Good afternoon, and welcome to Shoe Carnival's Second 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 developments. .

I'll now turn the call over to 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 Second Quarter Fiscal 2017 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 2017 guidance.

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

Before I get started, I'd like to say that our thoughts and prayers go out to the citizens of Houston, Texas as they recover from the devastating flooding as a result of Hurricane Harvey. I am happy to report that even though a few of our employees suffered some property damage, all are safe and sound. .

Now I'd like to resume the call. As I mentioned on our first quarter call, we were pleased with the start of the second quarter, as May's comparable store sales were positive. Every year, as we move closer to the end of the second quarter, sales are driven in each market by their actual back-to-school dates and tax-free holidays in certain states.

There were 2 notable changes in tax-free holidays this year. Alabama moved to July from August. And Georgia, which traditionally has been in July, decided not to have their tax-free holidays this year.

In addition to these 2 tax-free holiday changes, we also experienced shifts in a few back-to-school dates as school systems continue to move opening dates later in the calendar. .

Even with these changes, I'm pleased to report that our comparable store sales for the second quarter were up 0.4%. The positive momentum we began to see in the second quarter has carried forward into August as we finished the month with a 7% comparable store sales increase.

In addition, I'm excited to report that with our strong August results, our year-to-date comparable store sales are now flat as compared to the same time period last year. For the quarter, conversion was up slightly. Average dollars per transaction and units per transaction were up low single digits.

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

We ended the quarter with inventory up 0.6% on a per store basis due to later back-to-school dates. Our merchants continue to do a good job managing inventory, and our plan remains to end the year with per store inventory down mid-single digits. Merchandise margin and BD&O were flat as a percent of sales.

SG&A deleveraged 20 basis points due to slightly higher selling cost. The result was EPS of $0.24 per diluted share, which represents a 9.1% increase versus the second quarter last year. Kerry will give more detail on the financial results in his prepared remarks. .

We ended the second quarter with 418 stores in 35 states and Puerto Rico. During the quarter, we opened 5 stores and closed 4 stores. Of the 5 stores we opened in the second quarter, one is in a large traditional market we currently serve, 2 are in mid-market locations and 2 are in small markets.

For the remainder of the 2017 fiscal year, we expect to open approximately 7 more stores. Two of those stores will be small-market stores, 3 will be mid-market stores and 2 will be traditional large-market stores. We will close approximately 16 to 18 underperforming store in the second half of fiscal 2017. .

Over the past 2 years, we have stated that one of our long-term strategies is to address our stores that produce low or negative contribution while working with our landlords on rent negotiations and store relocations.

As we have stated in the past, if we are unable to improve the store's performance, we will close the store to enhance future shareholder value. .

Looking ahead to fiscal 2018, we have identified an additional 30 to 35 stores that we will close if we cannot improve the performance of those stores to our minimum contribution expectation. Even though this would reduce our overall sales volume, we would realize long-term improvement in operating income and EPS.

New store openings for 2018 will be in the low single-digit range. We remain committed to long-term strategic store growth. However, with the changing landscape in brick-and-mortar stores, we believe more attractive real estate opportunities will be available to us if we exercise patience. .

Now I'd like to update you on our ongoing CRM strategy. Over the past year, we have been data mining our Shoe Perks customer file in order to gain a better understanding of our customer. It became increasingly clear that this project was going to take more time to execute than we are willing to wait.

Earlier this year, we engaged a strategic partner that specializes in creating holistic CRM strategies for large- and mid-size retail organization. This initiative is instrumental in focusing the entire organization to a more customer-centric model.

Once this project is complete, we will leverage customer insight to better serve our customers and further differentiate the Shoe Carnival brand. This will result in a seamless, memorable experience for all customers across all shopping channels.

We have already identified some quick wins that we believe will allow us to quickly improve customer engagement. .

Moving on to merchandise. I'd like to take a moment to review our second quarter sales by department. Women's nonathletic ended the quarter up low single digits to last year on a comparable basis. Women's dress shoes continue to perform better than expectation, close to the comparable store increase in the teens.

In addition, our junior shoe categories continue to perform well. Men's nonathletic ended the quarter up slightly on a comparable basis. Men's dress shoes and boat shoes continue to be a challenge. However, we saw positive results from our traditional casual categories and from sport boots and hikers. Children's shoes were up low single digits.

