Good afternoon, and welcome to Shoe Carnival's Third 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 including 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 Third Quarter Fiscal 2017 Earnings Conference Call. Joining 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 third 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..

Over the past several years, we have been building and executing a multi-faceted digital presence with the goal of engaging our customers across all channels. Our initiatives have been focused on building a fun, exciting and memorable experience for our customers, regardless of how they choose to shop with us.

We have enhanced our store experience through the addition of shop in shops, which highlight key brands and/or classification. In this year, we have re-platformed our e-commerce site to enhance performance and reliability.

We launched the SMS program for those customers that prefer to hear about the latest Shoe Carnival experience via text, and we began to refocus our marketing spend away from traditional marketing venues to a more robust always on digital program..

In a quarter that saw traffic impacted by 3 hurricanes, affecting Texas, Florida and Puerto Rico, our traffic for the third quarter was only down low single digits.

Our merchant team provided our customer with a great selection of the seasons' most important styles that drove the mid-single-digit increase in units per transaction and a low single-digit increase in conversion. This led to a comparable store sales increase of 4.4% for the third quarter.

Each geographic region from the north to the deep south, with the exception of Puerto Rico, all reported positive comparable store sales increases for the quarter..

Our stores in Puerto Rico experienced a total comparable store sales loss in the teens due to the devastation of Hurricane Maria. As of today, we have 3 of the non-Puerto Rico stores open with the possibility of getting one additional store open before the year-end.

The remaining 5 stores will be a longer-term project, with some that may be closed permanently. I'll remind you that we impaired 7 Puerto Rico stores in the fourth quarter of fiscal 2016..

We ended the quarter with inventory down 4.3% on a per-store basis, which was in line with our expectations. Our plan remains to end the year with per store inventories down mid-single digits. Our merchandise margin decreased 80 basis points, while BD&O was down 70 basis points as a percentage of sales.

SG&A was leveraged 70 basis points primarily due to lower selling cost. The result was EPS of $0.66 per diluted share, which represents a 22% increase versus the third quarter last year..

Kerry will give more detail on the financial results in his prepared remarks. I would now like to transition to our #1 initiative for 2017. We announced on our last call that we are in the midst of implementing holistic CRM strategy. We are now in the final stages of implementing this strategy.

This initiative is instrumental in focusing the entire organization to a more customer-centric model. Once this project is complete, we will leverage customer insights to better serve our customer, and further differentiate the Shoe Carnival brand.

With the ever-evolving way our customers receive information, and how they choose to shop, this project will aid in both keeping our core customer engaged in the Shoe Carnival brand and the acquisition of new loyal customers..

In addition to the CRM strategy, over the next year, we will enhance our loyalty program, Shoe Perks. To award our high-valued customers and to incentivize all our loyal customers to make Shoe Carnival their store of choice for all their footwear purchases.

With the launch of our new website in September, we are in the process of creating key brand landing pages, which we believe will enhance our site and make us more relevant in the marketplace. And in 2018, we'll further strengthen our e-commerce store with the addition of vendor drop ship..

We ended the third quarter with 424 stores in 35 states in Puerto Rico. During the quarter, we opened 7 stores and closed 1 store. Of the 7 stores we opened in the third quarter, 2 are in larger traditional markets we currently serve. 3 are in mid-market locations and 2 are in small markets.

We will close approximately 16 underperforming stores during the fourth quarter of fiscal 2017. As stated in our last call, for 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 take a moment to review our third quarter sales by department. Our women's nonathletic department ended the quarter down low single digits to last year on a comparable basis. As expected, women's boots got off to a slow start, as we planned our boot receipts later in the quarter.

We were pleased with our sandal categories as we saw positive results in sport and athletic sandals for back-to-school. The men's non-athletic department ended the quarter up mid-single digits on a comparable basis. This increase was broad-based with comparable store sales increases out of dress, casual and boots.

Children shoes were up high single digit for the quarter. Our merchant team did an outstanding job of having the right styles from the right brands for our back-to-school time period. Adult athletic was up mid-single digits on a comparable basis for the quarter.

