Good afternoon, and welcome to Shoe Carnival's Second 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 materially differ 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 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. Please go ahead, sir. .

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

Our non-athletic footwear categories, particularly sandals, performed well in the second quarter. Shoe Perks, our loyalty program, continued to be a valuable tool as we increased shopping frequency and average order value across our most loyal customers to report an 8th consecutive quarterly increase in comparable store sales of 0.5%.

Even though we fell short of our expectations, we believe the initiatives we have executed over the past several years, such as Shoe Perks and our multichannel enhancements, will continue to help us drive comparable store sales increases throughout the year.

I'd like to provide you a little more color by month than we normally do to help you understand both the positives as well as the challenges within the quarter. .

As we communicated on our earnings call last quarter, the second quarter started off cool and rainy for most of May, which had a negative impact on seasonal product. As expected, the month of June was more seasonal, and we experienced a nice rebound in our sandal product categories.

Our merchant team has done a terrific job having the right assortment of family footwear when our customer is ready to buy. .

In July, sandals continued to produce positive results. However, at the same time, sales in adult athletic trended down low single digits.

As we entered the key back-to-school sell season, at the end of the second quarter, we saw a strong trend where our customers shopped not only closer to the start of school but continued to shop well after school began. This isn't the first time customers have waited to buy their footwear closer to need.

However, this year, it was more pronounced than we have seen it in previous years. When I review our guidance for the year in a few minutes, I'll provide a little more detail on the current sales trend for back-to-school in the third quarter. .

In the second 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 down approximately 2.5% on a per door basis, which was in line with our expectation.

Our goal by year-end is to reduce our per door inventories by mid-single digits. As a reminder, the fourth quarter last year, retailers experienced warmer-than-normal weather patterns, which negatively impacted the sales of seasonal product.

We believe with more normalized weather patterns, we have an opportunity to end the year with less fall product inventory versus the levels we had on hand for the same time period last year. .

This merchandise margin -- our merchandise margin was down 40 basis points due primarily to the growth of our multichannel sales initiative. We have now completed our first full year of SHOES2U, our endless aisles program which we launched in June of 2015.

This has helped us consistently increase customer conversion rates in our brick-and-mortar stores, yet at the same time, our overall gross margin has been impacted by higher shipping charges. This leads us to expect that gross margin for the remainder of the year will be essentially flat to slightly up as compared to the prior year period. .

Buying, distribution and occupancy costs as a percentage of sales decreased 30 basis points due primarily to lower distribution expenses. However, with comparable store sales with lower expectations for the quarter, we were not able to leverage SG&A expenses as a percentage of sales, resulting in earnings per diluted share of $0.22 for the quarter.

Kerry will give you more detail on the financial results in his prepared remarks. .

Our team remains focused on our multichannel strategic initiatives. We added approximately 1.2 million members to our Shoe Perks loyalty program in the second quarter. This represents the single best quarter ever for member enrollment and is another consecutive quarter of record enrollment.

This brings our total membership to approximately 11 million members, who on average spent 20% more than nonmembers and accounted for 67% of our sales in the second quarter. Shoe Perks has become a very important and effective tool for communicating special promotions and sales events to our customers. .

While we remain committed to the acquisition of new members, our team has begun to analyze customer segmentation data, which will allow us to identify our high-value customers and target specific communications to further increase shopping frequency and average order value going forward.

We are very pleased with the success of Shoe Perks, and we believe we have a tremendous runway ahead of us to acquire, engage and incent our most loyal customers to continue to consider Shoe Carnival as their destination of choice for shoes. .

We continue to improve our seamless, endless aisle experience for our customers. We will start to roll out our buy online, pick up in store and buy online, ship to store initiative beginning this quarter.

We believe we can take this initiative even further in 2017 to the development of vendor drop ship, which will allow us to expand our assortment with key brands without the risk of inventory ownership. .

As consumer shopping habits evolve, our team has done an excellent job on our multichannel efforts as we continue to better position Shoe Carnival for growth over the long term. .

We ended the second quarter with 413 stores in 35 states and Puerto Rico. During the quarter, we opened up 9 stores, which included 2 small-market stores, bringing our total to 5 small-market stores at the end of the second quarter.

We expect to open approximately 4 additional small-market stores in fiscal 2016 and continue to expect consistent small-market unit growth over the next several years. There were no store closures and one relocation in the quarter. .

