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Shoe Carnival, Inc. (SCVL)

F2Q07 Earnings Call

August 23, 2007 2:00 pm ET

Executives

Mark Lemond - President, CEO

Clifton Sifford - EVP, General Merchandising Manager

Kerry Jackson - EVP, CFO, Treasurer

Analysts

Jeffrey Stein - KeyBanc

Angelique Dab - Nollenberger

Jill Caruthers - Johnson Rice

Christopher Svezia - Susquehanna Financial Group

RJ Hottovy - Next Generation Equity Research

Rajiv Kumar - Thomas Weisel Partners

Harry Ikenson - Ikenson Consultant

Heather Boksen - Sidoti & Company

Samuel Poser - Sterne, Agee

Elizabeth Montgomery - Cowen & Company

John Pinto - Brightleaf Capital

Presentation

Operator

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

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. Mark Lemond, President and Chief Executive Officer of Shoe Carnival for opening statements. Mr. Mark Lemond, please begin.

Mark Lemond - President, CEO

Welcome to Shoe Carnival's second quarter 2007 earnings conference call. Joining me on the call this afternoon is Kerry Jackson, our CFO; Cliff Sifford, our General Merchandise Manager; and Tim Baker, Executive Vice President of Store Operations.

Net sales for the quarter ended August the 4th, 2007 increased 5.4% to $154.8 million from $146.9 million in the quarter ended July 29th, 2006. Comparable store sales declined 7.1% for a comparable 13-week period.

As most of you know by now, the switch in the retail calendar, combined with the movement of certain state's sales tax holidays and back-to-school dates, has resulted in somewhat confusing comparisons with the prior year. As we discussed in our release dated July 30th, 2007, we believe these date shifts accounted for about 3% of the 7.1% comp store decline.

Net earnings for the second quarter of 2007 were $167,000 or $0.01 per diluted share compared with net earnings of $2.9 million or $0.21 per diluted share in the second quarter of 2006.

We believe a number of dynamics have negatively impacted the footwear industry, including Shoe Carnival, over the past two or three quarters.

First, we believe that our core customer, a lower to moderate income consumer, is still facing financial challenges brought about by higher gasoline prices, the housing and mortgage issues and increased consumer debt loads. The result was lower traffic counts throughout the second quarter when compared with last year on a week-for-week basis.

Secondly, from a fashion perspective, after coming off two really good years in the men's and women's dress and casual side of the footwear industry, our core customers did not respond to the style and color direction this past spring.

Additionally, athletic footwear retailers have been in a decline for some time now and the industry seems particularly confused as to how to satisfy the current fashion taste of the urban consumer.

I'll let Cliff speak in more detail about the current fashion trends in a few minutes, but I want to address a couple of things we are seeing in the marketplace.

Although traditional athletic product is in decline, particularly with the urban consumer, vulcanized, especially canvas product has caught fire recently. This is true not only with athletically-inspired product lines, but with dress and casual vendors as well.

Unfortunately, a lot of this merchandise offering is at a lower price point than more traditional athletic product as well as some of the junior dress product we've had nice reaction to in the past couple of years. Consequently, we need to sell more pairs to make up the difference in topline sales.

On the positive side, looking forward, skate product is strong and getting stronger. And a number of important athletic vendors are in the process of improving their offering with this product category.

Additionally, we are just beginning to carry some of the more important skate shoe brands, the most important of which is Etnies. We've had phenomenal success with that brand introduction in only two weeks since we introduced it.

Importantly, we continue to make strides with the product initiatives from our largest vendor, Nike. These more technical product launches in the back-to-school period have been very successful again this year.

We're excited about the new product we've seen recently, and we expect this trend to continue into the remainder of this year and next. Fortunately, this product is commanding higher price points in our trade channel.

During the last quarter, we continue to aggressively manage our inventories as we head into the third quarter. As a result of this and the deleveraging affect of the comp store sales loss on buying, distribution and occupancy costs, our gross margins declined to 26% from 27.8% last year. We will continue this strategy of maintaining tight control over inventory levels for the remainder of 2007.

Besides the obvious reasons for this conservative strategy, we feel that there will be opportunity for closeouts and excess merchandise at discount prices in the third and fourth quarters, particularly with respect to athletic product. Therefore, our merchants are leaving plenty of open-to-buy for those opportunities.

Selling, general and administrative expenses for the second quarter increased by 1.1% as a percentage of sales. This was due primarily to higher advertising and compensation expenses at the store level.

Due to the shift in the calendar, we incurred an extra week of heavy advertising heading into the back-to-school season. The other increases came primarily from opening and operating more stores in the second quarter of 2007 versus 2006 and the charges incurred to close underperforming stores.

During the quarter, we opened six new stores. Therefore, at the end of the second quarter, we operated 284 stores, 19 more than the 265 stores we operated at the end of the second quarter of 2006. We still expect to open a total of 25 new stores this fiscal year with 11 coming in the third quarter and one additional store opening in the fourth quarter.

Our 2006 and 2007 new stores are trending at a sales rate of about 92% of our existing store base on a per square foot basis. We will also close four stores in the second half of 2007, and thus, end the year with 292 stores.

For 2008, we currently plan to open between 30 and 40 new stores. So far we have signed seven leases, are negotiating lease terms on 16 others and are reviewing 33 other specific store sites.

Our financial position continues to be very strong as we continue to manage for long-term growth. We repurchased 662,000 shares of our stock during the second quarter at a cost of about $18.9 million.

Despite these share repurchases and the accelerated expansion, we ended the quarter with a cash position of $15.5 million and no debt. Since the authorization of the share repurchase program, we have repurchased approximately 763,000 shares at a cost of about $21.1 million through the current period.

Due to the aggressive management at inventories I just mentioned, we ended the quarter with per store inventories about flat when compared to the end of the comparable week of 2006. In a few minutes, Cliff will speak a little more about the quality of those inventories as we move into the back-to-school period.

Turning to back-to-school, our sales trend in the very early sales period is improved from what we saw in the second quarter. However, we have not seen the significant lift that we had hoped for.

Although comp store sales are slightly positive midway through August, we had hoped that the back-to-school sales period would provide a better spending catalyst for our core consumer.

Having said that, less than 35% of our stores are in areas where schools have reconvened and we are recognizing stronger trends in the past few days than we saw at the beginning of the month.

As most of you know, the delays in the sales tax holidays and back-to-school dates in certain key states, particularly Florida and Texas, causes the early reads on the back-to-school period to be somewhat confusing. We don't expect to have a clear picture on 2007 back-to-school until the first week or so in September.

However, in providing guidance for third quarter earnings, we are assuming flat to slightly positive comp store sales for the quarter. Consequently, we expect earnings to range from $0.44 to $0.48 per diluted share.

Kerry Jackson will provide more details on the calendar shifts that affect the second quarter and the sales and earnings guidance for the third quarter in a few minutes. Right now, I'd like to turn it over to Cliff Sifford for more information about the product and merchandise.

Thanks.

Clifton Sifford - EVP, General Merchandising Manager

Thank you, Mark.

Obviously, I am disappointed in our sales performance for the quarter as we experienced losses in all departments. It is evident as we look at our different business segments that our urban consumer, both African-American and Hispanic, is not shopping as they have in previous seasons.

I feel that there are several reasons for this. One is the macroeconomic reasons that Mark addressed, but as importantly, I feel that the product offerings for spring, not only in our stores, but the market as a whole, were not exciting enough to capture this customer's attention.

In women's non-athletic, styling was not exciting and color was primarily brown tones, black and white. Additionally, there were very few new and exciting introductions from our athletic brands. Both of these issues affect the fashion-forward urban consumer.

Our best-performing categories and brands for the spring were those at target, the suburban consumer. As I talk through the product categories, I'll shed further light on this subject.

In women's non-athletic, we saw good performance out of pumps, flats, thongs, low profile, boat shoes and the canvas categories. We were disappointed with the performance of our junior business as a whole and sandals, both strappy, dress and casual, also underperformed. It is important to point out that our best junior doors are African-American or Hispanic.

In men's non-athletic, we experienced good sales out of our boat shoe, low profile and work shoe categories for the spring season. We experienced losses in fashion dress, urban casuals, urban boots and sandals. Traditional urban brands, such as Timberland and Lugz, experienced large declines and our suburban brands like Skechers and Clogs experienced very nice increases.

In children's shoes, our loss came out of the athletic department as we saw declines in girl's and boy's fashion classics, as well as boy's basketball. We saw very strong growth in girl's low profile, boy's skate and fashion athletic.

In adult athletics, we continue to see declines in urban plastic product. This decline in classic product does much greater in the women's athletic department than in men's. Brands that continue to show losses are K-Swiss and Reebok.

In addition to the classic products, we also experienced losses out of our men's basketball category as this classification continues to struggle. The skate category for both men's and women's performed extremely well. In addition, performance running, fashion athletics and Chucks also produced increases for the season.

Nike continues to be our best performing brand in spite of the fact that basketball as a category is not performing.

As most of you know, we do not normally talk about individual brands on this call. I made an exception to illustrate the underperformance of our urban brands as well as the good performance of our more suburban brands.

Our number one initiative is to find answers to the lack of participation of this consumer group. We have shopped markets all over the country and tested new brands and categories. We have challenged our key brands to not only bring more fashion to the marketplace, but to step up their marketing initiatives to this consumer.

We have seen an improvement in the product. Color has made its way back into the vendor offering. In women's non-athletic, there are new material such as patent leather, patent underglass, tartan prints and animal prints. There are new and exciting toe and hill shapes and as importantly, there is color. Reds, purple, and metallics will all play an important role in our fall business.

In athletics, we are also looking at great color and material pops. Patent, prints, weaves and colors have made their way into just about every category for fall and spring. This new product will be arriving throughout the fall season, which gives me optimism that this customer will have a reason to buy.

As Mark stated, our inventory ended the quarter flat on a per door basis. Both aged inventory and opened up spring product are down significantly from last year on a per door basis. Obviously, by keeping our inventories fresh and lean, it gives us the ability to react to developing trends and opportunistic buys as we move through fall.

I'd like to quickly address the early back-to-school sales trends. As Mark stated, the majority of our schools have still not gone back. For the schools that have gone back, we have seen, as we did last year, that customers are buying just prior to or after schools have opened.

In kids, new products from Skechers, Nike, and Etnies is performing well. In adult athletic, we have not yet seen a turn in our classic white business or the brands that drive that business. However, we have been pleased with this year's technical product launches from Nike, like the Reax and Tri-D.

Other strong athletic categories include skate and canvas Chuck Taylor, in non-athletic women's and kids low profile, and women's flats, boat shoes, and foam footwear are all performing well.

Now, I'd like to turn the call over to Kerry Jackson.

Kerry Jackson - EVP, CFO, Treasurer

Thank you, Cliff.

Our net sales for the second quarter increased $7.9 million or 5.4% to $154.8 million compared to sales of $146.9 million for the second quarter of 2006.

Our same-store sales were down 7.1% for the quarter. Initially, there may seem to be a disconnect between having a significant total sales gain and a comp store sales loss for the quarter. This can be explained by the shift in the calendar due to last fiscal year being a 53-week year.

Let me explain by walking you through the numbers. Last year, the 13-week second quarter ended on July 29th, but due to the shift in the retail calendar, this year's 13-week Q2 ended on August 4th. This shift of one week is significant, because it shifts a very important week of back-to-school into Q2 and shifted an average week sales into Q1 compared with last year's calendar.

The difference in sales for the week that moved into Q2 versus the week that moved out of Q2 was about $9 million. This $9 million benefit from the calendar shift plus the sales from the new stores less the sales from comparable store sales decline is how we ended up with a $7.9 million increase in total sales for the quarter.

Now, comparable store sales are different. In accordance with the preferred method of reporting prescribed by the National Retail Federation, we restated last year's Q2 numbers to report comparable store sales on a week-to-week basis.

While we report comparable store sales on a week-to-week basis to eliminate the calendar shift due to the 53rd week last year, our comps in Q2 were affected by back-to-school and tax free dates moving later, particularly in Texas and Florida. We estimate that our comp sales were negatively affected by 3% in Q2 due to back-to-school and tax free dates shifting into Q3.

Moving on to other items, gross margins for the second quarter of 2007 decreased to 26.0% compared to 27.8% same period last year. This decrease resulted from a 1.5% decrease in our merchandise margin and a 0.3% increase in our buying distribution and occupancy costs.

Two factors resulted in higher distribution costs for the quarter. First, as we have discussed before, our new distribution center has higher fixed costs due to the excess capacity we need for future growth.

This accounted for the majority of the increase. The second factor is we incurred additional cost to process approximately 4% more receipts in Q2 this year compared with Q2 last year.

SG&A expense as a percentage of sales increased to 25.9% for the second quarter compared to 24.8% in the same period last year. Store pre-opening costs in the second quarter were $268,000 or 0.2% of sales compared with $164,000 or 0.1% of sales in Q2 last year. We opened six new stores during the second quarter of fiscal '07 compared with four new stores opened during the second quarter of fiscal '06.

Store closing costs included in SG&A in the second quarter were $346,000 or 0.2% of sales. Last year, in the second quarter, we incurred $143,000 in store closing costs or 0.1% of sales. The effective income tax rate of 38.7% for the second quarter of 2007 was relatively steady with last year's second quarter.

For the first six months, net sales increased 1.6% to $320.5 million compared to $315.4 million in the first half of 2006. Same-store sales decreased 4. -- 5.4%, excuse me, for the first six months of 2007. Gross margins for the first half of 2007 decreased to 28.1% compared to 29.3% last year.

The merchandise margin decreased 0.2%, and buying distribution occupancy costs as a percentage of sales increased 1.0%. SG&A as a percentage of sales increased to 24.8% compared to 24.1% in the first half of 2006. Pre-opening expenses for first six months in 2007 were $556,000 or 0.2% of sales compared to $164,000 or 0.1% of sales in the first half of 2006.

Store closing costs including SG&A in the first half of 2007 were $400,000 or 0.1% of sales compared with store closing costs of $254,000 or 0.1% of sales in the first half of '06. Net income for the first half of 2007 was $7.5 million or $0.55 per diluted share compared with net income of $10.3 million or $0.75 per diluted share last year.

Depreciation expense for the second quarter was $4.0 million. Capital expenditures for the first six months of '07 were $11.4 million with the main components as follows. We spent $4.3 million on the new distribution center and $1.6 million on the new corporate headquarters. 2007 new stores were $3.4 million, and the remodeling and relocation of stores cost $374,000.

I'd now like to provide some guidance for Q3. As Mark said earlier, earnings per diluted share in the third quarter '07 are expected to range between $0.44 and $0.48. Same-store sales are expected to be flat to slightly up for Q3, and total sales are projected to decrease to between $183 million and $186 million compared with total sales of $189.1 million in Q3 last year.

The calendar shift I discussed earlier that benefited Q2 is a detriment in Q3, resulting in total sales in Q3 this year to be lower than total sales in Q3 last year, despite having flat to slightly up comps and the positive effect of the new store sales growth.

While we expect our merchandise margin to be relatively flat in Q3, we expect to deleverage our buying, distribution and occupancy costs and our SG&A costs due to the lower total sales compared with last year's Q3. This deleveraging of expenses is not a result of excess spending.

At the end of Q3, we expect to operate 8% more stores than last year, but we expect to hold our G&A dollar spend to be flat with last year's Q3 and our store expenses are expected to increase about 3%. Buying, distribution, occupancy dollars are expected to increase about 5% over last year's third quarter.

One last comment. Starting in Q3 this year, we will not be releasing our sales results on sales release Thursday as we've done in the past. Rather, similar to many of our peers, we will release quarterly sales and earnings at the same time.

This concludes our financial review of the second quarter for fiscal 2007. I'd now like to open up for questions.

Question-and-Answer Session

Operator

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions)

We'll take our first question from Jeff Stein with KeyBanc. Please go ahead.

Jeffrey Stein - KeyBanc

Mark, a question on expansion. Wondering, you know, given the fact that consumer spending seems to be weakening here a bit, wondering if you still feel as comfortable as you did earlier with 30 to 40 new stores next year and how much flexibility you have and at what point you would have to make a decision if you were to decide to cut that back at all?

Mark Lemond - President, CEO

Well, Jeff, we look at that on a day-to-day basis. It's not -- we don't say, you know, as of December 31, we'll make a decision on expansion for next year. It's a -- we constantly review that. So that's an ongoing process.

With respect to the commitment that we've made towards that next year from a legal standpoint, we have seven signed leases at this point in time. And as I said, we're negotiating terms on approximately 16 others.

The things that we look at in addition to consumer debt and consumer spending and the slowdown with certain of our product lines, particularly in the athletic sector, is the availability and the quality of the store sites that we're looking at.

You know, one of the strategy changes that we've made in anticipation of economic slowdown is we constantly review the number of large markets that we're going to enter into at any particular time. We have made a decision to only enter into two larger markets next year instead of three or four that we had originally contemplated.

But again, that's not a yesterday's decision. That's the decision that we make over time when we review the markets. We review what spending habits are in those markets. We review the availability of store sites and so forth. So as of right now, we are still fully intending to get between 30 and 40 stores opened.

As I mentioned, when you include the leases that we signed, with the leases that we are negotiating, with the LOIs that we're negotiating, and certain other sites we're considering, there are approximately 60 or so potential locations that are currently being analyzed.

Jeffrey Stein - KeyBanc

Mark, what percent of your stores for next year would you say, just approximately, would be in existing medium markets?

Mark Lemond - President, CEO

If we are -- Jeff, I would say that there are probably 10 stores that we would open in new, middle-to-larger markets. The remainder of the stores are going to be again, within the geographic footprint of where we currently have stores in smaller markets or within -- or in fill-in areas of markets like Cleveland, Ohio, places like that.

Jeffrey Stein - KeyBanc

Got it. And just a question on financials real quick. The share buyback program, are you guys just going to be opportunistic or are you committed to completing the $50 million buyback this year?

Mark Lemond - President, CEO

You know I'm not going -- you know I've told you what we've done on a retrospective basis. On a prospective basis, we continue to analyze that day for day.

Jeffrey Stein - KeyBanc

Got it. Okay. Thanks.

Operator

We'll go next to Angelique Dab of Nollenberger. Please go ahead.

Angelique Dab - Nollenberger

Sure, good afternoon. You had mentioned some quick commentary on the trends that you're seeing. Could you go back to the women's side of the business real quick and just talk about the new merchandiser and the impact that you may or may not be seeing from that hire?

Clifton Sifford - EVP, General Merchandising Manager

We haven't acquired any new merchants -- unless you're speaking of our new visual merchandiser that we just hired, and he's only been on board for a couple of weeks. But we have not, there are no new buyers or merchants in our merchandising staff.

Angelique Dab - Nollenberger

I thought a year ago you had hired a woman, or a person -- excuse me -- to be in charge of merchandising the new women's product as you were increasing women's product in your stores?

Clifton Sifford - EVP, General Merchandising Manager

What we did is three years ago, Angelique, this maybe what you're thinking about, we may have been talking about it over the past couple of years. But we took the gentleman that was -- had been running our athletic business very successfully and put him over our women's business. And then, we hired three women to run the buying there, to actually do the buying.

And from that point, our women's product mix improved greatly and that was one of the reasons based on what Mark was saying, one of the reasons that our women's business increased so dramatically over the past several years.

It seems like a no-brainer to have women buying women's product, but that's what we did and it certainly worked over the past several years. But the same folks that merchandised that product over the past three years are still merchandising the product for us today.

Angelique Dab - Nollenberger

And how do you think you might be changing that mix, if at all, going forward, maybe that's the question I should have been asking. Sorry.

Clifton Sifford - EVP, General Merchandising Manager

The mix of product?

Angelique Dab - Nollenberger

Yes. On the women's side.

Clifton Sifford - EVP, General Merchandising Manager

We are constantly -- in fact, we are working diligently to get our average price up to increase the brand selection in our stores. In fact, we're working with several brands today, which I would really rather not divulge.

But several brands that we plan on introducing for fourth quarter of 2007 that once we put those in our stores should help us get our average price per pair significantly up. Not only our average price per pair, but give us a real boost in fashion-forward product.

Angelique Dab - Nollenberger

Great. Thank you so much for your time today.

Operator

We'll take our next question from Jill Caruthers with Johnson Rice. Please go ahead.

Jill Caruthers - Johnson Rice

Good afternoon. Maybe if you could explain kind of your thoughts on flat merchandise margins in the third quarter, given you've had some significant pressure in that area over the past few quarters? And then, you know, a more cautious comp outlook?

Clifton Sifford - EVP, General Merchandising Manager

Well, personally, I'll answer that question. We came out of second quarter very, very clean in merchandise. In fact, I'm really proud of where we came in. Each product as I mentioned in my prepared remarks down significantly. Our opened up footwear is down double-digit from a year ago as of ownership. And we're real proud of that.

However, as we go through back-to-school and into the fall time period and sales did not materialize as well as we thought it would in the first two weeks of August, we're being cautious as to how promotional we'll need to be as we go through the rest of back-to-school.

I do feel that once we get through the back-to-school time period and the traditional women's product picks up, as it has traditionally in September and October, that we should drive better margins in that product as we go forward.

But we are cautious on back-to-school, because as I said, as Mark said, it's not materialized the first two weeks as well as we thought it would, although the past few days have been very encouraging.

Mark Lemond - President, CEO

Jill, I'll add to that. As we've gone through this year and obviously have recognized lower sales than what we anticipated, we've also adjusted forward-looking plans in terms of open to buy and inventory that we carry, et cetera.

So as we head into the back-to-school and the third quarter, we've adjusted those plans down to recognize or plan around a flattish comp store sales number so that we don't have that inventory build as we go through.

In addition, you know, as I said in my prepared remarks, we've left a pretty significant amount of open to buy, particularly late in the third quarter for close out purchases that we fully anticipate are going to be in the marketplace as we move through the third quarter and into the fourth quarter.

So the answer is, we're hoping to get better margins as we start driving this product through the pipeline, particularly the women's dress and casual product. But, you know, we've left ourselves with pretty significant open to buy to take advantage of closeouts and we don't have -- we don't see at this point in time a jeopardy of liquidation in the third quarter like we had to liquidate opened up footwear in the second quarter.

Jill Caruthers - Johnson Rice

Okay. So you've given yourself some room for possibly a more promotional back-to-school selling to help pick-up traffic. But you think some of those will be offset with more dress casual and some of these close-out opportunities?

Mark Lemond - President, CEO

Later in the quarter, yes. As women's product turns from athlete -- well, as the product mix turns -- the product sales mix turns from athletic to more of a dress in casual product sales mix, we'll see those margins increase as we go through the quarter.

Jill Caruthers - Johnson Rice

Okay. And I guess the new skate brands you have, the Etnies, I know you guys are pretty excited about that. It's been performing well, though just in the stores for a few weeks. What is the quantity of that? Could that actually move the needle? And is that -- do you feel that that brand has enough newness and excitement to drive some new traffic into your stores?

Mark Lemond - President, CEO

Well, we've only launched that product over the past couple of weeks so the answer to your first question is, no, it's not a significant number of pairs to move the needle in terms of the total company. But as we continue to sell that product and the other skate brands that we are selling very well, yes, we do expect to generate the positive results from that.

Jill Caruthers - Johnson Rice

Okay. And then just last question, maybe a little bit more on your urban exposure, if you could talk about possibly the percentage of sales or the percentage of the store base that have more significant urban exposure. If possible, if you could strip out that negative urban impact in the second quarter, kind of what the more suburban stores comped? Thanks.

Clifton Sifford - EVP, General Merchandising Manager

Jill, this is Cliff. We have -- out of the 284 stores that we operate today, 179 of them were what we consider to be urban. What turns a store urban in our opinion is at least 30% or more of the traffic that walks into the door is urban. It's because every store that we operate has an urban influence, it's almost impossible to tell you what our suburban business would be minus that.

Jill Caruthers - Johnson Rice

Okay.

Clifton Sifford - EVP, General Merchandising Manager

Does that make sense?

Jill Caruthers - Johnson Rice

Yes. So I -- okay. All right. Thank you.

Operator

We'll take our next question from John Shanley at the Susquehanna Financial Group. Please go ahead.

Christopher Svezia - Susquehanna Financial Group

Good afternoon, gentleman. This is actually Christopher Svezia. Mark or Cliff, just a question on the product. You had mentioned some of the shifts going on in the athletic sector. Moving more towards casual, canvas products and how the ASP on those types of products are much lower.

Can you comment at all about the margin rates that you're attaining on those products relative to the ones that they're replacing?

Clifton Sifford - EVP, General Merchandising Manager

Make sure I understand what you're saying to me. You want to know the shipped on athletic into the brown shoe, are we driving higher margins? If that's the case in the Vulcanized product, then the answer to that question would be yes.

We are obviously, it's a lower retail than what's shifting out of the athletic market, but we are driving higher margins out of that product. Flats, we're also seeing increases in flats. That also is driving a higher margin. Increases in low profile product, is also driving higher margins, but similar ASRs.

Christopher Svezia - Susquehanna Financial Group

Okay, that's helpful. And then you made a reference in answering someone else's question regarding, in the second half you're expecting to see higher ASPs. Is that primarily in the women's dress and casual business, or is that in the product assortments overall?

Clifton Sifford - EVP, General Merchandising Manager

You know, the answer -- that was a earlier question concerning new brands. And we are looking to add a couple of new brands to our assortment for the fourth quarter, which we think will -- which we believe, or we wouldn't add them, will add not only higher margins and higher ASRs in the women's division.

Mark Lemond - President, CEO

On that specific product.

Clifton Sifford - EVP, General Merchandising Manager

On that specific product, absolutely.

Christopher Svezia - Susquehanna Financial Group

Okay. And then on a -- when you talk about the skate product, can you give any color at all in terms of what's happening in those urban stores with regard to the skate product? And maybe also in terms of boat shoe products, in terms of what's happening with that consumer in those stores?

Clifton Sifford - EVP, General Merchandising Manager

That's a great question. And yes, we are seeing some movement on skate product in the urban doors, but not at the degree that we had hoped. We added aggressive skate products in our urban doors and more traditional skate product and the traditional skate product is not working as well as the more aggressive silhouettes.

But again, it's not enough to overcome the loss of the classic product. The second part of your question, and I apologize, I got strayed on skate. What was the second? You asked two questions in there, one on skate?

Christopher Svezia - Susquehanna Financial Group

The other part to it Cliff, was just in terms of boat shoe.

Clifton Sifford - EVP, General Merchandising Manager

Boat shoe classification is working very well and mainly in the southern urban doors, but also in our junior doors. Boat shoes for both men, women, and kids.

Christopher Svezia - Susquehanna Financial Group

And then, I guess, as you look towards the second half of the year, maybe into spring of next year, what do you think will stimulate urban consumer in terms of coming to your stores from a product perspective?

You talked about, you know, softness on the athletic side, softness in Timberland, I'm just curious. And obviously, you're getting some success here in some of the skate and nautical products. What do you envision in terms of that would hopefully drive this urban consumer to your stores as you look to the back half of the year?

Clifton Sifford - EVP, General Merchandising Manager

No. I think it's simply a matter of giving them something that's not already in their closet. I mean, you know, over the past four, five, six, seven seasons, as far back as I can remember, almost it's been about white classic, it's been about Timberland, it's been a lot of the sameness season after season after season.

Well, as the apparel changed to more preppy looks, that product didn't work anymore and when they came to the stores or looked in magazines and tried to find product to buy, they didn't find as much product that excited them.

So I believe that, and I do believe this that you got to give them material interest, you got to give them color, you got to give them new silhouettes, new heights, and you've got to give them a reason to buy. And I think that's what we have been challenging our vendors to do, that's what we have been challenging our buyers to do.

And as I mentioned in my prepared remarks, you're going to see more color, you're going to see more material interest, you're going to see different silhouettes as you walk into our stores, which I think will excite the consumer again, and give them a reason to put something else in their closet.

Christopher Svezia - Susquehanna Financial Group

Is that coming in towards the second half of this year, some of those new colors, new products?

Clifton Sifford - EVP, General Merchandising Manager

We were able to get some of our athletic brands to react for back-to-school, but I think you'll see it more as you go into the fourth quarter and our brown shoe business, you'll see it immediately as coming in this month and next month.

Christopher Svezia - Susquehanna Financial Group

Okay. And the very last question I have here is on the new store productivity rate. I think you had said 92%. Is that sustainable as you move through the balance of the year and what are your thoughts as you move into fiscal year '08 in terms of store productivity rate?

Mark Lemond - President, CEO

We can maintain at 92% of existing store sales, then I would be pretty happy with that. What we've got to work on, obviously, is lifting the whole chain up in terms of where we're driving sales right now, because 92% of a declining sales number is not very good.

So in terms of the 92% in and of itself is okay. We've got to make our stores -- our new stores more productive, there's no question about it. That's been a focus of Shoe Carnival for at least the past couple of years and it still remains a focus.

What we are driving right now, over the past four quarters is the sales per square foot of about $220 per foot. Obviously, if we continue to see the sales declines that we saw in the first two quarters, that $220 a foot won't hold for the year, but hopefully we'll be able to stem that tide.

So in terms of new store productivity -- and that's on a collective basis, by the way. 2006 and 2007 stores. We still have certain stores that are not anywhere close to that productivity level and we're working on those, weeding out those poor-performing stores.

Christopher Svezia - Susquehanna Financial Group

Okay. Fair enough. Thank you very much, gentleman.

Operator

We'll take our next question from RJ Hottovy of Next Generation Equity Research.

RJ Hottovy - Next Generation Equity Research

Good afternoon, everyone. Just a couple of quick questions here. First of all, knowing what we know now, about the consumer and obviously, traffic being down, do you have any plans in the back half to ramp-up marketing or what's your take on that? What are your marketing plans for the back half relative to where you'd planned for the year?

Mark Lemond - President, CEO

As of right now, we haven't made any changes to our marketing plans for the back half. We are, however, reviewing our creative content of our television advertising, but no definitive plans have been made to change what we're currently planning.

Obviously, as we continue through back-to-school and get into September, there may be changes coming down the road and at this point in time, I'm not willing to say that there are any finite changes being made.

RJ Hottovy - Next Generation Equity Research

Okay. The second question I had just had to do with the fourth quarter and maybe this one's for Kerry here. Just in terms of what you lose in that extra week in terms of sales as well as a potential leverage there, what is that, losing that extra week in the fourth quarter this year what should we be looking for?

Kerry Jackson - EVP, CFO, Treasurer

Well, keeping in mind that that extra week last year was worth about $11 million in sales, which obviously, will fall out totally, and we stated in our fourth quarter call, we thought it was a benefit of about $0.05 in the fourth quarter last year.

RJ Hottovy - Next Generation Equity Research

Okay. Thank you and good luck going forward.

Mark Lemond - President, CEO

Thanks.

Operator

We'll take our next question from Rajiv Kumar with Thomas Weisel Partners. Please go ahead.

Rajiv Kumar - Thomas Weisel Partners

Hey. Just a follow-up question on the promotional part. Could you give us some color of how much advertising spend was in the quarter?

Clifton Sifford - EVP, General Merchandising Manager

How much what athletic meant to our total business?

Mark Lemond - President, CEO

No, advertising.

Rajiv Kumar - Thomas Weisel Partners

Advertising spend?

Mark Lemond - President, CEO

I don't have the finite number, but it was about $2 million in excess of the 2006 quarter and again, it was because of heavy advertising in the week that ended August the 4th, of 2007.

Whereas in the prior fiscal quarter for 2006, that quarter ended July 29, so we had one additional back-to-school week in the second quarter of this year as opposed to last year. That's the reason for the $2 million additional spend.

Rajiv Kumar - Thomas Weisel Partners

Okay. So that means when you go into the third quarter, we'll see the dollar amount go down?

Mark Lemond - President, CEO

Again, we don't divulge advertising spend on a prospective basis, so we just don't divulge advertising spend on a prospective basis in a finite number.

Clifton Sifford - EVP, General Merchandising Manager

We're keeping in mind, also, that we are going to grand open more new stores this year than we did last year. We expect to open 11 stores versus opening eight stores the year before. So built into our add plan would be additional grand opening expenses.

Rajiv Kumar - Thomas Weisel Partners

Okay. Thanks.

Operator

We'll go next to Harry Ikenson with Ikenson Consultant. Please go ahead.

Harry Ikenson - Ikenson Consultant

I'm sorry. My questions were just answered in the prior two questions. Thank you.

Operator

We'll now take our next question from Heather Boksen with Sidoti & Company.

Heather Boksen - Sidoti & Company

Good afternoon guys. A lot of my questions have been answered, I have one more though. With respect to, in terms of the geography, I know Texas and Florida negatively impacted you in the end of July, with respect to August, I know August sales have been not the pick-up hasn't been as significant as you would have seen.

Is that the Texas/Florida impact there, or is that nationwide? Or any geographic color you could give would be helpful.

Mark Lemond - President, CEO

It's been in a number of markets. So right now, so you know, Florida schools have gone back. We've actually seen a pick-up in the last few days in some of the Florida markets.

So it kind of owes to what Cliff said and we're seeing sales in stores that schools have gone back, sales have actually picked up on a year-over-year basis after the schools have gone back. Texas, I think their schools go back this coming Monday.

So we're currently right in the throes of the Texas back-to-school period and I think the sales tax holidays just ended a week ago, so this past Sunday, so we'll talk about that, obviously, on the third quarter call.

Heather Boksen - Sidoti & Company

All right. Thanks.

Operator

Thank you. We'll take our next question from Sam Poser of Sterne, Agee. Please go ahead.

Samuel Poser - Sterne, Agee

Good afternoon. I just wanted to follow-up on the regional results from Q2 and talk about how you're viewing it for Q3, because there's been a lot of talk about the housing market, let's say, in the Atlanta region, where there's -- where a lot of people have less money.

Are you seeing any specific areas that you're more concerned about on a more macro basis than others?

Mark Lemond - President, CEO

Sam, we've seen results vary by region on a week-for-week basis. Overall, we've seen softer business in the south and we've seen -- we've split the country into three different sections horizontally, south, central, and north.

We've seen softer business in the south than we've seen in the prior year. The central region and northern region kind of flip-flop back and forth on a week-to-week basis depending upon what's going on.

I will tell you that we are just as concerned about the automotive industry in the north as we are about the mortgage situation in some of the communities in the south. You know, we're not seeing -- you know, it remains to be seen what the weather patterns are like for the remainder of this year.

So the hurricane season could play obviously, a role in what we see in a very short-term basis in the south. So from a geographic standpoint, I will tell you that it's weaker in the south or it has been up until now weaker in the south than it is in the central and northern regions.

Samuel Poser - Sterne, Agee

Okay. And then -- and just one specific question on Chicago itself, apparently, some people are talking about that you might have changed some advertising strategy there recently?

Mark Lemond - President, CEO

You're going to have to tell me what we changed.

Samuel Poser - Sterne, Agee

I'm getting messages from other people, anyway, one other question. The new stores, I mean are you looking to move more into a suburban mode as you open new stores versus a more urban-oriented business to make it somewhat less volatile?

Mark Lemond - President, CEO

We haven't really focused. The answer to that is no, we're not. You know, we've focused our store base and consequently our store sight election criteria around, where we think our core consumer is located.

If there are opportunistic areas within for -- Chicago, within the city of Chicago, particularly on the southern and southeastern sides of Chicago and it's heavily populated and it's dense, and it looks like its okay from an economic standpoint and employment standpoint and all those kinds of factors that we look at.

Then certainly we're going to do that store. We haven't changed our strategy in terms of our core customer. We still think that we can satisfy -- it's become more difficult in the athletic arena, satisfying the urban consumer.