I cannot be more proud of our merchant team in kids and adult athletics for identifying the key items of the back-to-school time period, and providing our stores the depth they needed to drive our sales..

Now I'd like to give a little color on our expectation for the remainder of fiscal 2017. We are excited about our exceptional results in the third quarter.

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

As we stated on the last call, our plans are to be less promotional this fourth quarter than last year and to that point, we have decided not to open our stores on Thanksgiving Day. Although this strategy will have an impact on sales, we expect to experience higher merchandise margin on the seasonal product.

However, as I mentioned earlier, we'll be closing approximately 16 stores during the quarter, which will impact merchandise margin as we clear through the inventory owned in those stores. .

Based on our performance to date and these expectations for the fourth quarter, we expect fiscal 2017 net sales to be in the range of $1,020,000,000 to $1,025,000,000 with comparable store sales flat to up low single digits.

We have raised our previous earnings guidance, and now expect earnings per diluted share of $1.42 to $1.49 compared to our previous expectation of $1.35 to $1.45.

Included in the full year earnings per diluted share estimates at the high-end of our guidance, we expect the fourth quarter gross profit margin will be down slightly, but BD&O and SG&A cost decreasing slightly as a percentage of sales. .

Please bear in mind that the fourth quarter this year will include 14 weeks compared to 13 weeks in the fourth quarter last year. While the extra week is worth about $12 million to $13 million in sales, it has an immaterial effect on net income for the fourth quarter.

The extra week is not included in the comparable store sales calculation for the quarter..

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

Thank you, Cliff. Third quarter net sales increased $12.9 million to $287.5 million compared to the third quarter of last year. Of this increase in net sales, $11.9 million was attributable to the 4.4% increase in comparable store sales.

We generated $6.6 million in sales from the 26 new stores opened since the beginning of the third quarter of fiscal 2016, partially offset by a loss in sales of $5.5 million from the 15 stores closed over the same period of time..

Our gross profit margin for the quarter was 29.8% compared to 29.9% in the third of quarter last year. This decrease was driven by an 80 basis point decrease in our merchandise margin, partially offset by a 70 basis points decrease in volume distribution occupancy expenses as a percentage of sales.

The majority of the merchandise margin decrease was due to being more promotional during the quarter and a shift in the merchandise sold during the quarter.

As Cliff mentioned earlier, we sold fewer women's boots during the quarter, which is typically the highest margin category in the third quarter, and sold more athletic footwear, which is typically the lowest margin category for the quarter..

The decrease in combined distribution and occupancy expenses, as a percentage of sales, is primarily due to lower occupancy cost and deleveraging effect of same -- higher same-store sales. The decrease in occupancy cost was primarily from the stores we have closed or will close since the third quarter of last year..

SG&A expenses increased $1.2 million in the third quarter of fiscal 2017 to $67.8 million. As a percentage of sales, these expenses decreased to 23.6% compared to 24.3% in the third quarter of fiscal 2016.

The overall increase in SG&A expense during the quarter was primarily due to increases in incentive compensation, consulting fees related to our CRM initiative, and our retirement savings plan, partially offset by lower advertising expense for the third quarter.

Included in both cost of sales and SG&A in the third quarter of fiscal 2017 were store closing cost of $300,000 compared to $360,000 in the third quarter last year..

More stores were closed in both Q3 this year and Q3 last year. Preopening cost included in both cost of sales and SG&A decreased $170,000 in the third quarter of fiscal 2017 to $328,000. We opened 7 new stores in the third quarter of fiscal 2017 compared to 3 new stores in the third quarter last year.

The effective income tax rate was 40.0% compared to 37.2% in the same period of fiscal 2016. For the full year of fiscal 2017, we expect our tax rate to be approximately 38.8%..

Third quarter net earnings increased 11% to $10.7 million, while diluted earnings per share increased 22% to $0.66. In Q3 last year, we had net earnings of $9.7 million, and diluted earnings per share were $0.54. Weighted average shares outstanding for the quarter decreased 1.6 million shares or 9% from Q3 of last year.

Total shares outstanding at the end of Q3 this year were $16,951,770 shares..

Now turning to our cash position and information affecting cash flow.

