Shoe Carnival's (SCVL) CEO Cliff Sifford on Q2 2014 Results - Earnings Call Transcript

Sep. 3.14 | About: Shoe Carnival, (SCVL)

Shoe Carnival (NASDAQ:SCVL)

Q2 2014 Results Earnings Conference Call

September 3, 2014, 4:30 p.m. ET

Executives

Cliff Sifford - President, CEO, CMO

Kerry Jackson - COO, CFO, SEVP, Treasurer

Analysts

Jeff Stein - Northcoast Research

Mark Montagna - Avondale Partners

Sam Poser - Sterne Agee

Jill Nelson - Johnson Rice

Scott Krasik - Buckingham Research

Chris Svezia - Susquehanna Financial Group

Operator

Good afternoon, and welcome to Shoe Carnival's fiscal year 2014 second quarter earnings conference call. [Operator instructions.]

This conference 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.

These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's 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 talked about during this conference call or contained in today's press release to reflect future events or developments.

I will now turn the call over to Mr. Cliff Sifford, president, chief executive officer, and chief merchandising officer of Shoe Carnival, for opening comments. Mr. Sifford, please begin.

Cliff Sifford

Thank you, and welcome to Shoe Carnival’s second quarter fiscal 2014 earnings conference call. Joining me on the call today is Kerry Jackson, senior executive vice president, chief operating and financial officer.

For today’s call, I will give a high-level review of the company’s second quarter performance and provide some insight into the back to school season. Kerry will review second quarter financial results along with third quarter and second half guidance and then we’ll open up the call to take your questions.

Comparable store sales for the second quarter decreased 2.1%, driven primarily by the decline of traffic in our brick and mortar stores. Traffic was down high single-digits for the quarter, driven by three components: the industry-wide lack of fashion drivers in the non-athletic side of the shoe business, the uncertain economic environment for our consumer, and a change in our circular advertising strategy.

The losses incurred during the two weeks affected by the change of our circular strategy accounted for approximately half of our comparable store sales loss for the quarter. This particular marketing change helped fund a more aggressive television strategy for the back to school time period. I’ll address that shortly.

Conversion, average units per transaction, average unit retail, and average transaction were all positive for the quarter. Merchandise margins were down 20 basis points as we continue our markdown strategy on slow selling spring and summer styles.

Gross profit decreased by 90 basis points as a percent of sales, while SG&A was deleveraged by 160 basis points as a percent of sales, resulting in EPS for the quarter of $0.13, which was within our previously stated guidance of $0.12 to $0.16.

Although we don’t report ecommerce sales separately, we were pleased with the sales increase we experienced for the quarter. As I mentioned on our last call, with are in the process of moving away from our third-party fulfilment arrangement and transitioning to shipping primarily from our stores. We will utilize our Evansville distribution center for certain key items and promotional products for peak sales periods.

This initially will vastly improve the selection of styles and ensure a depth of sizes available online which should, in turn, improve conversion significantly. We are currently ahead of our plan to have this completed by the end of the third quarter.

In addition to our ship from store initiative, within the next several weeks, we will launch our first-ever mobile app. This will allow us the opportunity to interact with our customers regardless of where they are in their daily lives.

Our Shoe Perks customer loyalty program is on pace to exceed our stated goal of 6 million members by the end of this year. I can’t stress enough how important this initiative is, as we navigate through the changing trends in marketing.

Today’s consumer is spending more time in the digital space. They interact with their friends and favorite retailers in all forms of social media. They receive the information that is important to them in their email inboxes. We must be able to communicate with them personally and know their wants, needs, and shopping habits. Our loyalty program is the avenue to get us there.

For the second quarter, Shoe Perks customers again accounted for more than 40% of our total sales. Our marketing team and store personnel have done an outstanding job of growing this important program.

Continuing with marketing, as I mentioned earlier, with back to school being our most important time period, we initiated the strategy to be more aggressive with our television cadence. We felt that advertising on national cable television, along with our normal marketing cadence, would help reenergize our consumer and drive more traffic for this critical time period.

There is no way to directly quantify the results of any television marketing. However, we did experience an immediate improvement in traffic and sales once we began the back to school television campaign. As a result, after mid-single digit comparable sales declines for May and June, our July comp store sales were up 1%.