As we look to the second half of 2016, we expect to open 8 additional stores and close 6 stores. For the total year of fiscal 2016, we continue to expect to open approximately 20 stores and close approximately 10 stores. .

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

In line with our historical focus, we will look to strong trade areas within our current footprint to review underperforming stores that have minimal opportunity to improve and either renegotiate lease terms, relocate or close the store. I'd like to take a moment to review our second quarter sales by department. .

Women's non-athletic ended the quarter up low single digits last year on a comparable basis. This increase was driven primarily through the high-single-digit increase in the sandal category. We were also quite pleased with the high-single-digit comparable store increase that junior dress shoe category produced.

This performance was driven by junior brands we have added to the assortment over the past several years. .

Men's non-athletic ended the quarter slightly up on a comparable basis. While men's casual, in particular, boat shoes, were disappointing, we did experience a nice mid-single-digit increase in men's dress and a double-digit increase in men's casual boots. .

Children shoes were up low single digits, driven primarily from children's athletic footwear, including campus basketball. .

Adult athletic was down less than 1% on a comparable basis. We experienced decreases in performance running, cross training and the skate categories as we believe that customers waited later to make decisions on back-to-school purchases. Campus basketball and updated retro categories performed well throughout the quarter. .

As I mentioned earlier, inventory was down 2.5% on a per door basis at the end of the quarter. We believe our inventory is well positioned in the right categories for the third and fourth quarters. .

Now I'd like to review our guidance for the fiscal year 2016. As I stated earlier, back-to-school got off to a slow start as compared to previous years. For the first time I can remember, footwear sales accelerated a day or 2 prior to school starting and continued to perform well after school began.

As of today, 90% of our schools have gone back, and quarter-to-date, we are up 1.3%, with approximately 2 more weeks of back-to-school selling to go.

Thus far in the third quarter, from an athletic perspective, there has been a slowdown in campus footwear overall, even though we continue to experience very strong sales gains in campus basketball, especially in the women's athletic department. .

updated retro styles for both men and women's running categories, along with men's and women's moderate running and men's performance basketball. .

Children's shoes are also performing well, with kid's athletic comping up mid-single digits month-to-date. .

On the women's non-athletic side of the business, we are pleased with the performance of junior dress, flats, sandals and the junior booty category. As we look forward to the rest of the year, we're encouraged by the performance of women's booties. And as the weather cools, we believe we will see this category accelerate even faster. .

In addition, we have seen some nice results in our women's sport casual category, which we believe will continue into the fall season. As a reminder, our sales comparison on seasonal products get easier once we enter into the fourth quarter.

And with any cooperation of the weather, we should experience a better boot performance during that important time period than last year. .

Based on this and our performance year-to-date, we expect fiscal year 2016 net sales to be in the range of $1,012,000,000 to $1,016,000,000, with comparable store sales increase in the range of 1.5% to 2%.

As a result of our share repurchase program, we continue to expect earnings per diluted share for the fiscal year to be in the range of $1.58 to $1.65.

Included in our earnings estimates for the fiscal year is the expectation that at the high end of our guidance, gross profit margin will be basically flat, with buying, distribution and occupancy costs flat to slightly leveraging. We expect SG&A will decrease slightly as a percentage of sales. .

We remain focused on the execution of our multichannel strategic initiatives to fuel future growth in sales and profitability.

We have confidence in our opportunities and our ability to capitalize on them while maintaining the financial flexibility to continue our commitment of returning value to our shareholders through share repurchases and consistent dividend payments. .

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

Thank you, Cliff. Second quarter net sales increased $4.1 million to $231.9 million compared to the second quarter last year. The net sales increase was driven by a $5.8 million increase in sales from the 25 new stores opened since the beginning of the second quarter of fiscal 2015 and a $1.2 million increase in comp store sales.

These increases were partially offset by a $2.9 million loss in sales from the 13 stores closed since the beginning of the second quarter of fiscal 2015. .

Our gross profit margin for the quarter was 29.0% compared to 29.1% in the second quarter last year. This decrease was driven by a 40 basis point decrease in our merchandise margin, partially offset by a 30 basis point decrease in buying, distribution and occupancy expenses as a percentage of sales. .