In the third quarter of this year, we repurchased 24,000 shares of common stock at a total cost of $455,000 due to the desire of not incurring any further borrowings on our line of credit, after we paid off the balance outstanding at the beginning of the quarter, we limited our share repurchase during the third quarter.

The fourth quarter is typically our largest cash generating quarter, while multiple factors play into the decision of when we repurchase shares in the open market.

To add a little perspective on our cash flow in the first -- fourth quarter, we could spend the remaining $13 million available under our $50 million share repurchase authorization in the fourth quarter, and still end the year with approximately $50 million in cash and no borrowings..

Depreciation expense was $6.0 million in the third quarter at fiscal 2017. Depreciation expense is projected to be approximately $24 million for the full fiscal year.

Capital expenditures for fiscal 2017, including the actual expenditures during the first 9 months of the year, are expected to be $20 million to $21 million, with approximately $13 million to be used for new stores, relocations and remodels. Lease incentives are anticipated to be $4 million for the year. .

My last comment today will be to discuss the calendar shift in fiscal 2018. Due to the fact that fiscal 2017 is a 53-week year, the fiscal 2018 quarterly calendar ends 1 week later than it did in 2017. While the shift affect each quarter during the year, it's most apparent in Q2 and Q3. Let me explain.

This year, our second quarter ended on July 29 and the very next week, the first week of Q3, our back-to-school sales accelerated significantly. Due to the calendar shift, in 2018, our second quarter will end on August 4, thereby, pulling in those sales for back-to-school into the second quarter and out of Q3 next year..

If the 2017 calendar was restated to 52 weeks and to reflect the 2018 ending dates, we will increase fiscal 2017 sales in Q1 by $5.1 million, increase Q2 sales by $22.9 million, decrease Q3 sales by $24.8 million, and decrease Q4 sales by an estimated $15 million to $16 million.

The net sales effect of the calendar shifts, and having one less week, would be to reduce 2017 sales by an estimated $12 million to $13 million. This concludes our financial review..

Now I'd like to open up the call for questions. .

[Operator Instructions] And we will take our first question from Sam Poser from Susquehanna. .

The way the -- I just have a question about the hurricane impact. What happened with the hurricane in those states was because of the traffic, the traffic went down, I would assume, in August and September.

And then the traffic -- couldn't make up the traffic, but those people that came back in those states arguably bought more, which helped the comp in your conversion.

Is that the right way to think about sort of how that -- how the hurricane impacted?.

The Hurricane impacted Florida and Texas right at the back-to-school time period, so it did have an impact on, actually, in Florida right after the back-to-school time period. So it did have an impact on traffic. The largest percentage impact from traffic, however, was out of Puerto Rico because we were closed for quite some time.

And we were closed -- how long in the 1 store and then we were able to get the other? So for at least a week, and then the other stores that we have not opened yet remained closed, obviously. .

I guess the question is in Florida and Texas, did the sales post-hurricane pick up a lot? Like were your -- did your conversion go way up in those markets even if traffic didn't substantially pick up where you could offset the traffic?.

The sales went -- wherever there was flooding, Sam, is the best way to think about it. In a hurricane, wherever there's flooding, you get a pretty good tailwind after the hurricane. So sales did pick up significantly in the Houston market.

Not so much, not so much in the Florida market because, again, it was after back-to-school and there was not a lot of flooding. .

Got you. And then when we -- when you think -- you talked about the low-single-digit store openings next year and how you wanted to get back to sort of opening stores again.

What is sort of like what you would see to be a store opening run rate this year you opened? Or you will have opened 19 stores? Is that like a good number as a target number to have despite the fact that next year is going to be lower?.

I think that's a terrific number. Once we -- the real estate settles down, I believe between 20 and 25 stores is an excellent number. .

And do you foresee that happening? I mean, is that something you expect to happen post next year? And do you foresee closing more than the 30 to 35 stores next year -- or 25, 35 stores next year, do you foresee another batch beyond that? Or does this get you sort of where, as of now, where you see you need to be between what -- the 26 you'll have closed this year and the 30 next -- 30-ish next year?.

Well, we're not really prepared to talk about '19.

If -- right now, Sam, we believe our customer has benefited from a lot of different things going on with the economy, and we hold hope that some of these underperforming stores -- we realize hope is not a strategy, but we will hold hope that some of these 30 to 35 stores will benefit from what we've seen in the third quarter and what we believe we're going to see in the fourth quarter and beyond.

So we're not really prepared yet to talk about '19. So I think we concentrate strictly on the 30 to 35 stores that we're looking at for next year. .

And then, Kerry, when you -- as you close the stores next year, like what -- and with the stores you've closed this year, where does that give you -- I mean, you're going to save some money because those are underperforming, I assume. Some of Puerto Rico may close as well.

So I mean, how does that affect your leverage point on the comp when -- as that happens?.

Well, over time, we may see that our comp against our buying distribution occupancy, where we typically say 2% to 3%, may come down because what we're seeing is we're closing low sales productivity stores, and they have a higher occupancy cost as a percent of sales, and as those stores close out, that may change that.

In the near term next year, when you close a store, you incur additional SG&A type cost. So I don't see that changing dramatically. But just generally, overall, we'll see a better operating margin as we get past '18. If all else stays the same, closing these stores would help the operating margin out. .

Okay. And then when you look at -- your inventories' down nicely. But I guess, the question is over time, what's your target annual turn? I mean, you're still on -- a forward weeks of supply basis, your numbers are still pretty high.

Where -- what's your goal, like if you want to talk about an inventory turn? Is there a target that you have?.

Well, right now, we're looking for just -- well, exactly a 2.4 downturn is where we -- the long-term plan is to get there. That's not going to happen. As you know, being an ex retailer, Sam. That doesn't happen overnight, but we're making really good progress. .

And then, I mean, that's 2.4 that's -- I would assume that's sort of a midterm plan.

I mean, would you foresee yourself over time getting to a 3? I mean, that would be huge, and that given that you're closing under-performing stores and so on, and doing drop ships and so on, I mean, that's -- theoretically, you could sort of wind your way there over time. .

That's a tough number in the shoe business because of the number of sizes that you have to be in stock. But I'd tell you, I won't -- wouldn't completely rule it out because of the fact that we ship from our -- ship our e-commerce business sales from our stores. .

[Operator Instructions] And we will take our next question from Chris Svezia from Wedbush. .

So first, I'm curious, Q3, what was the cadence or can you add any color about the cadence? I know August was up roughly 7% just maybe talk about how September and October played out. .

Yes, we were up 7%, not to correct you, but not roughly 7%, 7%. I didn't want you to think 6.9%, Chris, it was 7.% and we're proud of that number. We were up 2.9%, and we were just above flat for October. .

I don't know if you're going to be so proud of that 7% when I hear you telling us you got to comp that 7% next year, so I'll remember that for you.

What's the -- and in the fourth quarter, I'm just curious, what's the cadence as you go through the fourth quarter versus last year?.

Kerry is pulling that out right now. .

Okay.

And while Kerry is pulling that out, I got to -- when you talk about your CRM initiatives, just can you give any color as to when that starts to go into place? Is that -- do you expect to get some of that done or in place for holiday? Or is that really spring '18 [indiscernible]?.

We expect to get that in -- we will start the implementation of that program in early 2018. And it ramps up, so you need to look at that, as it's going to be good for '18, but it is a long-term ramp. So over the next 2 to 3 years, especially as we enhance our loyalty program, we'll see a benefit for at least the next 3 years. .

Chris, on the -- you asked about -- we were -- in November, we were down low singles. December, it was relatively flat, and January came back down low singles, and that gave us a 1.2% comp decrease for the quarter. The November weakness really came around these Thanksgiving time period. .

Okay.

And then when you talk about boots, and you say boots were down, how much of that is just to a slower start to the season versus you planned it down and brought it in late if you understand what I'm trying to say?.

Yes, I understand exactly. We planned it down and we brought it in later than we did last year. We -- our inventory in boots -- per door inventory in boots down double-digit through the quarter. It only began to recover from a double-digit decline, as we've moved through October but that was planned.

