Good afternoon, and welcome to Shoe Carnival's First Quarter Fiscal 2018 Earnings Conference Call. Today's call is being recorded. It is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited..

Management's remarks may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual results to be materially different from those projected in such statements.

Forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's earnings press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date.

The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements discussed on today's conference call or contained in today's press release to reflect future events or developments..

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

Thank you, and welcome to Shoe Carnival's First Quarter 2018 Earnings Conference Call. .

Joining me on the call today is Kerry Jackson, Senior Executive Vice President, Chief Operating and Financial Officer. .

On today's call, I'll provide a brief overview of our first quarter operating highlights and sales results as well as review our updated fiscal 2018 outlook. Kerry will discuss the financial results in more detail, then we'll open up the call to take your questions..

First is, it is important to note that the 53rd week in fiscal 2017 resulted in a 1-week shift of our fiscal 2018 calendar. Our fiscal 2018 first quarter ended 1 week later as compared to first quarter last year.

In fiscal 2018, all of our quarterly year-over-year sales comparison may be impacted if there are seasonal influences near the respective quarter-end dates. Comparable store sales for the first quarter are presented on a 13-week basis..

Now I'll review our operating performance. We experienced a very cold and wet start to the quarter, which affected sales through the Easter selling season. Once the weather turned from winter to warmer, even hot temperatures in certain regions at the end of the quarter, our customers reacted positively to our new spring assortment.

We are happy to report a comparable store sales increase of 1.3%. Sales of our spring product categories accelerated as we ended the quarter, and we continued to experience a strong athletic and athleisure trend. Traffic for the quarter declined mid-single digits while conversion and average dollars per transaction were up low-single digits.

Average units per transaction were up at the lower end of mid-single-digit range. We ended the quarter with inventory down 1.6% on a per store basis. We entered the first quarter with lower per-door inventory in fashion boots and seasonal clearance merchandise, which allowed us to achieve a 70 basis point improvement in merchandise margin.

BD&O was down 80 basis points as a percentage of net sales and SG&A delevered slightly. The result was a 31% increase in operating income, which, when combined with a 13% decrease in tax expense, produced EPS of $0.83 per diluted share, an increase of 73% compared to the quarter 1 last year. Kerry will give more detail in his prepared remarks..

To add a little more color on the first quarter, we have historically reported Easter on a combined basis for both the months of March and April. Even though we experienced a cooler and wetter Easter time period, comparable store sales for March and April combined were up 3.6% versus the same period last year.

Athletic shoes in total were up mid-single digits, while nonathletic was up low-single digits for the combined 2-month period..

Focusing now on our first quarter comparable store sales by department. Women's nonathletic was down low-single digits on a comparable basis. Women's boots were up in the teens on a comparable basis, with much more inventory and at much higher margins compared to first quarter last year.

We also experienced a low single-digit increase on a comparable basis in sandals, with weather warming and the latter part of the quarter. The men's nonathletic department was up low-single digits on a comparable basis. We were very happy with the performance of men's dress shoes and boots.

Children's shoes were up low-single digits on a comparable basis. This increase was driven primarily from Athletics, although we did experience a low single-digit comparable store increase in children sandals. Adult athletics was also up low single digits on a comparable basis. The strong athletic and athleisure trend shows no sign of slowing down.

Our customers know they can trust Shoe Carnival to have a tremendous assortment of the season's best styles and the top brands. The merchandise team continues to do a great job of identifying key family footwear and advertising those items to help make Shoe Carnival the destination store for both selection and value..

Now I'd like to spend a few minutes to update you on our key initiatives for 2018. As many of you know, we continue to exercise patience with opening new stores. At the same time, I'm pleased to report that we have been successful in improving the performance of some of the stores we have slated to close later this year.

Through a combination of improved performance and better terms with certain landlords, we are reducing the number of projected store closures from the range of 25 to 30 to a range of 20 to 25.

We continue to work diligently on each store in the closing list, with the goal of improving the metrics of each of the stores, thus, further reducing the number of store closures. New store openings for 2018 will be in the low-single-digit range. Near term, this reduces our overall sales volume.

However, long term, we expect to realize operating -- increased operating income and EPS improvement as a result of our store opening and closing efforts. .

For fiscal 2019, we do not expect to continue the level of store closings we have experienced over the past several years. We believe a better -- that better real estate opportunities are ahead of us as we look to benefit from the evolving specialty retail landscape, including retail consolidation and store closures.

We believe this and the implementation of our CRM strategy will enable us to once again ramp up store growth..