SG&A expenses increased $2.2 million in the second quarter of fiscal 2015 to $60.6 million. As a percentage of sales, these expenses increased to 26.1% compared to 25.6% in the second quarter last year. .

For the quarter, the increase in expenses for new stores was partially offset by expense reductions for the stores that have closed, resulting in a $216,000 increase in non-comp store-selling expenses.

Other significant changes in SG&A for the quarter included increases in wages, advertising, other employee benefits and equity compensation, partially offset by reductions in incentive compensation, employee healthcare and fixed asset write-offs. .

Preopening costs included in both cost of sales and SG&A increased $276,000 in the second quarter of fiscal 2016 to $632,000. Store closing and impairment charges included in both cost of sales and SG&A decreased $557,000 in Q2 this year to $36,000. .

The effective income tax rate for the second quarter of fiscal 2016 was 38.0% compared to 38.8% for the same period in fiscal 2015. For the full year of fiscal 2016, we expect our tax rate to be approximately 38.3%. .

Net earnings for the second quarter of fiscal 2016 were $4.1 million or $0.22 per diluted share on approximately 18.3 million shares outstanding. For the second quarter of fiscal 2015, we reported net earnings of $4.8 million or $0.24 per diluted share based on approximately 19.6 million shares outstanding. .

Now turning to our cash position and information affecting cash flow. In the second quarter of this year, we repurchased 967,000 shares of common stock at a total cost of $23.6 million. The amount that remains available under our $50 million share repurchase authorization at the end of Q2 was $20.5 million.

This brings the total shares repurchased during the last 4 quarters to 1,847,000 shares at a total cost of $44.1 million. .

We have also paid cash dividends of $5.1 million during that time frame while slightly increasing our cash and cash equivalents at the end of Q2 compared with the end of Q2 last year. .

Included in the annual diluted EPS guidance Cliff spoke of earlier, is the estimate of repurchasing approximately 300,000 shares in both Q3 and Q4 this year. .

As Cliff mentioned, going forward, we have confidence in our strategic initiatives and our opportunities for future growth. At the same time, we expect to maintain the financial flexibility to continue our commitment of returning value to our shareholders through share repurchases and consistent dividend payments. .

Depreciation expense was $5.9 million in Q2. 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 half, are expected to be between $20 million and $21 million. Approximately half of our total capital expenditures are expected to be used for new stores and the other half to 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 a little color on our earnings expectations for Q3 this year. At the end of -- at the high end of our guidance, we expect Q3 comp store sales to increase low single digits.

In Q3, we also expect our gross profit margin to increase slightly and our SG&A to leverage slightly as a percentage of sales compared to Q3 last year. Diluted weighted average shares for Q3 are expected to be approximately 17.7 million, a 9.2% decrease from the diluted weighted average shares outstanding at the end of Q3 last year. .

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

[Operator Instructions] Our first question comes from Jeff Stein with Northcoast Research. .

Guys, a couple of questions for you. First of all, with regard to the trend in canvas. I'm just wondering if you think, are we done? We've seen such a strong prolonged trend in this category.

Do you believe that we are now looking at a new lower trend? And if not, how are you thinking about your inventory plan in this category going forward? And just a follow-up housekeeping question. Kerry, wondering if you could talk about the share count you're assuming for Q4 as well.

In other words, are you assuming you're buying the additional 300,000 shares in the third quarter?.

Jeff, this is Cliff. We -- I'm not prepared to tell you that canvas is done. I am prepared to tell you that we will cut back the amount of canvas on a go-forward basis that we're carrying. We -- both in the skate category and in the walking categories and in the casual categories, we have seen canvas decline in all 3 of those categories. .

Okay.

And, Kerry, on the share count?.

For Q4, we are assuming that we're building in another 300,000 shares would be repurchased both in Q3 and Q4. And if we hit those numbers, Q4 shares outstanding will be just under 17.5 million. .

So you're assuming you're going to buy 300,000 in each -- so total 600,000 in the back half of the year?.

Correct. .

Got it. Okay. And wondering if you could talk about the kind of -- your -- the promotional cadence for the back half of the year, particularly in light of the election cycle.

Is it going to force you or are you thinking about altering your media mix, perhaps less television or starting your television later than normal?.

We definitely believe we have to alter our television buy, especially as we go through the third quarter, Jeff. And we'll utilize more digital advertising and our Shoe Perks members. You just can't -- you can't guarantee that the spots are going to run. It's -- the elections get -- they will preempt you for the election coverage.

