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Shoe Carnival, Inc. (NASDAQ:SCVL)

F1Q08 Earnings Call

May 29, 2008 2:00 pm ET

Executives

Mark Lemond – President, Chief Executive Officer

Cliff Sifford – Executive Vice President, General Merchandise Manager

Kerry Jackson – Chief Financial Officer

Analysts

Jill Caruthers – Johnson Rice

Heather Boksen – Sidoti & Co.

Chris Svezia – Susquehanna

Jeff Stein – Soleil Securities

Sam Poser – Sterne Agee

Operator

Good afternoon and welcome to Shoe Carnival’s first 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.

Those 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 as only 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 the conference call or contained in today’s press release to reflect future events and developments. I would now like to turn the conference over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival. Please go ahead sir.

Mark Lemond

Thank you and welcome to Shoe Carnival’s first quarter 2008 earnings conference call. Joining me on the call this afternoon is Kerry Jackson our Chief Financial officer and Cliff Sifford, Executive Vice President and General Merchandise Manager.

It is a reality that the retail sector is facing some of the toughest times in many years. We continue to fight through the challenging economic environment going into 2008 and have worked diligently during the first quarter to manage through this challenge with a combination of inventory management and expense control.

Rising fuel and food prices along with the issues in the home mortgage industry are continuing to dramatically impact the cost of living of our targeted moderate income consumer. Discretionary frequent shopping has diminished as we, like others, have experienced declining traffic patterns during the quarter.

Seasonal merchandise sales were disappointing for our first quarter, particularly in the sandals and open up dress shoe categories. However, I am pleased to report that our kid’s and adult athletic categories posted a low single digit comparable store sales gain.

We ended the quarter with inventories on a per store basis flat with the end of the first quarter of last year. And our management team did a commendable job controlling selling, general and administrative expenses during the first quarter. These expenses were flat on a dollar basis year over year despite ending the first quarter with 15 more stores than the prior year.

Looking ahead, we see a continuation of the difficult selling environment. However, we view this as an opportunity to increase our market share in the family footwear sector. In order to do this, as I have discussed in the fourth quarter, we have developed a hit list of strategic initiatives for fiscal 2008 and I’m encouraged by our progress.

We believe that with the current condition of our store inventories, we can continue to turn our product at an acceptable rate without having to resort to drastic clearance sales to make room for new seasonal goods. Additionally, we believe the recent improvement in athletic sales bodes well for the back to school period, especially with the Olympic emphasis this summer.

We recognize that being in stock with sizes in key core shoes is critical during periods in which we are seeing declining foot traffic. Therefore, we will continue to move forward with our initiative of reducing the overall SKU counts in order to provide greater depth and size runs for our customers and yet maintain lower, cleaner inventories in our stores.

This brings us to one of our other top priorities, the expansion of our loyal customer base by delivering a truly memorable total shopping experience. When Todd Beurman, our new Senior VP of Marketing joined us in January, his initial recommendation was to increase and expand the consumer research effort we started in the fourth quarter of last year.

This research and other internal efforts confirmed many of our assumptions regarding how consumers view Shoe Carnival and identified a number of new opportunities for improvement. Our first opportunity pertains to improving the effectiveness of a communication with our consumer before they walk in the door.

We must deliver a single consistent message in order to develop an honest relationship with our customer. Our message must resonate with the lifestyle and spending habits of both our customers and their peer groups. Additionally, we will continue to differentiate ourselves from our competitors in order to create an experience unique to Shoe Carnival.

To aid in these efforts and strengthen our competitive positioning, we have retained a new advertising agency, 22 Squared and charged them with the task of implementing a fully integrated marketing approach. This approach will deliver distinctive brand positioning and will clarify our image across all consumer touch points.

We expect the agency to aid in bringing the Shoe Carnival concept alive across all mediums, such as broadcast media and print and to integrate our internet website, customer loyalty program and in store graphics.

Revamping in store graphics and certain design elements will be a key part of the process of enhancing our customer’s experience. Additionally, we are currently analyzing all of the visual and audio elements of the Shoe Carnival store experience. As part of this analysis, we are refining the role of our mic person in our total customer service approach.