I think that will change as fashions change and cycle through, but we're still looking at income, you know, the lower to moderate income levels as really our core consumer, and try to merchandise around the ethnicity of that core consumer.

Samuel Poser - Sterne, Agee

Thank you very much.

Operator

We'll go next to Elizabeth Montgomery with Cowen & Company. Please go ahead.

Elizabeth Montgomery - Cowen & Company

Hi guys, lots of question so most of them have been answered. But if I can go back briefly to I think it was Bill's question on the urban consumer.

I'm wondering how much knowledge you have of your consumer base in terms of income versus particular areas, maybe demographically. And whether or not you're able to attribute some of the falloff in the urban consumer to specifically a macro economic situation or just a lack of fashion and whether or not that's different from your suburban consumers?

Mark Lemond - President, CEO

Well, we capture sales data at store level down to the zip code level. So that becomes a little bit dangerous at times, but it gives you a pretty good indication at least on the median income, medium household income levels of any particular area around a particular store.

And then we measure, obviously, the penetration of our sales within each of those zip codes, so we do somewhat measure -- not down to the actual customer level, but certainly down to the zip code level penetration within those zip codes.

So in terms of -- I'm sorry, what was the second part of that question?

Elizabeth Montgomery - Cowen & Company

So are you able to kind of see what some of the decline in the urban -- you know, are you able to see maybe what the driving factors are behind the lower spending?

Mark Lemond - President, CEO

I'm not sure how to quantify. Certainly there's an economic impact, particularly when you're talking about some of the mortgage issues that have come to light recently, with respect to refinancing and interest rates rising, et cetera.

But I'm not sure how to quantify that as opposed to what is known throughout the industry as a problem with that particular consumer from a fashion standpoint in both the apparel and footwear side. I'm not really sure how to quantify those.

Elizabeth Montgomery - Cowen & Company

That's okay. I guess I'll follow-up later, maybe if I could. But Kerry, could you just update us on the cash flow projections for the year?

Kerry Jackson - EVP, CFO, Treasurer

Right now we're looking somewhere, probably between $8 million and $9 million in free cash flow.

Elizabeth Montgomery - Cowen & Company

Okay. Thanks.

Kerry Jackson - EVP, CFO, Treasurer

Okay.

Operator

We'll go next to John Pinto of Brightleaf Capital.

John Pinto - Brightleaf Capital

Hi, Mark, Cliff, had two questions. I guess the first one is maybe understand the magnitude of what you've left yourself available with on your open-to-buy for those liquidation goods.

What type of -- first remind me, how much usually is less than your open-to-buy for at once in that time period? And maybe how much you are needing this year versus last year for that liquidation?

Mark Lemond - President, CEO

We normally like to have carried between 8%, 10%, 12% of our inventory in closeout product or in opportunistic buys, and this year I would tell you that we could get up to somewhere close to between 15% and 18%.

John Pinto - Brightleaf Capital

And in general, that product is maybe, what, as much as 1,000 points extra margin or what should we…

Mark Lemond - President, CEO

You can use closeouts. You can use closeouts several ways. Obviously, the higher retail price you're going to get out of it, the better the margins are going to be.

But you can also use it to drive sales for the rest of your product as well and we're waiting until we get the merchandise. And you know, most of the athletic vendors are holding off until back-to-school is over.

We've talked to all of them, so we're really not sure what's available, and as that becomes available, we'll make that decision, is the way we'll handle it.

John Pinto - Brightleaf Capital

Okay. Can I ask you if, I mean, you're usually conservative about this stuff. Have you factored this into your guidance or what have you factored into your guidance as to the affect of that extra available liquidation product?

Mark Lemond - President, CEO

Well, again, as we -- yes. We have, and from the standpoint that, you know, we've given guidance based upon the trends that we see and what we expect to happen over the next six months, as an overriding rule.

We don't know exactly what styles are available, we don't know the quantities that are going to be available. So from a very quantifiable standpoint, no, we haven't factored that into the guidance.

John Pinto - Brightleaf Capital

Okay, all right. Thanks. And then secondly, you've talked about, since you did open the door on brands and some products, I just wanted to know what.

You know, and since you have not had the Crocs product for some time or a little time now, how is the category you're working, is that a fair substitute for that category, given you've been shut out of that product line?

Mark Lemond - President, CEO

It's working very well in the kid's business, in the kid's department, very well. And it's working okay in the women's department.

It's selling through at about half the rate in women's that it's selling through in kids to get to quantify that a little closer. But we're very, very pleased with the sales in the kid's area.

John Pinto - Brightleaf Capital

Is it like 20% weekly sell-throughs type number?

Mark Lemond - President, CEO

We're not going to quantify that.

John Pinto - Brightleaf Capital

Okay. All right. All right, well, thanks a lot. Appreciate it.

Mark Lemond - President, CEO

Okay.

Operator

We have no further questions at this time. I would like to turn the call back over to Mr. Mark Lemond for any additional or closing remarks.

Mark Lemond - President, CEO

Well, thank you for joining us on the call today and we look forward to hopefully producing better results on the next conference call. Thank you.

Operator

This concludes today's presentation. We appreciate your participation, and you may now disconnect your lines.

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Source: Shoe Carnival F2Q07 (Qtr End 8/4/07) Earnings Call Transcript
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