We were pleased with the quarter results in sandals and boys' and girls' athletic. Adult athletic was down slightly on a comparable basis due to a decline in men's basketball. Women's athletic posted a mid-single-digit increase for the quarter. Running categories in both men's and women's continue to show strength. .

Now I'd like to give a little color on our expectation for the remainder of fiscal 2017. We are excited about the outstanding results in August. As we have consistently communicated, our customers buy at need, and they certainly are proving that for back-to-school.

We believe the positive athletic and athleisure trend happening in the family footwear category will continue, and we have reallocated inventory dollars to those specific categories for the fall season to take advantage of this trend.

For the majority of our other footwear categories, the month of September and October will depend on the weather as it always has. We expect, once cooler weather arrives, it will fuel the bootie and sport casual categories. .

For fourth quarter, as we have stated throughout this year, we have planned our boot sales very conservatively, and we are prepared to chase product if the category surprises us.

We plan on being much less promotional with boots as we navigate our way through the fourth quarter, which will have a negative impact on sales, but we expect to produce better margins. However, as I've mentioned earlier on today's call, we will be closing approximately 16 to 18 stores in the second half of fiscal 2017, which will impact margin.

Based on our performance to date and these expectations, we expect fiscal 2017 net sales to be in the range of $1,006,000,000 to $1,019,000,000, with comparable store sales flat to down low single digits.

We have raised the low end of our previous earnings guidance and now expect earnings per diluted share of $1.35 to $1.45 compared to our prior expectation of $1.30 to $1.45.

Included in the full year earnings per diluted share estimates at the high end of our guidance, we expect the second half of the fiscal year gross profit margin will be flat, with BD&O and SG&A cost decreasing slightly as a percentage of sales. .

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

Thank you, Cliff. Second quarter net sales increased $3.2 million to $235.1 million compared to the second quarter of last year. Of this increase in net sales, $801,000 was attributable to the 0.4% increase in comparable store sales.

We generated $5.7 million in sales from the 28 new stores opened since the beginning of the second quarter of fiscal 2016, partially offset by a loss in sales of $3.3 million from the 14 stores closed over the same period of time. Our gross profit margin for the quarter remained flat at 29.0% compared to the second quarter of last year. .

Our merchandise margin, along with buying, distribution occupancy expenses as a percentage of sales, remained flat compared to the second quarter of 2016. SG&A expenses increased $1.2 million in the second quarter of fiscal 2017 to $61.8 million.

As a percentage of sales, these expenses increased to 26.3% compared to 26.1% in the second quarter of fiscal 2016. The overall increase in SG&A during the quarter was primarily due to a $1 million increase in expenses for new stores net of expense reductions for stores that have closed and a $916,000 increase in impairment of long-lived assets.

These increases were partially offset by decreases in stock-based compensation and incentive compensation expense totaling $849,000. Included in both cost of sales and SG&A in the second quarter of fiscal 2017 were store closing costs of $821,000 compared to $36,000 in the second quarter last year.

4 stores were closed in the quarter compared to no store closings in the second quarter fiscal 2016. Preopening costs, including both cost of sales and SG&A, decreased $262,000 in the second quarter fiscal 2017 to $370,000. .

We opened 5 new stores in the second quarter of fiscal 2017 compared to 9 new stores in the second quarter last year. The effective income tax rate was 37.9% compared to 38.0% in the same period in fiscal 2016. For the full year of fiscal 2017, we expect our tax rate to be approximately 38.0%. .

Second quarter net earnings were $3.9 million or $0.24 per diluted share compared to net earnings of $4.1 million or $0.22 per diluted share in Q2 last year. Weighted average shares outstanding for the quarter decreased 2.2 million shares or 12% from Q2 of last year. Total shares outstanding at the end of Q2 this year were 17,019,769. .

Now turning to our cash position information affecting cash flows. In the second quarter this year, we repurchased 469,000 shares of common stock at a total cost of $10.2 million, and $13.5 million remained available under our $50 million share repurchase authorization.

This brings the total shares repurchased during the last 6 quarters to 2.9 million shares at a total cost of $71.9 million. We've also paid cash dividends of $7.4 million during that time frame.

We believe this demonstrates our confidence in our ability to generate cash from operations in excess of what is needed to invest in our operations and also our commitment to return value to our shareholders.

While we did incur borrowings at the end -- on our line of credit for the first time in many years to fund the peak in inventory for back-to-school, we paid off the full amount in mid-August.

