school sale sandals. So we're very happy with where we are. .

Okay. So the guidance -- and I guess, what I'm getting at is the guidance doesn't really assume that you guys would continue to be promotional to drive the sandal business as we go into second quarter, kind of cleaned up what you had to, and last... .

We actually believe that we'll see a -- better margins in sandals for the second quarter than we did in the first quarter. Again, as I've said to Jill, most of our margin pressure's coming from our multichannel initiatives. .

Okay. Understood. Got it. And canvas, I'm just curious, there's a -- I guess, your canvas business continues to hold up. It's pretty broad based, no real change there, judging from what you're saying. .

Exactly. We hear everything you hear, but we haven't experienced it yet. .

Okay. And when you -- your comp outlook for the second quarter, I don't know if any color you want to give sort of what you're seeing right now. You're assuming just the trends. Seems like you accelerated as you came out of the first quarter.

Is it fair to say you're comping probably in excess of where you were in the first quarter and you're assuming some moderation as you go through the quarter?.

No. That would not be correct. We saw acceleration as we went through the latter part of the first quarter. Unfortunately, as we entered into the second quarter, weather did play a part. It's been incredibly wet and very cool in the Midwest, and with that, our business is trending for the month to be basically flat.

We believe that's going to accelerate as the weather warms up. And well, as we go through the remainder of the quarter, we're going against a mid-single digit in June that if you'll remember correctly, we're going to a mid-single digit increase in June and we're going against a mid-single-digit loss in July.

So we think we have opportunity, especially with the way our athletic business is trending and when the sandals reignite to pick up sales. So we're guiding to low single digits in the second quarter. .

And the mid-single digit decline in July is because the athletic business slipped into the third quarter last year?.

It slipped into August that is correct. And we don't see a lot of change this year. There might be a tweak here and there in some states, but we don't see a lot of change in that. .

We'll take our next question from Sam Poser with CRT Capital. .

Cliff and -- can you walk through -- you mentioned that the March margin or the margins were hurt by the multichannel processes.

Can you give us some break down, like a little more detail within that 90 basis point decrease in the merchandise margin of how much of that sort of promotionally related versus -- can you just break it down little more for us there?.

No. I don't know if I can be any more direct than that. Here's what I'll tell you, Sam. When you look at the merchandise margin, it was both multichannel and it was us getting more aggressive on the product that we expected would sell at the Easter time period, but it didn't because of the cooler weather. .

Okay.

I mean -- so is it by nature that you're finding that you're selling good -- you're running more promotional activity online than you are in store? Is that a fair way to look at it?.

We run promotion, and if categories don't work, Sam, we feel that there could be an inventory situation because something didn't sell as well as we thought it would. We are promotional, both online and in stores. .

No, no, I understand that. But I'm saying, you're bringing up the issue that the -- running the e-commerce business is -- doesn't work at the same margins so the brick-and-mortar works at. .

Sam, I'm not the only one who thinks that up. Every retailer in America talks about that. .

I'm not -- I want to get at this color on how much of that is selling goods at lower prices versus how much of that is -- you're shipping, and all that goes -- is that falling into gross margin? Or is that...?.

That's in gross margin. That's in the merchandise margin. .

That's in the merchandise margin.

So then -- so how would you split that 90 basis point decrease in merchandise margin between promotional activity and those incremental shipping costs?.

Sam, what we've said before on calls is that we see that the multichannel initiatives as an extension of our stores, and we're not going to break down the individual pieces and trying to bifurcate between what is a multichannel and which stores. We see it as all one.

We can -- through those various channels though, we can tell you that we typically are more promotional on the Internet. And -- but it also comes with a charge for the shipping at times. We sometimes will do free shipping as a promotion, sometimes we won't. But we're not going to break down the individual components of the 90 basis points.

We're just going to tell you what the factors are that led to it. .

Okay.

I'm glad you answered the question by -- so I guess, the question is what can you -- what is -- what results in you being more promotional online than you are in store? I mean, what is the causal[ph] of all that, would you view it?.

I don't believe -- I'm not sure I follow the question.

Why don't you...?.

Kerry said that you're more promotional online that you are in store. My question is why.

Why is that...?.

You would be more promotional because occasionally, you offer free shipping or discounted shipping I don't have to ship when I'm in the store. .

No, but that's not what he -- no, no, that wasn't what you said, Kerry. You said that sometimes, you're more promotional online and sometimes you offer free shipping, and sometimes you don't. I don't think of the shipping as separate from promotions.

So the question is this, do you -- you have some goods that are online exclusives, correct? I mean, are you doing -- are you finding that you're doing a disproportionate of more promotional listings online?.

Yes. There are times we run promotions online that we don't run in stores. We'll run flash sales. We'll run -- what -- every retailer does that. So that's not unusual to Shoe Carnival. .

And we'll take our next question from Jeff Stein with Northcoast Research. .

A couple of questions for you.