Although we are contemplating many changes, we are approaching all these initiatives with a sense of balance, including taking a conservative approach to cash management. We do not expect that the visual and design changes I just referenced will mandate a full store remodeling program. Likewise, a balanced approach does not include making overly dramatic changes to a concept that has proven to deliver sales per square foot metrics superior to our competitors in the open stock family footwear sector.

We firmly believe that taking advantage of real estate opportunities in a down retail market is a prudent long term strategy, especially when those locations fill in our existing under penetrated markets.

While we recognize that the immediate profitability of our newly opened stores will be impacted by the current difficult macroeconomic environment, we are continuing with our plan to open between 23 and 25 new stores during fiscal 2008 with approximately 15 of these new stores located in large and small markets in existing geographic regions.

As discussed in the fourth quarter, we have identified nine underperforming locations that we intend to close yet this year. We are pleased to see some life out of the athletic business right now and we expect to see this continue through the back to school period, especially with the summer Olympics falling right in the middle of this important sales period.

However, we will continue to plan and execute our business in a conservative manner. Our merchants will remain focused on decreasing inventory levels per store and improving the turnover in gross margin return on investment. Our plan is to allow inventories per store to fall throughout the remainder of the year, thus generating cash flow and protecting gross profit margins.

In addition to inventory control, we will remain focused on expense control and making investments and changes that will yield the greatest amount of shareholder value for years to come.

Now I’d like to turn it over to Cliff Sifford for a more in depth discussion of the inventory and product sets.

Cliff Sifford

Thank you Mark. As Mark mentioned we continued to experience a decline in customer traffic during the first quarter. We did, however, see an increase in conversion and average transaction. In addition, we are seeing some positive trends in April and so far May that offer encouragement as we go back to school.

Although there continues to be no fashion drivers in women’s non-athletic, we did see positive comparable store sales increases in our athletic business for the quarter, particularly in women’s athletic.

Total comparable store sales for the quarter were down 4.9%. The largest decline for the quarter came from our women’s non-athletic department where the lack of fashion, the very early Easter and clear weather led to a double digit comparable store sales loss. Our men’s non-athletic department ended the quarter down very low single digits while children’s sales were flat and adult athletics was up low single digits.

We attribute part of our current positive trend in athletic to the initiative we first stated a year ago concerning the family channels lack of fashion product for the African American and Hispanic consumer. Our buyers have been working closely with several of our key vendors on product that would appeal to this important segment of our business.

Several styles have been delivered and we are happy with the results. These results give us confidence that as we see economic conditions improve for this customer, we will be well positioned to be the destination store in our channel for fashion athletics.

Other key athletic classification and vendors for the quarter were skate and performance running, along with Nike, ASICS and Converse. Inventories ended the quarter flat on a per door basis. As always, we have been aggressive in moving through slow selling product and as a result merchandise margins ended the quarter down 80 basis points versus first quarter last year.

We are taking a conservative approach to inventories for the remainder of the year with average per door inventories planned down high single digits. Also want to update you on our other merchandising initiatives as we head into the important back to school season and beyond.

First, as you know, there has been inflationary pricing and manufacturing concerns on product coming out of China. We have not see any distribution interruptions, nor do we expect any significant delays due to factory closings or the devastating earthquakes in China.

For the fall season, we have experienced on average cost increases of between 5-15%. We do not anticipate these cost increases moderating until the Chinese factories have had a full year to factor in the new labor laws that were enacted this past February. We recognize that due to this inflationary pricing and current economic conditions we will sell fewer pairs in 2008 than we did in 2007.

In order to succeed, the pairs we do sell must be sold at higher retails. Our strategy to meet this goal is to add value to our women’s non-athletic product with better materials, more comfort features and even more brands. In our athletic department, our strategy is to fund those vendors that have proven to us that the customer recognizes their product for performance and value.

These brands include Nike, ASICS, Converse and New Balance among others. We have already seen some positive results of this strategy for spring as we have driven higher out the door retails in every department, except women’s non-athletic.