So fourth quarter, I don't believe we're going to change our promotional cadence much at all for the fourth quarter. .

We'll go on to Jill Nelson with Johnson Rice. .

Can you talk about -- a competitor talked about -- kind of mirrored your thoughts on a later start to back-to-school shopping, kind of tagged it at maybe a 2-week delay. Maybe if you could just talk about how you're seeing your customers shop closer to need and any insight on that. .

It really is different than what we've seen in years past. In years past, you could almost count on the week prior to back-to-school for any given market, the sales would begin to increase. This year, it's like 2 days, 3 days just before school starts, but it continues on. And in some cases, up to 2 weeks after back-to-school.

So we are seeing that trend. It's more pronounced than I have ever seen it. And I really can't put an explanation to it. Wished I could, but I really can't. .

Okay. And then, I guess, if you look now what kind of trends, it seems like August comps have improved.

If maybe you could just -- has it been kind of a weekly acceleration? And kind of if you look back now, do you think back-to-school is tracking in your lines of expectations adjusted for the late start?.

Jill, it has not sequentially gotten better. I think I heard a competitor say that yesterday. But it has definitely, through the month, gotten better. 3 out of the 4 weeks of August have been positive and much stronger positive as we go through the latter part of August.

As far as telling you whether back-to-school is going to hit our expectation, I really believe I need to give that another couple of weeks. We have at least 2 more weeks of back-to-school. We are still seeing acceleration of sales for schools that have gone back.

And I just -- I'm not prepared to tell you that it has met our expectation until we get at least to the middle of September. .

Okay. And then, I guess, a shift in the topic.

Can you remind us again kind of how you're looking at boot inventory and those buys for the back half?.

Yes. We have been -- over the past several years, and you've been following us, know that we've concentrated on reducing our per store inventories. And we've done -- the merchant team has done a good job at that.

We feel that if weather cooperates with us at all in the fourth quarter, as you remember, we didn't heed our boot expectation last fourth quarter. However, we had a pretty good fourth quarter with athletic. But we feel we can reduce our fall inventory on a per door basis going into the first quarter of 2017.

So with that said, I think our inventories are going to end this year down mid-single digits on a per door basis. .

We'll continue on to Greg Pendy with Sidoti. .

Just -- I guess, ahead of plans when you mentioned that you're looking to launch buy online, pick up in store, is there any expectation that you may be able to, I guess, reduce some of the shipping you're seeing from online orders and capture some of that -- those online orders without having to incur any shipping costs as the people would actually be picking up the product in the store?.

Greg, that's certainly a hope. However, if they buy online and the store closest to them does not own the product, then we're going to have to ship the product to that store, and we'll incur shipping charges for that. But the positive is that they are coming to the store to pick the product up.

And in our stores, with the in-store environment and the way we run our stores with the promotional activity, we believe that if we get them in the store, we have an opportunity to maybe increase that purchase. .

And if I could just get one follow-up.

Was there anything -- I guess, given the shift in back-to-school last year, did that boost your SG&A last year in the third quarter by, I believe, maybe $3 million or so, given just the calendar shift in the tax-free shipping holidays?.

Greg, are you' saying in Q3 last year or this year?.

Yes.

was it inflated last year by a couple of million, I think, just because of -- just due to a shift in tax-free holidays that you would cycle out this year? Or is it relatively the same this year?.

It's relatively the same on a comparison basis. There wasn't a real story -- I walked through some of the increases of advertising wages and a few items like that, that represent the SG&A. But there wasn't a real story behind it. This year, from a sales -- it was very comparable. The shift occurred last year, and last year was comparison against '14.

But '16 versus '15 in Q2 were very comparable on the shifts. It just is a little lumpy on the SG&A though. While we -- against our original sales expectation, we were expecting to leverage our SG&A. Because it came in a little lighter, we didn't. But we do expect that to be a little bit better in Q3, where we're guiding to leverage our cost structure. .

[Operator Instructions] And with no additional questions in the queue, I'd like to turn things back over to our speakers for any additional or closing remarks. .

I'd like to thank you for joining us on the call today and your interest in Shoe Carnival. I look forward to talking to you again on the third quarter call. Thank you. .

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation..