Good afternoon and welcome to Shoe Carnival's First Quarter Fiscal 2017 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 development. .

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

Thank you and welcome to Shoe Carnival's First Quarter Fiscal 2017 Earnings Conference Call. Joining me on today's call 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 2017 guidance.

Kerry will review the financial results, then we'll open up the call to take your questions. .

Like many companies across specialty retail industry, we had a challenging start to fiscal 2017. We believe this was primarily due to the IRS decision to delay tax refund season until the end of February compared to mid-February last year.

Historically, in conjunction with the timing of tax refunds, our customers use the beginning of the year as a second back-to-school sales period, where they replace the athletic footwear purchased in July and August. This year, we saw an escalation of sales of first few weeks of tax refund season.

But our sales results never hit the peaks we experienced in comparable prior year periods. .

In addition, we also believe that a later Easter selling season hurt our sales because the holiday moved away from the timing of spring break. As a result of these 2 events, our first quarter comparable store sales declined 3.9%.

To give an indication of how sales trended for both the Easter selling season, along with the shift of the later tax refund season, March and April sales combined were up 1.4% on a comparable store basis. For the quarter, conversion was flat. Average dollars per transaction and units per transaction were up low single digits.

These positive results were partially offset by a mid-single-digit decline in brick-and-mortar traffic. .

We ended the quarter with inventory down 1% on a per-store basis. Our merchants continue to do a good job controlling the inventory in a challenging environment. Merchandise margins were up 30 basis points due primarily to our tighter inventory control.

BD&O as a percentage of sales increased 80 basis points due primarily to the deleveraging effect of occupancy expense. SG&A was deleveraged 90 basis points due to the decline in sales. The result was EPS of $0.48 per diluted share. Kerry will give more detail on the financial results in his prepared remarks..

We ended the quarter with 417 stores in 35 states and Puerto Rico. During the quarter, we opened 7 stores and closed 5 stores. Of the 7 stores we opened in the first quarter, 4 are in larger traditional markets we currently serve and 3 are in mid-market locations. As a reminder, our growth plans revolve around 3 market types.

First, our traditional stores will be located in market areas with a population base greater than 150,000 people, and we target a store size of approximately 9,000 square feet. Second, our mid-market stores serve a population base of 75,000 to 150,000 people and average 7,000 square feet.

Finally, our small market stores target a population base of 45,000 to 75,000 people and with a store size of approximately 5,000 square feet. .

For fiscal 2017, we currently expect to open approximately 19 stores. Approximately 3 of those will be small market stores and 9 will be mid-market stores. We will close approximately 18 to 20 stores.

As part of our strategy of increasing operating income as a percent of sales, we continued to address underperforming stores with a focus to renegotiate rents or relocate stores to a stronger center. If we're unable to improve the store's metrics through this strategy, we will close the store. .

As you know, over the past several years, brick-and-mortar retail continued to evolve. It is vitally important for us to remain prudent on underperforming stores. We are committed to a strategic store growth.

We believe, as a result of other retail closures, that we'll have future opportunities to potentially achieve even more favorable real estate deals in markets where we plan to add stores over the next several years. .

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

The positive results we saw in junior dress shoes, tailored casuals and sport sandals and canvas casuals was offset by a double-digit decline in boots and a high single-digit decline in sport casuals and traditional dress shoes. For the combined time period of March and April, women's nonathletic was down mid-single digits on a comparable basis. .

Men's nonathletic ended the quarter down mid-single digits while men's casuals posted a mid-single-digit increase. We experienced a double-digit decline in men's dress and a mid-single-digit decline in men's boots. For the combined March and April time period, men's nonathletic was flat on a comparable basis to last year.

Children's shoes were down low single digits. Increases in girl's athletic, infants and kid's casuals were not enough to overcome decreases in dress shoes, boots and sandals. For the combined time period of March and April, children's shoes were up mid-single digits, driven primarily from a high single-digit increase in children's athletic. .

Adult athletic was down low single digits on a comparable basis with increases coming from retro product, athleisure and canvas. For the combined March and April time period, athletic footwear was up mid-single digits on a comparable basis to last year. As I mentioned earlier, inventory was down 1% on a per-door basis at the end of the quarter.

We are pleased with our product offerings, and our inventory is well positioned in the right categories for the second quarter. .

Now I'd like to give a little color on our expectation for fiscal 2017. We are encouraged by the early positive trend we are experiencing so far in May. With the headwinds of a later tax refund season and a later Easter behind us, we look forward to a more normalized calendar as we navigate our way through the remainder of the year.

We believe we'll be facing more promotional environment as we experience other retailers going out of business and store closures in many of the markets our stores are located in.

We believe the positive athletic and athleisure trend happening in the footwear category will continue and have reallocated inventory dollars to the athletic and athleisure categories for the second half to take advantage of this trend. .

Looking a little further out to the fall of 2017, we have completed our boot buys and are pleased with the product direction. However, we are planning this business very conservatively and we'll be prepared to chase any trend or category based on customer demand and preference.

Based on our performance to date and these expectations, we are reiterating our guidance provided on May 2, 2017, for full year net sales to be in the range of $1,002,000,000 to $1,018,000,000 with comparable store sales flat to down low single digits..

Earnings per diluted share is expected to be in the range of $1.30 to $1.45. 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 cost basically flat. We expect SG&A will increase slightly as a percentage of sales. .

I would now like to turn the call over to Kerry. .

Thank you, Cliff. First quarter net sales decreased $7.1 million to $253.4 million compared to the first quarter last year.

This was primarily due to a $9.9 million decrease in comparable store sales and a $3.3 million loss in sales from the 14 stores closed since the beginning of fiscal 2016, partially offset by sales of $6.1 million generated by the 26 new stores opened since the beginning of fiscal 2016. .

Our gross profit margin for the quarter was 28.5% compared to 29.0% in the first quarter last year. This was driven by a 30-basis-point increase in our merchandise margin, offset by an 80-basis-point increase in buying, distribution and occupancy expenses as a percentage of sales.

The increase in buying, distribution and occupancy cost as a percentage of sales was primarily due to higher occupancy costs. As a reminder, we typically need a 2% to 3% comp store sales increase to leverage our occupancy cost. .

SG&A expenses increased $658,000 in the first quarter of fiscal 2017 to $58.9 million. As a percentage of sales, these expenses increased to 23.3% compared to 22.4% in the first quarter last year.

For the quarter, the increase in expenses for new stores was partially offset by expense reductions for stores that have closed resulting in a $1.1 million increase in non-comp store selling expenses. .

Significant changes in SG&A for the quarter included increases of store-related fixed asset impairments and employee health care, along with decreases in advertising expense and stock-based compensation expense.

Included in both cost of sales and SG&A in the first quarter of fiscal 2017 were store closing costs of $1.1 million, which included $646,000 of store-related fixed asset impairments.

Store closing costs, including cost of sales and SG&A, were $119,000 in the first quarter of fiscal 2016 and there were no impairments of fixed assets reported during this period. Five stores were closed in the first quarter of fiscal 2017 compared to 4 stores in the first quarter of fiscal 2016. .

Preopening expenses, included in both cost of sales and SG&A, increased $253,000 in the first quarter of fiscal 2017 to $534,000. We opened 7 new stores in the first quarter of fiscal 2017 compared to 3 new stores in the first quarter of fiscal 2016.

The effective income tax rate for the first quarter of fiscal 2017 was 37.6% compared to 38.2% for the same period in fiscal 2016. For the full year of fiscal 2017, we expect our tax rate to be approximately 38.0%. Net earnings for the first quarter fiscal 2017 were $8.2 million or $0.48 per diluted share.

For the first quarter of 2016, we reported net earnings of $10.7 million or $0.56 per diluted share. .

Now turning to our cash position information affecting cash flow. In the first quarter of this year, we repurchased 766,700 shares of our common stock at a total cost of $19.2 million. $23.7 million remained available under our $50 million share repurchase authorization at the end of Q1. Depreciation expense was $5.8 million in Q1.

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

Capital expenditures for fiscal 2017, including actual expenditures during the first quarter, are expected to be between $21 million and $22 million with approximately $16 million to be used for new stores, relocation 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 expectation for the second quarter this year. We expect Q2 comp store sales to be relatively flat, partially due to later back-to-school dates this year in certain markets, which shift sales from July and into August.

Additionally, we expect our gross profit margin to decrease slightly and our SG&A as a percentage of sales to be relatively flat to Q2 last year. .

That concludes our formal presentation. I'd like to open up the call for questions. .

[Operator Instructions] Our first question comes from David Mann with Johnson Rice. .

You talked about how you expect it to be more promotional as the year goes on.

Can you just give a sense on what you've seen thus far in terms of the liquidation sales and how that's impacting your business from the other retailers?.

David, the -- earlier in the year, with MC Sports closing down, we did see, especially in shopping centers where we shared -- where they were a cotenant, we actually did see a slowdown in sales in those stores.

The department stores have not really begun their going out of business sales yet or at least not in our area, and we believe that's going to have an effect sometime during the second quarter or maybe even heading into the third quarter. So we'll have more information on that as we do our call in August. .

And we're tracking those stores that are affected by it and we're looking at about 41% of our stores or about 170 stores will be affected by at least one closing in this primary trade area. So that's why we had projected our gross profit margin to be slightly down in the second quarter taking into account those GOB sales. .

Great. And then in terms of the commentary on May and also the sort of flattish outlook for Q2, have you seen -- where have you seen the recovery in the business? Has it been all traffic? Has it been certain categories? Any color would be appreciated. .

No problem. It has not necessarily been traffic. Traffic continues to be a challenge in brick-and-mortar stores. I will tell you, however, that spring product categories have picked up nicely since the beginning of May with sandals coming on fairly strong.

We were a little disappointed actually in our sandal sales in the first quarter, but they picked up very nicely in the past 4 to 5 weeks and very excited about where that could be with our strongest sandals month coming in June.

The reason for the caution is, again, as Kerry said, the number of closures that we have going on around us and what that's going to do with the customer, well, is yet to be seen. .

And if you could just clarify, how much do you think the shift in school openings will affect you in terms of this quarter and benefit you in Q3?.

We think we're going to come out of July relatively flattish because of the shift. It's where we were looking at a slight increase in the comps because of -- we had a weaker July and an easier compare at this -- but that shift will probably leave us relatively flat in July. .

We'll go next to Sam Poser of Susquehanna. .

What are you expecting -- I mean, you're expecting promotional activities.

So what's the gross margin expectation for the full year again? Could you just walk us through how that all plays out now?.

Well, what we said, Sam, was that we expect our gross profit margin to be down in Q2. But we also expect to be down for the full year slightly. .

But I mean, if -- are you including in that the promotional activity at those department stores that will close, which would probably pressure into Q3 as well.

Is that a fair assumption?.

So we're currently expecting since these GOBs are -- seem to be very aggressive to get through them and some of the stores like Penney started this week that we were contemplating the majority of that issue to happen in Q2. The flip side of it, we did not have -- we had a decent back-to-school, but our early fall sales last year were not very strong.

And assuming that's going to not be repeated, we should see a little bit better margin improvement in that. So we're looking at coming out of Q3 relatively flat there. .

Relatively flat in gross margin and then Q4 would be up because of the -- Q4 would be up because the extra week helps you and things like that, correct?.

Well, it's not as much as the extra week as much as we had to get very promotional to keep our seasonal merchandise turning. And therefore, we expect -- and like Cliff, said on the call that we're going to be cautious with our seasonal merchandise. And if it's stronger than we expect, we'll chase it.

So we're expecting some recapture of our merchandise margin in Q4. Remember, in Q4 last year, our merchandise margins were down 130 basis points. .

Right. Right, I understand. I missed the beginning of the call. Can you -- I mean, what is -- what tax -- I mean, sorry. You talked about tax rate.

What share count are you using within your guidance now that you took such a big buyback in the quarter?.

On an annual basis, it's just over -- fully diluted. It's just over 15,900,000 shares. .

So you're planning to get more aggressive on the buyback, too?.

Well, not necessarily more aggressive, but we had planned to be buying back shares in every quarter this year. And what that reflects is the positive benefit -- the longer the shares are outstanding for the -- or retired for the year, the more beneficial they are.

So we front loaded our repurchase towards the beginning of the year to show a lower weighted average for the full year. So we don't intend to maintain the same level of buying back the whole year as we did in Q1. .

I mean, to get to 15.9 million, you're going to have to -- I mean, you're going to have to still buy back fairly aggressively, if I'm thinking about this right. .

We'll still be buying back, but we may spend about the same amount we did in the first quarter over the remaining 3 quarters, though it may be slightly more than first quarter. But you also have to take into account the positive effect of all the -- the full year effect of the shares we bought back last year. .

I mean, you ended last year with 17.4 million. You now have 16.8 million. I mean, getting down to an average of 15.9 million is heady stuff there. .

I think I've just laid out the repurchases for you. .

[Operator Instructions] We'll go next to Greg Pendy with Sidoti. .

Just wondering if you could give a little bit of color on the traffic, I know it was down in the quarter.

But is there any kind of overall theme or trend? Are you seeing some puts and takes with some stores maybe being outliers within the traffic? I know you don't have much mall exposure, but if you could kind of tell us which areas and what reasons might be below and then if any areas are trending above?.

Greg, that's a terrific question and one I don't think I have the answer to at the tip of my fingertips.

We've experienced declining traffic across -- we've watched ourselves from North, Central, South, deep South and of course, Puerto Rico, and traffic remains down mid-single digits in all of those market areas which is, again, reflective of what's going on with brick-and-mortar stores.

I can't -- the best -- the most interesting part of that question I believe I could get you an answer on is mall-based traffic and -- is this mall?.

No, it's North, Central, South. .

Okay. So with the North, I can give you this. With North our traffic for the quarter was down mid-singles. In the Central time zone, traffic was actually down very, very low singles. And in the South, weather zone, it was down mid-singles. And in the -- in Puerto Rico, down mid-singles and in the deep, deep South, down low singles. .

It appears we have no further questions at this time. I'll turn it back to you, Cliff, for any final or additional remarks. .

I just want to thank you for joining our call this afternoon and we look forward to talking to you about second quarter in August. I hope each of you have a great Memorial Day weekend. Thank you. .

Thank you. This does conclude today's conference. We appreciate your participation. You may disconnect at any time and have a great day..