We ended the quarter with inventory down approximately 2.2% on a per-store basis, which was in line with our expectations. As we have stated in the past, we will continue to put pressure on our per-store inventories in support of our strategic initiative to increase inventory turns. I am pleased with the execution of this initiative by the merchants as they lowered inventory levels in our smaller volume stores while maintaining depth of key items as we headed into the back to school season.

Moving on to merchandise, after the unusually cold and wet first quarter, we were look forward to a second quarter of sandal sales to lift our comparable store sales as the category did last year. We recognized within the first few weeks of May that the customer was not responding to this category as they did in 2013.

With that knowledge, we addressed prices aggressively, and we began to liquidate the product. I’m pleased to report that inventory levels in opened-up footwear are down double digits on a per-store basis, as compared to the same time period last year.

Drilling down by department, our women’s non-athletic department sales for the quarter were down mid-single digits on a comparable store basis. In addition to sandals, we saw a decline in dress shoes and boat shoes. However, we did experience robust sales in comfort casuals, molded footwear, and canvas casuals.

Comparable store sales in our 108 better brand stores, which are located in higher income localities, performed much better, not only in women’s non-athletic department but also in the overall store sales results. This initiative is working, and we are continuing to roll it out to additional stores.

In our men’s non-athletic department, we ended the quarter with a high single-digit decrease on a comparable store basis. We did see increases in the campus casual classification, but not enough to overcome the sales decline in both shoes and men’s sandals.

Our children’s business ended the quarter with a low single digit comparable store sales increase. For girls, the quarter was all about canvas casuals and sandals. For boys, basketball, running, and canvas were the key categories.

In adult athletics, comparable store sales were up low single digits for the quarter. We experienced a nice quarter of women’s running, men’s and women’s canvas, and men’s cross training.

Turning now to store expansion, we ended the second quarter of 2014 with 398 stores, operating in 33 states and Puerto Rico. We opened a record number of 16 new stores in the second quarter, including the two new markets of Buffalo, New York, and Miami, Florida.

For the remainder of 2014, we expect to open an additional nine stores and relocate one store. Our current plans call for closing two stores by the end of the year, ending fiscal 2014 with approximately 405 stores. We could close an additional three to four stores by the end of the year, depending on continuing negotiations with landlords.

As we look forward to 2015, with the implementation of our new real estate analytical software, we are in the process of doing a comprehensive review of our entire fleet of stores. This review will help us understand not only the best markets for near term expansion, but also to identify our underperforming stores with little to no growth opportunity.

This process will give us insight on future store closings or relocations, as well as the best possible markets for future expansion. As we complete this review, we will look to open 20 to 25 stores in 2015, concentrated in either large markets we currently serve, or single-store markets within our current footprint.

Now for some insight on our back to school results. As of yesterday, all our markets have gone back to school. For the month of August, we experienced a comparable store sales increase of 0.8%. For the last seven weeks, which comprises all our back to school activity, comp sales were up 1.2%.

Canvas product was the big category of the back to school season, with sales up 38% versus the same time period last year. This accelerated at the expense of [boat] shoes and soccer slides. Low single digit comparable store increases for the time period were realized in children’s, non-athletic shoes, and athletic footwear for the entire family. Canvas casuals, along with skate and basketball, performed well. We also saw increases in women’s running, men’s cross-training, and men’s running.

Lastly, I want to address the guidance we gave within the press release. For the last year, we have seen an increase trend with our customer being an event-driven consumer. Our back to school results show that when presented with an event like back to school, she shops. When the need is not as present, she is less active.

We believe this is a result of the current economic environment our customer is facing today. Our merchandise assortment this fall is trend-right and well-balanced, led by a strong boot selection. We are encouraged by the early results in boots, where we are running double digit sales increases so far this quarter. However, it is still very early in boots, and we need to see how boot sales trend now that the back to school period is winding down.

As we look at the remainder of this quarter and next, we are taking a cautious approach to the third quarter, as there is no event like back to school or holiday to motivate our consumer. We are looking at fourth quarter with more enthusiasm, due to weather fueling boot sales and holiday sales.

Now, I’d like to turn the call over to Kerry Jackson for details on our financial results.