We expect limited, if any, borrowings against the line of credit for the remainder of the fiscal year and are projecting the end of the year with approximately $50 million in cash and no borrowings. .

Depreciation expense was $6.1 million in the second quarter of fiscal 2017. Depreciation expense is projected to be approximately $24 million for the full fiscal year.

Capital expenditures for fiscal 2017, including actual expenditures during the second quarter, are expected to be $22 million to $23 million, with approximately $14 million to be used for new stores, 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 qualitative information on our earnings expectations for the third quarter this year. We expect Q3 comp store sales to be up low single digits. Additionally, we expect our gross profit margin to be flat to slightly up and our SG&A as a percentage of sales to be slightly up compared to Q3 last year. .

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

[Operator Instructions] We will take our first question from Greg Pendy with Sidoti. .

I guess my question, just on the store -- the planned store closings that you're looking at. Can you just give us a little color on maybe why you didn't wait to push those out heading into a seasonally strong period in the second half? Why the timing? It just seems like it's a little bit off.

Most people who are looking to rationalize their store base did that over the summer. .

Well, Greg, we want to get -- our Christmas time, so to say, is back-to-school. So our most productive time of year would be back-to-school and then secondly would be a holiday. We're in our lowest inventory position at -- after the holidays.

We find that as one of the most advantageous times for us to get to a liquidation of the inventory and close the store at that point in time. Historically, that's been our longest period that we've had -- our strongest period for store closings. .

Okay.

So if I understand that, when you say store closings on the second half, a lot of that will be, I guess, during January?.

Yes, it's very backloaded to the year. .

Got it. Got it.

And then can you just talk about, I guess, the overall environment that you guys saw for seasonal product? Just given the fact that there has been -- I know you called out the athletic side, but can you just talk about how you guys did with seasonal and sandals product?.

Greg, we were -- sport sandals, just like I think everyone has reported in sport sandals and -- flip and sandals were extremely strong during the quarter. I think I called out -- in fact, I'm positive I called out kid's sandals as a strong category. So we're pleased with our -- we're pleased with the performance of the seasonal product.

But the true driver as we went through the quarter was out of our women's athletic, out of our kid's athletic and out of the running categories in both men's and women's. The other reason the men's athletic business was just very slightly down was because we're the strongest user -- strongest seller of basketball in the family channel.

And as you know, the basketball category has not been particularly in favor at this time. .

[Operator Instructions] We'll take our next question from Chris Svezia with Wedbush. .

So I guess, first, I just want to go to the guidance for a second. So when you said flat gross margin in the back half of the year, Q3, you're sort of indicating slightly positive, but fourth quarter last year was down substantially.

Just kind of walk through how we should think about -- I mean, that would imply fourth quarter is down based on what you just said. Just kind of walk through the thought process between third quarter, fourth quarter and the gross margin. .

Well, here's -- from a margin perspective, we expect fourth quarter, the boots will be up substantially from a year ago. We are going to be much less promotional on boots this year. We bought fewer boots. There's no reason to have to push them through.

On the other hand, we're closing between -- at the end of the fourth quarter, we'll be closing between 16 and 18 stores. So that's going to have an impact on margin. Those 2 combined, Chris, margin should be basically very close to the outline. .

So just so I understand this, you'll make back a substantial part of gross margin in the fourth quarter related to the boot business, but being less promotional.

But the offset is you're going to be closing stores that have a negative impact on gross margin?.

That is correct. You have to clear through the inventory. We don't transfer product out of a closing store. Normally, we do not transfer product out of a closing store. We cut the product off -- product delivery off a month prior to their going out of -- the closing sale. We take almost a full quarter to allow the store to clear through its inventory.

And in the last month or the last few weeks of a store closing, we clear the inventory. .

Okay. How are you planning boots for the back half of the year? Just what are your thoughts from a either comp perspective or planning perspective? Just any color about the categories since you're talking about that. .

We're planning boots from a pair standpoint down high single digits. And Chris, it's going to be very difficult to give me a -- give you a specific answer on that because if the weather cooperates, then we'll have a much better boot season because we'll realize a much higher retail -- average retail price on those boots.

But if the weather doesn't cooperate, then the retail price will be a little lower, but not at the price we were at last year. Does that -- I hope that makes sense. There's no -- there's opportunity to have -- actually have an increase in boots from an average retail standpoint -- I mean, an increase in boots on sales due to average retail price.

That make sense?.

Okay. No, I got it. I got it.

And from a -- can you remind me again, what is the trajectory of comp by month, third quarter last year, August, September, October?.

Kerry is going to give you that number. .

August last year was up low single digits, but then we saw a decline in September of low singles. Both September and October were declines, low singles from a comp basis. We ended the quarter down negative 0.4%. .

Okay, got it. And then just curious, Cliff, you mentioned the dress category in women's. Any color about what that is? Just any color about that would be helpful. .

It's -- as I said in my prepared remarks, we are a little surprised and had not planned for the kind of increase that we had. But we're seeing great sell-throughs on jeweled or evening kinds of shoes, and that really is a driver.

I hate saying that because I got competition listening in, so I appreciate you having to get them [indiscernible] categories. .

All right, fair enough.

And last, just on the e-commerce business, what was your e-commerce business in the quarter?.

We don't report these numbers. .

Can you tell me at all the percentage increase?.

We don't report -- we don't report any particular store's percentage increase. .

And we'll next go to Sam Poser with Susquehanna. .

All right, let's talk about Texas and you've got about 20 stores closed in Texas right now according to your website.

So how does that work into the guidance that you provided for the back half of the year since I would gather you don't know when those stores may open up?.

We don't know when those stores are going to open up, but we have stores in Houston that are open right now. And as soon as the water clears away -- and no one knows how long that's going to take, Sam. But as the water clears away and we can get employees to the stores, we'll open the stores.

We have very little damage, very little damage in our stores. From what we've been able to tell, there's -- I think there's 1 or 2 stores where we don't have electricity, so we can't look into those stores with the cameras. But from what we've seen, we have very little damage.

And so as soon as our employees can get to the stores and customers show up, we've actually had a couple stores that opened and the customers didn't show up. So we ended up closing them for the day. And we'll continue to do that every day until the customer can get out. And -- but Sam, we don't expect to be closed very long at all. .

So I mean, have you included any impact from that into the guidance, I guess, is the question?.

Sam, we think we have -- we don't have great information, like Cliff just said, but we think we've been sufficiently conservative in the guidance to take into account the fact that this is -- if this is not a very long-lived event, then we're -- the guidance covers it. .

Okay, I'll just leave it there.

I guess the other question is, could you give us some idea of sort of what the -- since we talked about sales by month, what the sales by month were in Q2? And what the sort of combined comp for July and August sort of merging that back-to-school time period together gave you?.

You're going to have to give me a minute to give you the July and August comp combined. The -- I will tell you that we were up low single digit in the month of June. We were flat and -- excuse me, low single digit in the month of May, flat in June. And we were basically just barely negative in July, and that was because of the last week.

We had increase in every week in the month of July with the exception of the last week, and that was due strictly to the shift in back-to-school. .

Okay. And then that combined comp, I guess, you're looking that up, so... .

I don't -- if you estimate it, because August is a bigger month and we drove 7%, we're basically flat in July, you're probably in the range of 4%, 4.5% on a blended basis. I don't have the numbers in front of me, but we don't typically look at it in that fashion. .

All right. And then -- so that long-term debt -- the debt that showed up in your balance sheet is now gone because that was the sport inventory, just clarifying that. .

Correct, that is true. We peaked our inventory. We always peak our inventory very strongly right before back-to-school, and those borrowings were just to cover that. It was affected by the aggressive buybacks that we did in the first half this year, but what we had to cover was that inventory.

And then as soon as the inventories were turned into sales in the first couple weeks of August, we were able to pay down that entire amount. .

All right. I think all the other questions I had have been answered. I have one more for you, Cliff, though, just to follow up on Chris's question.

In the women's dress business, in the fancy-shmancy shoes, what brand specifically have driven such a good increase?.

Sam, you've dialed into this call for the 5 years that I've been the CEO. And for the 5 years that I've been CEO, for every single quarter, I've told you we don't talk about specific brand. .

Well, I just figured the way you said it and that the competition was listening and since you seemed [indiscernible] with them, I would ask that question. .

Well, I appreciate the question. .

And since there are no further questions, I would like to turn the conference back to Mr. Cliff Sifford for closing remarks. .

Thank you for your continued interest in Shoe Carnival, and we look forward to sharing our third quarter performance in November. I hope each of you have an enjoyable Labor Day weekend. Thank you. .

That concludes today's conference, and thank you for your participation..