Second, we mentioned on our last call that we had hired a new Senior VP of Marketing, Todd Beurman, who comes to us with years of experience driving retail sales in both shoe stores and department stores. In the short time that he has been on board, we have completed ethnographic research on our core consumer and hired a new ad agency.

In addition, you will see a 360 degree marketing program that encompasses new creative and all media inserts and in store visuals. We are also working toward a new customer loyalty program and a new look for our website, both of which should launch in the latter half of this year.

And lastly, we have made major changes to our women’s non-athletic buying team with the addition of a new Vice President, [DMM] along with several key buying reassignments that we believe will give us greater strength in the marketplace as we continue to improve our product and brand assortment.

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

Kerry Jackson

Thanks Cliff. Our net sales for the first quarter decreased $3.6 million to $162.1 million compared to $165.7 million for the first quarter of 2007. Our same store sales declined 4.9% for the first quarter. Gross profit margins for the first quarter of 2008 decreased 1.0% to 29.0%.

As a percentage of sales, the merchandise margin decrease 0.8% and buying distribution occupancy costs increased 0.2%. The decrease in merchandise margin as a percentage of sales was largely a result of lower margins in our women’s casual and sandal product due to promotional selling.

We experienced a 0.6% increase in occupancy costs as a percentage of sales as a result of lower sales for the quarter against our increasing store base. This increase was partially offset by a decline in distribution costs, both as a percentage of sales and in dollars.

In Q1 of last year, we converted to our new distribution center and incurred onetime startup costs of approximately $936,000 or $0.04 per share. Despite operating 15 more stores during the first quarter of this year, selling, general and administrative expenses remained flat at $39.3 million.

While we did incur additional expenses as a result of operating those 15 additional net new stores, these increases were offset by aggressive expense controls in other areas of our business. As a percentage of sales, SG&A increased to 24.2% for the first quarter compared to 23.7% in the same period last year due to lower sales.

Preopening costs in the first quarter were $34,000 compared with $289,000 in the first quarter last year. The decrease in preopening costs is primarily due to opening two stores in the first quarter of 2008 compared with opening seven stores in the first quarter of 2007.

Store closing costs included in SG&A expenses were $285,000 for the first quarter of fiscal 2008 as compared to $55,000 for the first quarter last year. No stores were closed in either period. The amounts recorded in the first quarter of fiscal 2008 represent closing costs for stores we closed in the future quarters.

We expect to close nine stores during fiscal 2008. Operating income for the first quarter was $7.8 million compared to $10.5 million in the same period last year. Our operating margin decreased to 4.8% in the first quarter from 6.3% in the first quarter last year. Net income decreased 35% to $4.8 million for the first quarter compared to $7.3 million earned in Q1 last year.

Diluted earnings per share for the quarter declined 28% from last year to $0.38 per share. Our weighted average diluted shares outstanding were 10.2% lower at the end of Q1 this year compared with end of Q1 last year.

This decrease is primarily due to the 1.2 million shares repurchased in 2007 as part of our $50 million buyback program. The reduction in shares outstanding increased EPS in Q1 this year by about $0.03. No shares were repurchased in Q1 this year. The effective income tax rate for the first quarter of 2008 increased to 38.4% from 32.0% in the first quarter of 2007.

The lower rate in Q1 last year was due to a reduction in state income taxes from state incentives related to our investment in our new distribution center in 2006 and 2007. The reduction in income tax expense related to the tax incentives equated to a $0.05 increase in earnings per diluted share in the first quarter of last year.

Capital expenditures for the first quarter of 2008 were $2.6 million, detailed as follows. We spent $1.4 million on the remodeling and relocation of stores, $600,000 on 2008 new stores, $200,000 on software and IT with all other additions of $400,000.

Depreciation expense for the first quarter was $4.1 million. Additional capital expenditures of approximately $10 million will be made over the course of fiscal 2008 for the opening of new stores, store remodels and various other store improvements along with continued investment in technology and normal asset replacement activities.

Mark and Cliff mentioned earlier that we are in the process of developing ideas for changes to in store graphics and store design. The $10 million we expect to spend on cap ex the remainder of the year does not include any expenditures that may result from those modifications to our concept.

The investment we made in our distribution center last year has provided us the distribution capabilities to comfortably handle our distribution needs for at least the next 12 months.

However, at this time, we have not achieved the expected productivity from the new DC, productivity that we will need three to five years from now. Currently we have not paid the designer and builder of the material handling system in the DC, the contractual retention amount.

That vendor, SDI Industries Inc filed a demand for arbitration with the American Arbitration Association on April 22, 2008 seeking payment of the retention amount of $1.1 million along with interest and attorney’s fees. We filed a counter-claim on May 22, 2008 denying SDI’s claim and making a claim of at least $3 million to complete or reconfigure certain areas of the DC and to reimburse us for the extra labor we incurred due to the productivity shortfall.

We are in the process of hiring a new firm to remediate the DC and tentatively expect to have those modifications complete within 12 months. We do not expect this issue to affect our distribution of product to our stores, nor is it expected to affect our store growth plans.

My last comment is to note that despite the continuation of a very difficult retail environment going into 2008, we’re still able to generate free cash flow in the quarter with approximately $10 million in cash and had no long term debt. In 2008, with cautious management of our inventories, expenses and cap ex, we once again expect to be able to fund our store growth, generate significant free cash flow and end the fiscal year with no long term debt.

While we expect limited use of our credit facility this year, to give us more flexibility in our capital structure now and in the future, our bank group agreed, subject to documentation to increase our unsecured line of credit by $25 million for a total of $95 million available for cash advances and letters of credit.

We wish to thank our bank group for their support and confidence in our company. This concludes our financial review of the first quarter of 2008. I’d now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Jill Caruthers – Johnson Rice.

Jill Caruthers – Johnson Rice

Wondering if you could talk about, you mentioned there was some significant changes in the non-athletic women’s merchant team. Maybe if you could talk about some lead time for when we see these new buys come in the store and just a little bit more on that.

Cliff Sifford

We began to make changes in that team actually at the end of 07 when we moved one of our buyers out of that team and into the allocation team, a merchandise manager. We then made a reassignment of a divisional within our organization into the women’s buying responsibility and we hired a divisional from outside the company. So I think you’re going to see the results of some of those changes as early as fall with the new fall product and then the rest as we move into fourth quarter.

Jill Caruthers – Johnson Rice

I guess the expense control is the very pleasantly surprised to see that you kept the dollar amount flat, I know in the last conference call you kind of guided to you were expecting to have expenses grow less than 3.5%. I mean have you ratcheted that down for the year now given the results in the first quarter?

Kerry Jackson

Yes we have. We’ve had a significant savings in first quarter keeping our expenses flat. Now we don’t expect that our expenses be flat in second quarter or third or fourth in actuality. But we should do better than the 3.5% we originally projected.

Jill Caruthers – Johnson Rice

Was there any onetime benefits or anything in the first quarter?

Kerry Jackson

No, it was just hard to earn expense controls.

Jill Caruthers – Johnson Rice

The re-analyzing you’re doing on the store front with the mic person’s role and whatnot, any type of guidance on when the timing of these changes will happen or are you still pretty much in the process and this is more of an 09 implementation?

Mark Lemond

We are in the throes of deciding a number of different changes right now. I want to be first to say that we don’t expect any of these changes that we’re talking about, whether from a visual standpoint, from any of the design elements to the way the mic person operates to be any dramatic change.

Though we are making small tweaks to incorporate some of the changes we think need to be made to service our customer better and to incorporate some of the ideas that customers gave us in certain of this ethnographic research that we did. So they’re not major, dramatic changes that you as an analyst for example would say, wow, this is really going to change the shape of Shoe Carnival in the future.

It’s more of tweaking our current operation to make it more accommodating to our customer. And a lot of these changes are going to be made, some of these changes have been identified and are in the process of being made, certain others are being talked about and discussed as we speak.

Operator

Your next question comes from Heather Boksen – Sidoti & Co.

Heather Boksen – Sidoti & Co.

A question regarding the inventory you’re planning for the remainder of the year. You said you were planning to have it trend down at least on a per store basis through the remainder of the year, with the inventories flat though at the end of the quarter, just curious how you’re planning on getting to that. Is it going to be, do you need to take markdowns or continue to be promotional in the second quarter to achieve that or if not, how are you getting there?

Cliff Sifford

As far as taking markdowns, we’ll continue to do it, our markdown cadence in the women’s non-athletic has been underperforming as we moved through this quarter. But I don’t see the markdown cadence being any more aggressive than we did last year. If you remember last year, we had a slow first quarter. We felt that was completely weather driven. So we, most of our heavy markdowns came in the second quarter.

This year we didn’t wait, we took heavy markdowns in the first quarter. So we’ll just continue our cadence as we move into the second quarter. It should be lighter, actually, than last year. The fact is is we believe again and I think I talked about this at the last conference call that because of the rising prices out of China and inflationary prices, we are probably going to sell less pairs.

We’ve seen the declining customer count in our stores now for right out of year and we feel that that decline is probably going to continue at least in the short term. So if you’re going to sell less pairs then we should stock less pairs. So we have planned the inventories down, not from a buy standpoint, not through a markdown.

Heather Boksen – Sidoti & Co.

I know last year you guys took a lot of markdowns in the second quarter, I was just curious if you were planning the promotional cadence similar to last year or more.

Cliff Sifford

We don’t plan it to be heavier than last year.

Mark Lemond

One other point I want to make is that we are intensely focused on reducing the SKU count in our stores in virtually every category, but particularly in the women’s casual and dress category. So when Cliff talks about carrying less inventory, it’s very much on a rifle basis with respect to particular categories rather than just a flat out statement that we’re going carry 10% less pairs. It’s not that way.

We are planning certain categories where we think we can generate a higher inventory turnover and a higher gross margin return on investment and targeting those categories for smaller inventories and harder working inventories. Obviously it’s an attempt to keep the inventories cleaner, fresher as we move throughout the year. The other impact that we expect to see is that we will be in size more often on our key core footwear.

The way I look at the business is there’s an underlayment of product that we depend on in a day in, day out basis and if we are in size more, if we are out of stock less often, then we’re going to see our conversion rates continue to go upwards. In the first quarter we had a pretty nice increase in price actually on a per pair basis which is encouraging for the rest of the year.

But we have seen a decline in traffic. So we’re combating the decline in traffic with a decline in the number of pairs that we’re stocking and hopefully we’ll see an increase in conversion rates as we carry our sizes in a better proportion to what we have right now.

Heather Boksen – Sidoti & Co.

Are you seeing in terms of timing for back to school, I know last year it wound up being an issue with the later back to school holidays, have you guys heard anything in particular regarding any states so far where that might be an issue?

Cliff Sifford

So far no. The only significant change is that Florida has not enacted the tax free holiday that they had last year and it looks like that’s going to go away. That happened to us, I don’t know, three or four years ago and all that does is shift the sale, the sales still come it just shifts them closer to the back to school time period. But Florida last year moved most of their tax free into August anyway, so we shouldn’t see a significant change in August on that.

Heather Boksen – Sidoti & Co.

So it all still falls into your third quarter anyway, correct?

Cliff Sifford

It should, yes.

Heather Boksen – Sidoti & Co.

The 22 to 25 new stores, can you speak about how many of those are in existing markets and how many are new?

Mark Lemond

I think I said 15 are in existing larger and smaller markets.

Operator

Your next question comes from Chris Svezia – Susquehanna.

Chris Svezia – Susquehanna

Just on the comp, could you tell me what it was traffic versus ticket for the comp decline in the quarter?

Mark Lemond

I would tell you that unit sales on a comp basis were down a little over 8% and price was up about 3.5%. So we do measure traffic conversion, ticket prices and the whole bit. But the way we look at it on a comparable basis is a decline in units of 8% and an increase in price of a little over 3.5%. That’s for footwear only, it excludes accessories.

Chris Svezia – Susquehanna

When you look at your seasonal product and you’ve referenced in terms of what was weak the sandal business, some of your open toe footwear was soft, have you cleared through most of that during the first quarter or do you still, obviously, anticipate to continue to be somewhat of an issue here during the second quarter and just kind of what you’re doing if anything you could do intra-quarter to kind of address that business at this point.

Cliff Sifford

We did not clear completely through it in the first quarter nor did we expect to. We just started our clearance program much earlier this year than we did last year, recognizing the fact that we didn’t feel it was going to get any better and so far we’ve been right on the money on that.

But again, like I said earlier, the last year we waited until second quarter to begin that clearance process and this year we’ve started it much earlier. So I feel that many of the markdowns that we needed to take have already been addressed and are showing in the margins.

Chris Svezia – Susquehanna

When you look at the athletic business which is obviously performing nicely for you and I guess broadly speaking within the industry, certainly showing some signs of improvement, is that enough for you as you look to back to school to potentially generate a positive comp.

I mean obviously that product has higher ASPs, however a lower overall merchandise margin. But is it enough for you guys to potentially generate a positive comp if you continue to see these trends unfold in the athletic business as you go to back to school?

Cliff Sifford

We don’t really give any forward-looking guidance but the only way I know to answer that question is athletic becomes a very important part of our business as we move into back to school, especially n the August, the latter part of July, all of August and the first part of September, athletic becomes a very big percentage of our business.

Mark Lemond

And I think that benefit is going to be even greater this year because of the Olympic impact.

Chris Svezia – Susquehanna

And then assuming also the product offerings that you’re getting, whether it’s skate or Converse or Nike etc, addressing that sort of urban consumer in terms of what you’re doing there is better than you had last year too, is that fair to say?

Cliff Sifford

I don’t think there’s any question about that. And I’ve got to tell you that I think that part of what’s going on is that for the first time in about three years, the athletic industry has offered the customer something that they don’t already have in their closet. Its new color, new silhouettes, just new product that they can get excited about.

Chris Svezia – Susquehanna

But just on what you’re looking at in terms of the inventory reductions per store for the balance of the year layering into that the cost increases coming out of Southern China, whether they’re 8-15%, whatever it is, plus your actually going to be increasing pricing yourselves on some of this product as you add you know more value in casual land and I’m sure on the athletic you’re seeing higher prices.

I’m trying to get an idea of how all this potentially will flow for the balance of the year with inventory per store down but yet higher pricing, possibly higher ASPs on product. How does all this flesh out for the balance of the year?

Mark Lemond

I’m not sure what your question is.

Chris Svezia – Susquehanna

Your inventory per store is actually going down, however your cost related to that inventory because of cost increases from Southern China is actually going up but your units are going down but at the same time you’re having, at least hoping to get higher ASPs above the cost increases on those products that you’re seeing cost increases. So should we I guess assume that ASPs potentially could increase for the balance of this year, however units are down, is that how we should look at it?

Mark Lemond

That’s exactly the plan. The increase in average selling price is obviously going to depend on what the marketplace holds as we move into back to school, actually I should say as we move through the clearance periods of June and early July and into back to school periods. I would suspect that there are not too many retailers in the footwear sector that are planning huge increases in inventory.

I know that most if not all people that carry products sourced out of China are planning for those same kind of cost increases that we’re planning on. So I would expect that there wouldn’t be as much pricing pressure in terms of, particularly non-athletic product as we go through the back to school and the fall period that we’ve seen in the past.

If there are, as I stated at the fourth quarter, then we have the capability of tightly controlling our cost structure and if we need to, maintain a lower gross profit margin to continue to reduce those inventory levels or to maintain a fresh inventory, we have the capability of doing that. I think probably more so than some of our competitors.

Chris Svezia – Susquehanna

Is there anything as you look at your product assortment, you obviously spoke about athletic and making changes on the women’s non-athletic end of the business in terms of you’re buying teams, etc. Is there anything from a product perspective as you look to fall that gets you sort of excited outside of the athletic business?

Cliff Sifford

I’m looking forward to the boot season. We think that with all the excitement going on with casual boots and fur lined boots that we could end up with a fairly healthy boot business.

Operator

Your next question comes from Jeff Stein – Soleil Securities.

Jeff Stein – Soleil Securities

A question on real estate, we’re beginning to hear from other retailers that the real estate market is beginning to loosen up somewhat and wondering if you’re beginning to see that in some of the deals you’re seeing.

Mark Lemond

We just got back from the Las Vegas International Council of Shopping Center deal making session last week and I don’t think I’ve ever seen a period of time where there are so many strip centers being planned for 2009, 2010, 2011. There are a tremendous amount of deals that are being planned at this point in time.

However, you have to temper that enthusiasm in the real estate industry with the fact that Target has slowed down some of their growth, J.C. Penney is slowing down some of their growth, so you’ve got some strip center anchors that are pulling back a little bit in terms of real estate expansion.

So how many of those record number of deals that are being planned actually get done remains to be seen. But we’re being fairly cautious on individual sites that we are currently hanging our hate on strictly for that reason.

Jeff Stein – Soleil Securities

I guess I’m referring more to the cost of the real estate, are you seeing developers trying to be more realistic in terms of what they’re charging you per square foot?

Mark Lemond

I think if you look at new strip center development, no, we’re not. I don’t see any huge decrease at all in terms of the numbers that they’re quoting. You know as we move forward and we finally get down to a negotiated rental rate, then maybe that’ll, my opinion of that will change in the future.

But right now the numbers they’re quoting on new strip center development is still pretty high, particularly in some of the larger cities that we’re looking at. When you start talking about redevelopment, it really goes city by city.

Some we’re seeing become more reasonable in terms of the price that they’re quoting and some if it’s, typical supply and demand, if it’s a strip center that could potentially be in high demand because of changing demographics in certain marketplaces then we’re seeing rental rates that are still very high. But overall I would not say that as of right now we’re seeing a wide sweeping decrease in the rates of retail rentals in our particular size box, 10,000-12,000 square foot box.

Jeff Stein – Soleil Securities

Can you address the issue of store closing costs and what you might expect to see over the balance of the year with nine stores to be closed for the year?

Kerry Jackson

We incurred, like I said, $285,000 in Q1. That’s going to be about what we incur in Q’s 2, 3 and 4. It actually goes down in the subsequent quarters but not significantly.

Jeff Stein – Soleil Securities

So each quarter we should expect around that same number, $285,000?

Kerry Jackson

In Q2 this year it’s going to come down to about $230,000. For the year we’re expecting just under $1 million.

Jeff Stein – Soleil Securities

Mark, you did allude to the fact that, and this goes back to the store redesign and graphics and so forth, you did allude to the fact that some of the changes are already being made. Can you be a little bit more specific in terms of what we should be looking for?

Mark Lemond

What we want to do is we want to make sure that we tie in and integrate our in store graphics package with the advertising that we are going to see for back to school. So that’s part of the changes that we’re currently in the process of making.

When you start talking about changing graphics it’s not done overnight, you don’t spread that out to almost 300 stores from Monday to Tuesday but we should see those kind of changes for the back to school period. That’s just an example.

Jeff Stein – Soleil Securities

And what different role, what kind of a change in role could you possibly have in mind for the mic person because it’s my understanding and belief that that person has actually been probably the best promotional tool you have in the store. Are you planning in any way to diminish that?

Mark Lemond

Don’t worry, we’re not getting rid of the mic person. Part of the overall Shoe Carnival concept, we’re not getting rid of it. What we are thinking about are ways that we can contemporize that particular function and make it more appropriate for today’s consumer.

So we are absolutely not getting rid of that very critical tool. I think that’s one of the reasons why our sales per square foot are better than our competitor’s sales per square foot because we’re able to push the product out the door. What we are trying to do is make that mic person more acceptable to all consumers and not just part of the consumer base that we think we’re getting.