Kerry Jackson

Thank you, Cliff. I want to discuss our second quarter financial results in more detail followed by information on cash flows and then conclude with our outlook for the third quarter and the second half of fiscal 2014.

Net sales were $222.1 million for the second quarter of fiscal 2014, as compared to net sales of $216.4 million for the second quarter of fiscal 2013, an increase of $5.7 million. This $5.7 million increase in net sales was driven by an increase of $12.2 million from the 42 new stores opened since the beginning of second quarter fiscal 2013, partially offset by comparable store sales decline of 2.1% and a $2.2 million decline in sales from the eight stores closed since the beginning of the second quarter of fiscal 2013.

Gross profit margin for the quarter was 28.0%, a decrease of 0.9% compared to the second quarter of fiscal 2013. Our merchandise margin decreased 0.2% from Q2 last year, while buying, distribution, and occupancy expenses increased 0.7% as a percentage of sales.

The increase in buying, distribution, and occupancy was primarily due to higher occupancy and distribution costs, including the slight deleveraging effect of higher pre-opening costs in the current year. As a reminder, we typically need 2% to 3% comp increase to leverage our occupancy costs at our current rate of new store growth.

Selling, general, and administrative expenses increased $5 million in the second quarter of fiscal 2014 to $58 million. The $5 million increase in SG&A was primarily due to a $3.6 million increase in expenses for new stores, net of expense reductions, for stores that have closed since the beginning of the second quarter of fiscal 2013.

Other significant changes in SG&A for the quarter were attributable to increases in advertising and employee healthcare expense offset by a reduction in the [unintelligible] compensation. As a percentage of net sales, SG&A increased 1.6%, which includes the deleveraging effect of higher pre-opening costs related to store selling expenses in the current year.

Total pre-opening costs for Q2 were $1.9 million, an increase of $956,000 over the second quarter last year. Of the total pre-opening costs incurred in Q2, $1.2 million is included in SG&A and $704,000 is included in cost of sales for pre-opening rent and freight.

In Q2 last year, we incurred $913,000 of total pre-opening expense, of which $594,000 was included in SG&A and $319,000 was included in cost of sales. The increase in pre-opening expense was due to opening eight more new stores in Q2 this year compared to Q2 last year.

The effective income tax rate for the second quarter of fiscal 2014 was 38.9%, as compared to 38.7% for the same period in fiscal 2013. The annual effective income tax rate for fiscal 2014 is expected to be 39.3%, an increase of approximately 1% over the prior year. This increase in the annual rate will primarily be due to the expiration of certain federal tax credits not currently available to us and the passage of new tax legislation in Puerto Rico.

Net earnings for the second quarter of fiscal 2014 were $2.6 million, or $0.13 per diluted share, as compared to our expectations provided on May 22, 2014 of $0.12 to $0.16 per diluted share. For the second quarter of fiscal 2013, we reported net earnings of $5.8 million or $0.29 per diluted share.

Now turning to our cash position and information affecting cash flow, during the quarter we repurchased approximately 161,000 shares under our share repurchase program at an aggregate cost of $3 million. We currently have $17.3 million available under our existing repurchase authorization.

Depreciation expense was $4.9 million in Q2. Depreciation expense is project to be approximately $20 million for the full fiscal year. Capital expenditures for fiscal 2014, including actual expenditures during the first half of the year are expected to be between $32 million and $33 million.

Approximately $17 million of the total capital expenditures are expected to be used for new stores and $9 million to be used for store relocations and remodels. Lease incentives are anticipated to be between $9 million and $10 million for the year.

My final comments today will focus on sales and earnings expectations for the third quarter and second half of fiscal 2014. We expect third quarter net sales to be in the range of $247 million to $252 million, with comparable store sales ranging from down 1% to an increase of 1%.

Earnings per diluted share in the third quarter of fiscal 2014 are expected to be in the range of $0.45 to $0.51. In the third quarter of last year, sales were $235.8 million and diluted earnings per share were $0.54.

Included in the earnings estimates for the third quarter is the expectation at the high end of our guidance, the gross profit margin will be relatively flat, and SG&A will deleverage about 80 to 90 basis points. The deleveraging of SG&A is primarily due to higher advertising expenses.