Our goal all along, as I stated and I think in a couple of calls now, was to move product out of -- or move dollars out of the nonathletic categories into the athletic categories, so we could maximize -- or we could elevate the athletic business to where we thought our customer demand was going to be, and I believe we did exactly the right thing. .

Okay. And then when you said flat in October, how much of that -- is that just due to the fact that you have boots in later? And if you didn't have boots coming in later, it would have been a different comp? I'm just curious about the flat in October. .

No -- oh, you're talking about from a comp standpoint?.

From a comp perspective, yes. .

The -- I think that actually did have a little to do with the boot sales. It was warmer. October with us is all about the weather. If we have a cool October, we sell boots.

By the time we get to October, the demand for athletic product has settled down, and it becomes a seasonal product issue with us, and we were just waiting for the cooler weather, which did not arrive [indiscernible].

And since it arrived in November, is it fair to say comps have improved at all because the boot business is starting to move and flow? Is that a fair characterization?.

It's a fair characterization. .

Okay. I don't bite. It's okay. You can answer.

But last thing I just want to ask you is when you -- the stores you're going to close next year, are they actually losing money right now? No -- Kerry answered some questions previously about it, but are they actually losing money right now? Or are they break even? Just where do they stand at this point, if you can add any color for that?.

Once you identify a store that you're going to close, you have to start accelerating some costs. So where the store is prior to this -- before we had made a commitment to close the store, they are more of a breakeven to slightly positive.

And now what we're seeing because of accelerated expenses in some of these, now they're losing money, not a dramatic amount of money, but they've gone negative as a group. .

Okay. All right. Got it. Okay. Final thing, just real quick. When you talked about the merchandise margin, this should be up because you're being less promotional in boots in how you bought your inventory. But the offset to all that is the clearance sales or liquidation sales you've got to run in the 16 stores in the fourth quarter.

So are merchandise margins, as you see it today, a wash for the fourth quarter?.

Slightly. Slightly down, slightly down. .

Yes, we -- let's take the leverage of our BD&O a little bit, but still expect our overall gross profit margin for the quarter to be slightly down. .

And we will take our next question from Greg Pendy from Sidoti. .

I guess, just as we look, how should we be thinking about the out-year? I mean, if you're closing 16 stores this year, and the impact that's going to have, I guess, on the gross margin, just given the liquidation process, the clearance process that you used for store closures, is it fair to say the impact will be roughly double next year as we start to think about that, given the fact that you're targeting 30 to 35 stores?.

Well, it's going to be hard for us to predict. We have not closed this many stores at one time. As Cliff talked about it, we're going to -- we need to get through this fourth quarter, and we've made projections on what we think it's going to take liquidate, and how much it's going to hurt our margins.

But we need to get through that before we can really make a prediction on doing twice as many stores in the out-year. .

Okay.

But is the process, you think, going to be the same that you use, where you don't really move product to keep it within the stores? And I think it's -- I think you spoke last call, roughly the last 3 weeks is -- of a closing is sort of liquidation process of a store?.

We're taking -- Greg, we're taking almost 4 months to close a store, so that we can eke out every dollar of gross margin that we can. We closed a store in the third quarter, and we're very pleased with the margin performance of that store through the closure.

So we took the learnings from that store, and have applied it to the 16 that we're closing in the fourth quarter, and we believe we're going to duplicate exactly what we did in the third quarter. .

And we will take a follow-up from Sam Poser. .

Real quick. You're closed -- you closed 5 stores in the first quarter, 4 stores in the second quarter, 1 store in the third quarter, and you're closing an additional 16 stores for a total of 26 stores closed. Next year, you're taking -- you're saying 30 to 35, which is not double anything. It's slightly more.

Most of that probably comes at the end of the year, but it's not doubling store closing cost just from a big picture.

Is that correct?.

That is correct. Correct. .

And we have no further questions at this time. So I will turn it back to Cliff Stifford for any closing or additional remarks. .

We do appreciate you joining us on the call today. We hope everybody has an incredible Thanksgiving with their family, and we look forward to talking to you about our fourth quarter results next year. .

And this concludes today's conference. Thank you for your participation, and you may now disconnect..