We ended the first quarter with 405 stores in 35 states in Puerto Rico. During the quarter, we closed 3 stores and had no new store openings..

Our CRM strategy is moving forward nicely. We expect our initial implementation to be complete by the end of the calendar year. This strategy is a key element in understanding who our customer is and creating a one-to-one relationship with them. Although a large part of our customer data comes from our loyalty program, it is not just about loyalty.

By identifying our high-value customers and where they live, we will improve site selection and real estate. Understanding how they shop, along with the brands and categories they prefer, our merchandise team can improve the merchandise selection on a store-to-store basis.

And by understanding the pain points on our customers' journey, we can improve the operations on our brick-and-mortar stores and online. We believe this holistic approach to CRM will give us a clear runway for growing Shoe Carnival now and in the future..

We are very close to launching the next version of our loyalty program, Shoe Perks Gold. This new program will offer our high-value customers a new tier of rewards, which is designed to incentivize them to make Shoe Carnival their store of choice for all their family footwear purchases.

The goal of this program is to -- is not to simply reward those customers who spend the most but to encourage those customers that have not achieved top tier status to shop more often. I will give you more detail on our updated loyalty program during the next call..

We are also very close to launching our vendor drop-ship program. Our goal is to have vendor drop-ship ramped up by the end of the second quarter. This enhancement will allow our customers the opportunity to seamlessly view and select from a broader brand of style selection than currently offered at shoecarnival.com.

For Shoe Carnival, we get the [textile] brands and expand sizes without the risk of inventory ownership..

We have a lot of great developments going on at Shoe Carnival today. In order to stay relevant with the changing retail landscape and the ever evolving consumer, we must continuously improve and innovate. The investments we are making in technology and customer engagement are incredibly important as we take Shoe Carnival to the next level of growth..

Finally, I'd like to give you an update on our financial expectations for fiscal 2018. We continue to plan our business conservatively in order to more effectively manage inventory and margin.

I am happy with the performance of our spring and summer product categories and the continuation of the strong athletic and athleisure trend we have been experiencing over the past several years. I am also happy with the way our second quarter has begun, with both sales and margin exceeding our expectation.

We believe this trend will continue to at least the back-to-school time period. I'm also pleased with the work our real estate team has done in reducing the number of stores slated to close this year. Based on these factors, we are raising our EPS guidance for fiscal 2018.

We now expect fiscal 2018 earnings per diluted share to be in the range of $1.90 to $2.05, which is up from prior guidance of $1.85 to $2. And we expect fiscal 2018 net sales to be in the range of $1,013,000,000 to $1,020,000,000, with comparable store sales up low single digits..

That concludes my overview. I would now like to turn the call over to Kerry. .

Thank you, Cliff. Our net sales for the first quarter ended May 5, 2018, increased $4.1 million to $257.4 million compared to $253.4 million for the first quarter ended April 29, 2017. Comparable store sales for the 13-week period ended May 5, 2018, increased 1.3% compared to the 13-week period ended May 6, 2017.

The $4.1 million increase in net sales was primarily due to increase of $4.4 million from the 19 new stores opened since the beginning of fiscal 2017 and an increase of $7.9 million related to stores included in our comparable store sales base, partially offset by an $8.2 million of loss on sales from the 29 stores closed since the beginning of fiscal 2017..

Our gross profit margin for the quarter was 30.0% compared to 28.5% in the first quarter last year. This was driven by a 70 basis point increase in our merchandise margin and an 80 basis point increase in buying, distribution and occupancy expenses as a percentage of sales.

The reduction in buying distribution occupancy expenses as a percentage of sales was primarily a result of leveraging more occupancy expense against a higher sales base. Occupancy expense for the quarter was lower than -- in Q1 last year, due primarily to a $1.5 million decrease in occupancy cost for stores we have closed or will close.

The increase in our merchandise margin was primarily due to having less prior seasonal carryover and clearing that product at a higher margin than in Q1 last year..

SG&A expenses increased $1.1 million in the first quarter of fiscal 2018 to $60.0 million. As a percentage of sales, these expenses remained flat at 23.3% compared to the first quarter last year.

For Q1 last year, the increase in expenses -- I'm sorry, for Q1 this year, the increase in expenses for the new stores were offset by expense reductions for stores that have closed, resulting in $1.8 million decrease in noncomp stores selling expenses.

Significant changes in SG&A for the quarter included increases in incentive stock-based compensation, along with decreases of fixed asset impairments and earnings on a retirement savings plan.