For the second half of the year, we expect net sales to be in the range of $462 million to $471 million, with comparable store sales ranging from flat to up 2%. Earnings per diluted share in the second half of fiscal 2014 are expected to be in the range of $0.53 to $0.64. In the second half of last year, sales were $436.1 million and diluted earnings per share were $0.57.

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

Question-and-Answer Session

Operator

[Operator instructions.] And we’ll take our first question from Jeff Stein from Northcoast Research.

Jeff Stein - Northcoast Research

You’re looking for flat gross profit margins in Q3. I know you had to be more promotional to drive sales in Q2. It kind of sounds to me like you’re not expecting that to repeat again in Q3, despite the fact that it sounds like your customer continues to be under pressure. So just some thoughts on why you think you can hold your gross profit margin flat.

Cliff Sifford

We weren’t necessarily that happy with our gross margin last year, so holding it flat is actually probably a little lower than we normally would run in a third quarter scenario. So we feel that the margins we have planned allow us to be promotional in the areas where we need to be promotional, and we believe that boots being the category that they are, and a high margin product category, will help us overcome any promotions we have to run in the non-boot categories.

Jeff Stein - Northcoast Research

Can you talk about your plans to scale back your store expansion for next year? Is it related to the current environment, real estate availability, or both?

Cliff Sifford

I would say it’s related to two things. One, we’re doing a very deep dive into our current store base, the entire fleet of stores. I mentioned that earlier in my prepared remarks. To look at all our stores and the potential for those stores for further growth, especially our underperforming stores. So while we’re doing that, and we have our real estate team literally focused on that today, that keeps them somewhat out of the market to look for new sites.

But as we’re doing it, we instructed them to concentrate strictly on the large markets. You know, we opened up Dallas, we opened up Detroit, we opened Miami and Buffalo. So we need to fill in all of those markets. That should be our number one priority. And then to look at small markets where we have historically always done well. So it’s a really two-pronged approach.

Jeff Stein - Northcoast Research

It would seem that one of the reasons why you decided to launch a national cable TV advertising program was to expand more aggressively and leverage your fixed costs, one of those being advertising. So it would seem with perhaps slower growth, that you’re probably unlikely to get as much leverage on the advertising line next year as you otherwise would have. Is that correct?

Cliff Sifford

I’ll answer that this way. We opened up 34 stores this year, we’re opening an additional 20 to 25 stores next year. That national advertising is to help all 50 some odd stores - 54 to 59 of those stores as well, as they continue to ramp up. So we have not put the marketing plan in place for 2015.

So I can’t answer at this point whether it’s going to be leveraged. But because we are growing 20 to 25 next year and we did grow 34 this year, we need to continue to support those stores with advertising.

Kerry Jackson

Right now, the way it looks like the 20 to 25 stores we’ll open next year, we’re very much front-loaded into the first quarter. So we’re looking to open 10 to 12 of those stores in the first quarter next year, and then the remaining stores will be opened through the second and third quarters, into the third quarter, beginning of fourth, like our normal is.

What we’ve allowed ourselves to do is that if we find that the economy is supportive of a faster growth, and we’ve put our plans together, finish our analysis and our learnings from that, we could accelerate at the back end if necessary. We’re not anticipating right now, but if we find the economy’s more conducive to it, we could add stores in the back half.

Operator

And we will now go to Mark Montagna with Avondale Partners.

Mark Montagna - Avondale Partners

Question about the stores that have the higher tier of non-athletic footwear. I’m guessing that number is now 108. And are you still tracking to try to get to 200 stores, or 230?

Cliff Sifford

We are definitely at 108 stores today. That’s actually 108 comp stores today. Out of the 34 stores that we opened this year, we also put them in 30 of those stores, and I think that number is right. It’s 30 to 31 stores. So we’re actually at about 132 stores with that better product. And as we continue to open up stores, we’ll expand into those stores, and there are additional comp stores that we will expand into. So I don’t think that we’ll hit 200 next year. I think that over the next several years, over the next two years, we should be close to 200 stores.

Mark Montagna - Avondale Partners

So looking at those higher end demographic stores, are you seeing a divergence in their overall comp performance? It sounds like you are. Is that for all of those types of stores? And is there a divergence in profitability?