Operator

Your last question comes from Sam Poser – Sterne Agee.

Sam Poser – Sterne Agee

How should we look at the share count for the rest of the year?

Kerry Jackson

It should be fairly steady with what we saw in the first quarter assuming that we don’t buyback any additional shares.

Sam Poser – Sterne Agee

Would you expect to return to more to normal, because it sort of sounds like there was some markdown shifted from Q2 to Q1 compared to last year. Do we look like we should be returning to more normalized margins in Q2 just based on the earlier start of markdowns and the fact that you’re not treating your inventory like fine wine?

Cliff Sifford

If you were talking about comparative to last year or maybe even better than last year then the answer to that would be yes.

Sam Poser – Sterne Agee

I’m just looking back a few years and it looks like Q2 last year was abnormally low.

Cliff Sifford

And it was, as I explained, we waited until Q2 last year to take the lion’s share of our markdowns and we did not this year. So I would expect to see better margins in Q2. But that all has to do with how the customers react to the markdowns we’ve already taken. The goal is to come clean, I anticipate margins to be higher than last year, yes.

Mark Lemond

I will tell you that we are not planning margins at the level they were two to three years ago, strictly because of the economic issues that we’re facing right now. So if you look strictly at the prior year, yes, we are planning higher margins. But not to the level that we saw a few years ago.

Sam Poser – Sterne Agee

How is the quarter’s run so far. I mean in Q1, by month, can you give us a breakdown of that?

Kerry Jackson

We don’t give out monthly comps, we only give out quarterly comps. But we saw a very difficult March because it was a very early Easter. It was also cold and wet and we saw some of the most difficult time periods at that point in time. Towards the end of the quarter when it started warming up and we had shoppers coming out to look at that spring product, we saw our business get better.

Mark Lemond

One of the reasons why we’ve gone to quarterly comps is as you can well imagine are the changes in weather patterns at the very early part of the season, for example the first quarter, but additionally changes in holidays, key selling weekends, etc, etc. So it’s one of the reasons why we’ve gotten away from monthly comps, it really doesn’t make much sense when you compare month to month until you get to quarter end.

Sam Poser – Sterne Agee

I was really looking more towards what kind of momentum you might be gaining. I mean a lot of other people out there have said that April started getting better and that had continued into the beginning of May and I was wondering if you were seeing the same kind of trend that lots of other people are seeing right now.

Mark Lemond

I will tell you that we are seeing a better trend, the comp store declines have moderated significantly and whether that continues into the rest of the second quarter remains pretty much a function of our clearance and the markdown cadence that Cliff spoke to and quite frankly pricing pressures created by competitor’s clearance. So right now we are seeing a better trend.

Sam Poser – Sterne Agee

And then when we look out towards, let’s say the end of the year, the end of the quarter, I know you’ve talked about the inventory levels to be down on a per store basis and you’re trying to push them down, but if we just look at it on a total basis, what kind of target number would you be looking for from an inventory perspective and just forcing up the turn with the reduced SKU count and the stores and everything else.

Mark Lemond

Again, we haven’t given specific guidance, certainly not on a balance sheet basis. But what we’re trying to give The Street is our direction, our strategy and what we anticipate on a per store basis. You can extrapolate that if you will over the store base, understanding how many stores we’re opening and closing. So you can pretty much extrapolate the changes in inventory on a total basis. But we’re not giving that guidance, certainly not with respect to inventory.

Sam Poser – Sterne Agee

And then what about your age of goods right now, how are you looking on a relative basis?

Cliff Sifford

From an age standpoint we’re in pretty good shape. Again my biggest concern at this point is the spring 08 product and women’s non-athletic that did not perform in the first quarter.

Operator

It appears we have no further questions at this time.

Mark Lemond

I’d just like to thank you for joining us this morning and hopefully we’ll look forward to a better second quarter when we talk to you next. Thank you.

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Source: Shoe Carnival, Inc. F1Q08 (Qtr End 05/03/08) Earnings Call Transcript
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