Store closing costs, included in both cost of sales and SG&A, were $167,000 in the first quarter this year, and there were no impairments of fixed assets reported during this period. Store closing costs included both cost of sales and SG&A in Q1 last year for $1.1 million, which included $646,000 of store-related fixed asset impairments.

3 stores were closed in Q1 this year compared to closing 5 stores in Q1 last year. There were no preopening expenses recorded in Q1 this year. Preopening expenses included both cost of sales and SG&A in Q1 last year for $534,000. There have been no new stores opened this year compared to 7 store closings in Q1 last year..

The effective income tax rate for the first quarter of fiscal 2018 was 25.0% compared to 37.6% for the same period last year. For the full year of fiscal 2018, we expect our tax rate to be approximately 25%. As a reminder, in December 2017, the U.S. Tax Cuts and Jobs Act was enacted, which reduced our corporate statutory tax rate from 35% to 21%..

Net earnings for the first quarter of fiscal 2018 were $13.0 million or $0.83 per diluted share. For the first quarter of '17, we reported net earnings of $8.2 million or $0.48 per diluted share..

Now turning to our cash position and information affecting cash flow. In Q1 this year, we repurchased 810,613 shares of our common stock at a total cost of $19.0 million. $31 million remained available under our $50 million share repurchase authorization end of Q1. Depreciation expense was $5.6 million in Q1.

Depreciation expenses project to be approximately $22 million for the full fiscal year. Capital expenditures for fiscal 2018, including actual expenditures during the first quarter, are expected to be between $10 million and $11 million with approximately $6 million to be used for new stores' relocations and remodels.

Lease incentives are anticipated to be approximately $500,000 to $1 million for the first year -- for the year..

My final comment today will focus on adding a little color on our earnings expectations for the second quarter this year. The calendar shift due to last year being a 53-week period is significantly affecting our Q2 sales and earnings compared to the prior year Q2.

Last 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 back-to-school into the second quarter this year and out of Q3.

If the 2017 calendar was restated to reflect the 2018 ending dates, Q2 sales last year would increase by $23 million in the quarter. While we expect a low- to mid-single-digit increase in our comparable store sales in Q2, due to the calendar shift, we expect total sales to increase in the low teens.

Shifting the promotional back-to-school sales into Q2 will have a negative effect on our merchandise margin but should create significant leverage on our buying distribution occupancy expenses, leading to a 50 to 80 basis point increase in our gross profit margin.

The shift will also result in high-single-digit increase in our SG&A dollar spent compared to Q2 last year, though will still be leveraged against the higher sales base..

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

[Operator Instructions] And we'll go first to Mitch Kummetz with Pivotal Research. .

I guess I have a few. Cliff, I'll start with you. The athletic business continues to trend well. I think you said it was up low singles on the quarter. Delta I thought it was up low singles.

Can you just talk a little bit about the benefit that you're seeing from better access to athletic brands? I know Adidas in particular is focusing more on the family channel. I suspect PUMA is doing the same.

To what extent are you benefiting from that? And at some point, do you lap that? And when you get to the point that, does that become kind of an issue for you guys or no?.

Mitch, the -- it's a great question, but the -- we've seen this trend at least for the last 2, maybe even 3 years. And I keep getting -- we keep getting that -- exactly that question, "What happens when you lap it?" And the category continues to get stronger. That changes brand to brand, and we don't talk about brands on the call.

But it does change brand to brand. But the top 4 brands within the athletic world for us, anyway, are all positive and continue to be positive. .

Got it. And then Kerry, on the guidance, I think you said for Q2, if I heard you correctly, a low- to mid-single digit comp, which is stronger than the comp you just posted, and also kind of better than your full year outlook.

Is there something that you're seeing in the quarter already or kind of something baked into your outlook to suggest an acceleration in the comp for Q2?.

Well, as Cliff said in his remarks that we saw our season -- spring seasonal product accelerate at the end of the quarter when it warmed up, and we have seen that continued into May. And that we're taking into account the -- what probably was some sales shift because of weather from the seasonal products into the second quarter. .

Okay. And then lastly, on the full year guide. It looks like the high end of the sales range came down a few million. The EPS went up. I'm guessing the EPS went up partly due to the gross margin benefit you get from closing 5 fewer stores. I would have thought that, that would also help on the sales line.

So is there something else happening on the sales line that is offsetting that? Or how do you just sort of reconcile those pieces?.

Mitch, I'll jump in and I'll let Kerry finish. But on the sales line, when you close stores, sales accelerate because you have to clear through all the inventory. We made a decision to not close those stores, we only had to lower the sales volume for those stores.