Cliff Sifford

I’m not going to tell you every one of those stores are performing better than the company, but I can tell you as a total they are. And I mentioned several times in my prepared remarks that our customer is, from an economic standpoint, being challenged. And in these higher income demographic stores, not as much. The sales there, as a total, are better, and the traffic is not near as depressed.

Mark Montagna - Avondale Partners

And then just regarding that fulfilment, how you’re changing the way you’re fulfilling ecommerce, is there an ultimate goal in terms of what percentage of the product will be done through vendor fulfilment? Is it mostly athletic, or can it spread to non-athletic? And any idea, on the basis point of savings or maybe the millions of dollars of savings that you might be able to get?

Cliff Sifford

That second question is a very good one, not one that I’m prepared to answer today. But the first question, we have not entered into an agreement with any vendor at this point to ship from vendor. What we’re doing before the end of the quarter is a ship from store scenario, where our stores will fulfil about 90%, maybe even a little higher than that, of our total ecommerce fulfilment.

In key time periods or key promotional time periods, we’ll stock product in our distribution center here in Evansville, and that distribution center will fulfil those orders. We’re some time away. I don’t want to put a time limit on it before we implement a ship from vendor scenario.

Operator

And we’ll take our next question from Sam Poser of Sterne Agee.

Sam Poser - Sterne Agee

I wanted to dig in a little bit into the switch from circular to national TV. And I believe you said half the comp loss, you’re attributing it to that move. Do you consider that a one-time situation, and as you go forward, things will normalize? Or how can we think about that as we lap [unintelligible] going forward?

Cliff Sifford

We look at that as a one-time situation in this past spring. It normalizes more as we go through the fall time period. First of all, we don’t run as many inserts in the fall as we do in the spring time period, so it will not have that kind of an effect in the fall time period. We feel we have the inserts, circular program set as we did this past spring, so it will not be a reoccurring issue next year.

Sam Poser - Sterne Agee

And then for the fourth quarter, how can we think about gross margin increase and is that going to be all because of the comp or can we see some merch margin increases as well, given that you’re pretty bullish on the boots?

Kerry Jackson

Are you talking about fourth quarter?

Sam Poser - Sterne Agee

The fourth quarter, yeah.

Kerry Jackson

Inherent in that guidance, we gave the second half, but when you run your models, you’ll find that we expect to see some increase in our gross profit margin. And part of it is because the gross profit margin in Q4 last year was so depressed, and we also see some nice leverage on our SG&A compared to last year also, keeping in mind that we incurred a 2.5% comp decline in the fourth quarter last year. So we lost a lot of leverage due to the sales decline.

Sam Poser - Sterne Agee

So you’re not assuming much of a merch margin lift?

Kerry Jackson

Well, it will be enough to notice. You might see around a 40 basis point improvement in what we’re modeling out or giving as guidance.

Sam Poser - Sterne Agee

Okay, and then just ecommerce, how big is it right now as a percentage of sales and where do you think you can get to the next two or three years?

Cliff Sifford

That’s a number we just do not give out. Let me say that we are focused on our ecommerce business, and it’s definitely a growth vehicle for us. But we do not give out separate ecommerce numbers.

Operator

We’ll take our next question from Jill Nelson with Johnson Rice.

Jill Nelson - Johnson Rice

Could you quantify the advertising expense increase you’re incurring this year?

Kerry Jackson

Directionally, we’ll give you indicators if it’s an increase or decrease. We said we might increase 15 to 20 basis points at the beginning of the year, our total ad spend. But on a quarter by quarter basis, we really don’t want to give out detailed information like that, for competitive reasons.

Jill Nelson - Johnson Rice

Okay, I was just wondering, because it sounded like you ran more TV ads than initially planned, so I was just wondering if that year outlook was still on tap.

Cliff Sifford

We ran exactly the amount of television campaign that we had planned for the year. So we did not increase it during the year.

Jill Nelson - Johnson Rice

And then if you could just talk about the boot inventory, how that stands. It seems like you’re getting some strong early sales trends in that category. If you could just talk about the inventory plan for the back half.

Cliff Sifford

Let me start off by saying it’s really early. And although we’re very encouraged by the increases that we’re having, and we believe that that’s an indication of what’s going to happen in boots as we go forward, it is early.

We believe that we’re going to see significant increases in boots and as we go through especially the second half of the fall time period, fourth quarter. So we have planned our inventory up, and I would really rather not say how much, but we’ve planned our inventory up, and we’ve planned our sales up on a comparable basis, significantly in boots.

Jill Nelson - Johnson Rice

And given the very strong strength you saw in canvas for second quarter and into back to school, could you talk more about what categories are really suffering and kind of losing ground versus that canvas product?

Cliff Sifford

I mentioned in my prepared remarks two categories directly. Boat shoes and soccer sandals took big hits. Just to expand on that, I feel like sometimes we get punished a little bit from a sales perspective because we’re so aggressive on items that are big. Like last year, we owned the soccer sandal business last year. In fact, for the past couple of years soccer slides have been something that I’ve talked about almost every conference call. We owned it. I don’t want to talk about the numbers of pairs, but it was significant.

And then over the past several years, we owned the boat shoe business, and when you get double digit declines in that category for two years in a row, that’s hard to make up with $49 canvas shoes. So although canvas has been very, very good when you compare that to the average price of boat shoes, it’s kind of tough to make up.

However, I do have to say this, our average unit retail for the month of August was up slightly, and the way I explain that is that if you look at the average price of soccer sandals and the average price of boat shoes, they average out about the same retail price as canvas shoes. So that’s the reason we were able to maintain our average retail price.

Operator

And we’ll take our next question from Scott Krasik with Buckingham Research.

Scott Krasik - Buckingham Research

First, just on the boat shoe, the acceleration in the decline, I think previously you had said the girls business was bad, but the boys business was holding up. So did that now even out, so to speak?

Cliff Sifford

I think what I’ve said in the past is that our adult business is not good, but that the children’s boat shoe business is good. But you know, what happens is, we did not grow the kids business in boat shoes nearly as quickly as we did the adult business. So a lot of the growth we’re seeing in our kids boat shoe business has to do with the fact that we’re expanding store base, whereas in our adult boat shoe business, we already had that in all stores. So our adult boat shoe business has been a declining business for almost two years.

Scott Krasik - Buckingham Research

And then it sounded like maybe your performance athletic business was okay, whereas a lot of people are seeing declines and shifts over to Sketchers and some of those other things. So is that just the way you’re classifying these brands?

Cliff Sifford

You know, that absolutely could have something to do with it, because we do classify some of the brand that you just mentioned in our women’s non-athletic are. But to answer your question specifically, we were pleased with the performance athletic business, especially in our women’s athletic area. And we were flat in our performance business in men’s.

Scott Krasik - Buckingham Research

And is it prudent to guide merchandise margins up in the fourth quarter when on a two-year basis you’re still over 100 basis points up in the fourth quarter?

Kerry Jackson

Well, we’re up from ’13, but even with that guidance, we’ll be down from what we achieved in Q4 2012. So we’re really not making up the losses we took last year. We’re just expecting it to be a little bit better than it was.

Scott Krasik - Buckingham Research

In Q4 2013 I thought your merch margin was down like 20 basis points?

Kerry Jackson

What I’m giving you is gross profit margin.

Scott Krasik - Buckingham Research

Okay, so you’re including the leverage.

Kerry Jackson

Right.

Operator

And we’ll take our next question from Chris Svezia with Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

Kerry, comps last year, could you just remind us what the trajectory was for the third quarter last year? August, September, October?

Kerry Jackson

In August, we were up just under a point last year, when we came out of August. We had a really quiet September, and as part of our cautiousness this year, just like last year, it got quiet, we had negative comps. And then our October rebounded nicely, when it started getting cool. We started selling our fall product nicely. And we were up mid singles in October.

Chris Svezia - Susquehanna Financial Group

So, based on your guidance for the third quarter, do thing not necessarily get worse from here, don’t necessarily get that much better from here, even though you’ve got October is, probably not a big month necessarily, but you’ve got a tougher comparison in October.

Cliff Sifford

That is correct. We believe that we have opportunity in September, but we are a little cautious on October because of the tougher compares.

Chris Svezia - Susquehanna Financial Group

Did November accelerate pretty significantly, if I’m not mistaken?

Cliff Sifford

Yes, it did, but I’ve got to tell you, we feel we still have opportunity in November. We definitely have opportunity in December and January.