First of all, Cliff, I'm wondering, as you grow your Shoe Perks membership and sales as a percent to total, does that in any way become a drag on your merchandise margins?.

No. I believe that actually will help, not only our sales in the long term, but will help our margin because what this is going to allow us to do, especially with our new CRM individual that we just hired, we're going to be able to talk individually to our customers.

So this week -- for instance, this week, we sent out a sandal -- a women's sandals e-mail to all our Shoe Perks members. So I got that sample email.

"if you're Shoe a Perks member, you've got that women's sandals e-mail." And in the future, with this new CRM individual, we'll be able to tailor that e-mail to where, "If you buy athletic shoes from us, you'll get an athletic e-mail instead of a women's sandal e-mail." So this will -- this is going to help us as we grow -- as we move forward to grow our business and grow our business even more profitably.

.

Sure. I understand. That makes sense. But your -- with Shoe Perks, you're giving awards away. So as your Shoe Perks membership grows and you give more awards away, doesn't that impact margin? That is my question. .

We would manage that margin -- we would manage that with our promotional cadence. I understand what you're saying now, and we would manage that with our promotional cadence and the number of coupons that we would put out to our customer base. .

Jeff, we said all along in our longer-term forecast and even when we gave guidance for the full year is that we expect to see -- have headwinds because of the multichannel initiatives, much of it being related to the shipping charges around that multichannel initiative.

But -- that we expect to have positive opportunities within our product that we're selling. What hurt us in the first quarter is we had to get more promotional with that product margin and, therefore, it didn't cover the headwinds on the multichannel. And we may see a little bit more of that as we go through the year.

But overall, we've said, for the next few years, we expect to have rather flattish merchandise margins because of those headwinds. .

Okay. I have a question also on your SHOES2U program.

Can you talk a little bit about what kind of impact it's having on your sales and conversion? So in other words, had you not had SHOES2U, any thoughts in terms of what that might have meant in terms of mid-sales opportunities?.

We don't want to get into how much it's meant from a sales standpoint, but we will tell you that it is -- we believe it is responsible -- entirely responsible, actually, for our increase in conversion. So it's added at least -- it's added in excess of 100 basis points to our conversion rate. .

Okay. Perfect.

And as far as your buy online, pick up in store; buy online, ship to store, what is the timing of the rollout of that?.

We think that will happen early in the third quarter. .

Okay.

And are you getting any meaningful volumes off of your app? And can you talk about the number of downloads you've had so far?.

I don't know that off the top of my head, and I probably should. I can tell you that we can do a very high percentage of our online business, but they enter the site through a mobile device. We know that. I don't have the number off the top of my head on the number of people that have downloaded the app. I'll certainly get that. .

[Operator Instructions] We'll take our next question from Eddie Plank with Jefferies. .

So I guess, with respect to the longer-term margin impact for multichannel, just how are you thinking about that? I would think that presumably, expenses would go up as you introduce buy online, pick up in store; buy online, ship to store, et cetera.

Is this something we should expect to kind of normalize over time? Something you can improve? How are we looking at it in the big picture?.

I believe as we get it up and running, then we get -- we are really late to the game, Eddie. And we've actually been racing to catch up with all our competition. So I think as we get to the volume expectation that we believe that it can bring to us, then I think it'll all balance out.

But I do believe it's going to be in the near term, we're going to see a little pressure on margin. And I think that's the way we got it at the beginning of the year. .

Okay. Got it. That's helpful. Any -- just kind of bigger picture now. We've been reading about these new overtime rules.

Any thoughts on how that might impact your payroll, if there's any impact at all?.

That came out yesterday. We're in the middle -- I don't know if you've seen it, but it's a 450-page document that we are poring over. Our Human Resource people are going through it, and with everything they have. And I still don't know how to answer that today. It just hit us yesterday. So give us a little time, and we'll certainly be able to tell you. .

Fair enough. I only read page one. So last question, Kerry, I mean, you did a little bit of a buyback in the first quarter.

Any kind of guidance on how we should think about it -- buybacks for the remainder of the year?.

We're committed to buying back shares when we think they're valued. We have -- we're generating a significant amount of cash flow in our projections this year, and the models are showing that -- the analysts' models. So we're going to be out there.

And the first quarter is tough for us from a standpoint that we released a little bit later -- fourth quarter numbers. They don't come out till mid-March, and then we shut down before the quarter is over being a quiet period. So we have a limited window of opportunity.

And we put in a 10b5 program to potentially buy some shares during that blackout period that we had. However, the stock price react-- was reacting very strong and was accelerating in many cases through the quarter. So we didn't get an opportunity to buy anything through that 10b5 program.

But we will -- next week, our window's open up through the quarter. We'll have some time that the stock's under pressure, I'd see us being a buyer of it. .

And with no further questions at this time, I'd like to turn the call back over to Mr. Sifford for any additional or closing remarks. .

Thank you for joining us, and we look forward to speaking to you about our third quarter results in August. .

And that does conclude today's conference. Thank you for your participation, and you may now disconnect..