That's part of the reason why we brought sales down or lowered the top end of the guidance.

Kerry?.

The rest just need some fine tuning based on what we saw coming out of Q1 and expectations for the rest of the year. But you're right on the increase in the EPS. We're -- because we're closing fewer stores and not liquidating those margins, we're able to -- we'll have better margins.

Plus we're not accelerating expenses for the store closing as to the quarter. So that will help us also. And that was attributable -- help attribute to the increase in EPS, along with the stronger margins -- in the strong margins in the first quarter. .

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

This is actually Renato Basanta on for Sam. So I guess my first question. So I guess how should we be thinking about the cadence of comps, I guess, for the balance of the year beyond 2Q? 3Q was very strong last year. I think partly because of the hurricanes and then the later start to back-to-school.

So just trying to get a better feel for the puts and takes here.

Just anything we should be thinking about in terms of back-to-school shifts this year? Anything else that would affect that cadence?.

Well, on a comp basis -- comp store sales basis, we report the equivalent weeks, so you're not going to have shifts for that because -- for back-to-school, et cetera, because of that. From a tax period standpoint, that's all marrying up that's the primary shift we have that might cause that to move.

We had guided for the year low single digits and that was -- every quarter was similar to that on a low-single-digit basis. And like I said a moment ago, we were a little on the low end on our expectations on comps in Q1 because of the seasonal product not selling until the end of the quarter and we picked that up in the Q2.

But generally, it's low singles for the year for each quarter. .

Okay. That's helpful. And then you're closing fewer stores than expected.

Can you just talk a little bit about how you're planning the store closures versus last year? More in terms of -- any color on how efficient really you can be in clearing that inventory given some of your improvements in e-commerce, and then maybe some learnings from last year?.

Well, in all honesty, liquidating inventory on a store is not any easy process. You have to force it out of the door. You've taken basically a complete turn of inventory and pushing it out in half the time you would normally do. So you're going to take some hits on margins.

We did have some learnings from last year about markdown cadences that we think is going to help. But from a standpoint of how many stores we're liquidating this year compared to last year, that's where we're seeing the March hit. Last year in Q4, we closed 16 stores, but 7 of those stores we didn't liquidate to the walls.

We ended up transferring some of that out to replenish some of our hurricane stores that were affected when we lost the inventory, if you remember. This year, all stores that we plan -- the 20, 25 stores we plan on closing, we're going to be forced to liquidate all that inventory.

So it's going to be a larger hit to margin this year than it was last year. .

Okay. That's helpful. And then I guess, just last one for me. As we look out to 2019, are you seeing -- it seems like there's a potential for you guys to really reaccelerate store growth.

Are you seeing -- what are you seeing in terms of store economics, rents, et cetera, that potentially give you greater confidence in getting that store growth number back up again after the slowdown this year?.

We're not -- we are -- right now, we have nothing in the pipeline for '19. It doesn't mean that we won't have any new stores in the pipeline. We are waiting for those shakeouts. There are still closures going on all around us.

They have -- our team just got back literally, just got back from the biggest real estate show of the year in Las Vegas, in the ICSC. And we plan on meeting with them next week to discuss what they found out there.

But one of the reasons we slowed our growth down is that rents were just getting outrageous and landlords were not feeling the pain of all the store closures that we were seeing around us. So we wanted to give that an opportunity to shake out. And we'll be a lot smarter than that once we get the debrief from our real estate team next week. .

We'll go next to Christopher Svezia with Wedbush Securities. .

This is actually Paul Nawalany on for Chris. I just have a few questions.

In terms of the fiscal year outlook -- and then forgive me if you might have touched on this outside of 2Q, what color can you provide as to gross margin and SG&A? And then secondly, how do you feel about inventory in the channel overall? And if you could provide any color on how you might be planning boots for this fall?.

I'll take your first part, and let Cliff finish up with the last 2. From a standpoint of gross margin for the year, we expect our gross profit margin to be -- our merchandise margin to be down -- flat to down slightly.

We expect to leverage our buying distribution occupancy cost for the year, which will lead to a slight increase in our gross profit margin. We expect to deleverage our SG&A slightly. But overall, our operating margin should increase a little. .

And from an inventory perspective, I think you asked about our inventory level and that of our -- the rest of the channel. We really don't comment on the rest of the channel. I'll tell you that I believe, personally, that the family footwear channel is the best managed footwear channel out there.

And I'm not going to comment on their inventory levels, but I think it's suffice to say that most of the family footwear leadership is very concentrated on having the right levels of inventory.

From a boot perspective, we really don't like to comment this early on boots for competitive reasons, but we do expect to see a slight increase in the boot category as we move through fall. .

One clarification I would like to make on the earnings outlook for the year. That was against adjusted earnings from last year. If you remember, we had several adjustments that we're going to use for adjusting. That was the basis I used to compare against our expectations for '18. .

And we'll go next to Greg Pendy with Sidoti. .

I just wanted to just get a -- real quick on the BD&O. You said, I think, Kerry, it was down $1.5 million, and occupancy decreased for the quarter. And just given your outlook for comps and you think you can leverage BD&O for the year. If I'm not mistaken, you typically needed about a 2% to 3% comp historically.

Is that the store closings that's probably bring that closer to the 2% range?.

You know, yes, it is. The stores we've been closing have been lower productivity stores. And some of the larger hits to the occupancy side were in prior years due to the compares.

So therefore, in '18, we're seeing the reduction -- not only reduction in total occupancy cost because of store closings but we're able to leverage it a little bit easier because those were the inefficient stores from an occupancy standpoint. .

[Operator Instructions] And we'll go next to Steven Martin with Slater. .

So Kerry, I ask you this almost every quarter.

Can you give us the going-forward share count for both outstanding and for fully diluted calculation, assuming you don't purchase any more shares?.

We haven't been giving it that way, Steve. What we were saying is built into our guidance, so I'll give you based on what we purchased and expect to purchase that we planned through the year. We're expecting our share count -- fully diluted share count at the end of the year to be just slightly over 15 million shares.

And I don't have the total outstanding with me. .

Okay.

Given that your second quarter is going to end a week later and include a solid August week of back-to-school, should we anticipate that the inventory at the end of Q2 will be down again on a year-over-year basis?.

Steve, this is Cliff. I believe that inventory will be slightly down on a year-over-year basis. But we had 3 very large weeks of back-to-school. And so they're not going to be down a great deal. Week 1, by far, is the largest week -- but not by far, excuse me. Week 1 and 2 are fairly equal in size, and then week 3 is slightly lower. .

Okay.

Can you comment -- well, let me -- are there -- the store reductions, the 20 to 25 you've given us, is there a possibility that, that will go down further based on current negotiations? Or is that a solid number for now?.

We are working on that number every day, and there wouldn't be anything that would please me more than take that number down. So for today, that's the solid number. I'm not going to tell you that's going to be the number by the end of the year. .

Okay. .

I would like for that number to be lower.

But Steve, I only know what I know today, right?.

Right, right. I just meant, is it too late -- like if a landlord came to you tomorrow and say, "Okay, we're going cave and give you some extra rent reduction." Is it too late to keep that store open because you haven't ordered for it? Or is it... .

Not yet. That's -- Steve, that's a great question because it does -- there will come a time when it will be too late, but it's not there yet. .

Not there yet. Okay. Can you talk about the status of Puerto Rico in this whole issue of stores? I know it's a favorite subject of yours. .

Well, we had 9 stores before the hurricane. 1 store was permanently damaged and will not reopen. We have 2 more stores that haven't reopened at this point in time. And the landlords haven't turned those over to us yet. They're anticipating doing that later this year. .

And Puerto Rico as a market, how is that doing? Because I know you didn't -- you have been a little disappointed.

And now that there's a little less competition, is it a better market?.

No. We don't normally talk of market-to-market on the call. But it's just like any market where you have the kind of unfortunate devastation that they had. There's always a bump in sales upwards. It remains to be seen, at this point, how long that's going to last.

But for right now, as in any market that suffers the kind of devastation that they suffered. Sales are positive. .

Okay. And one last one related to drop-ship. You said you'll have that up and running by the end of the second quarter.

Does that mean -- so you'll have it going for back-to-school?.

Yes. My goal was to have it done before this call and -- as you and I discussed earlier. But it's a complicated system that requires a lot of vendor cooperation and input. So we will have it up and running before back-to-school. .

Got you. .

I normally don't say anything solid, but we will have it back before back-to-school. .

Or there will be a lower headcount?.

No. We will. .

I got your final -- I've got your number on the shares outstanding. 16,076,000. .

All right.

And that's as of quarter-end?.

As of quarter-end. .

At this time, I'll hand the call back over to Cliff Sifford for any additional or closing remarks. .

Thank you for participating today. We look forward to talking to you about our second quarter results in August. I hope each of you have an enjoyable Memorial Day weekend. Thank you. .

That does conclude today's conference. We thank you for your participation..