Chris Svezia - Susquehanna Financial Group

I guess just kind of walk through why you feel that confident. As the quarter progresses, for you to kind of hold where you are, and then secondarily, just kind of feeling that good about fourth quarter. Obviously, you called out boots. That’s a piece of it. Your inventory seemed pretty clean. Maybe just talk about some other thoughts about why you feel that confident.

Cliff Sifford

I’d be glad to talk about it. Again, our customer shops at need, or at an event, I guess is the best way to say it. And there really is no driving reason for the customer to get excited in September. You know, if the weather turns cool, she’ll be here, because she’ll need her boots. And in the month of October, it’s the same thing. If the weather is cool, she’ll shop for boots, just as she did last year.

And November and December, those are event-driven months. I mean, you have Veterans Day, you have the big day at the end of the month, and then you have holiday to help drive that business. That, plus our overwhelming belief that boots are going to be, again, the item of the season, we feel strong about the fourth quarter.

Kerry Jackson

We really, at the height of our guidance, only talked about recapturing the amount we lost last Q4. And the low end of our guidance is that we’re, in the fourth quarter, we won’t recapture, but just a little bit of it. So a lot of it’s in the comparison of being down 2.5% in the fourth quarter last year, and our belief that boots, we’re very well-positioned for boots.

Chris Svezia - Susquehanna Financial Group

Are you assuming any change in traffic trends? Or are you assuming higher average unit retail, or improving conversion as you go through the balance of the year?

Cliff Sifford

We believe that we’ll see improving traffic trends, especially in the latter part of the fourth quarter. Unless there is another frigid December in January, like there was last year, where no one could even get out, traffic trends would have to improve.

Chris Svezia - Susquehanna Financial Group

What are the stores which have the women’s better brands? I don’t know if you’re going to give us a specific comp, but what’s the delta between that and the aggregate of Shoe Carnival stores? Like, if they’re comping down 2%, what were those stores actually doing? Did they comp positive in aggregate? Were they flat?

Cliff Sifford

They were just under flat in aggregate. So they weren’t down 1%. They were about 200 basis points better than the non better brand stores, which was exactly what happened to us in the first quarter too. So the numbers maintained itself.

Chris Svezia - Susquehanna Financial Group

And just from a product margin perspective, in Q3, it’s pretty much flat, or are you expecting to be down slightly as you maybe tweak some inventory? How should we think about Q3 from a product margin perspective?

Cliff Sifford

Strictly from a merchandise perspective, it’s going to be flat. And the reason for that is, again, there’s not an event for the customer to come shop. So you know what? We want to make sure we convert everybody that comes in. We’ll probably be a little more promotional. But we can be promotional on some product, because of the fact that we have boots selling the way they are, at a higher margin. So we believe we can maintain a flat margin.

Chris Svezia - Susquehanna Financial Group

Are boots increasing as a percentage of your mix as you go into the back half of the year? Because I think you ran out of some product fourth quarter last year, if I’m not mistaken.

Cliff Sifford

The answer to that is yes. I don’t really want to get to a percentage, but yes. It’s increasing.

Operator

And we’ll take a follow up question from Sam Poser with Sterne Agee.

Sam Poser - Sterne Agee

A couple of product questions for you. What do you expect in terms of potential offset to the strength in boots in the back half?

Cliff Sifford

What product categories are we planning down?

Sam Poser - Sterne Agee

Correct.

Cliff Sifford

I’m not sure I really want to get into that. Let’s just say this, we believe we’re going to have a strong boot season, and let’s leave it at that.

Sam Poser - Sterne Agee

And your friends in Manhattan Beach, how are you seeing them these days? And if there’s any color there.

Cliff Sifford

We saw them in July, and I saw them again at [Magic]. We don’t talk about individual brands, so I apologize for that, but that’s just a policy we have.

Operator

And it appears that we have no further questions at this time. I will now turn the call back over to Mr. Sifford for any additional or closing remarks.

Cliff Sifford

We really appreciate you joining us today, and we look forward to speaking to you again on our third quarter call in November. Thank you. Speak to you then.

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Shoe Carnival (NASDAQ:SCVL): Q2 EPS of $0.13 misses by $0.02. Revenue of $222.1M (+2.6% Y/Y) misses by $2.97M. Shares -2.98% AH.