Good afternoon, and welcome to Shoe Carnival's Second Quarter Fiscal 2018 Earnings Conference Call. Today's call is being recorded. It is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. Management's remarks may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual results to be materially different from those projected in such statements. Forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's earnings press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements discussed on today's conference call or contained in today's press release to reflect future events or developments. I'll now turn the call over to Mr. Cliff Sifford, President and Chief Executive Officer of Shoe Carnival, for opening comments. Mr. Sifford, please go ahead.

Thank you, and welcome to Shoe Carnival's Second Quarter 2018 Earnings Conference Call. Joining me on the call today is Kerry Jackson, Senior Executive Vice President, Chief Operating and Financial Officer. On today's call, I'll provide a brief overview of our second quarter operating highlights and sales results as well as a review of our updated fiscal 2018 outlook. Kerry will discuss financial results in more detail. Then we'll open up the call to take your questions. Before I get started, I want to take this opportunity to personally announce the hiring of our newest Executive Vice President, Chief Strategy and Marketing Officer, Mark Worden. Mark has 23 years of brand and marketing experience and will bring to Shoe Carnival a fresh perspective on enhancing our overall brand value. Over the past year, we have undertaken a journey toward customer centricity, where we have mapped our customers' journey and identified opportunities for improvement. We have a special relationship with our most loyal shopper, who counsels us to offer the wide selection of the best brands available to the family footwear channel. Our challenge is to communicate this Shoe Carnival message of great brands and the latest styles at great value to new customers in both existing and new markets. We believe that Mark's branding experience makes him just the person to make that happen. Mark and his family have already moved to Evansville, and we look forward to adding him to our executive team on September 10. Now onto the call. Please remember that 53rd week in fiscal 2017 resulted in a 1-week shift of our fiscal 2018 calendar. Our fiscal 2018 second quarter ended 1 week later as compared to the second quarter last year. In fiscal 2018, all of our quarterly year-over-year sales comparisons may be impacted if…

Thank you, Cliff. Our net sales for the second quarter ended August 4, 2018, increased $33.3 million to $268.4 million compared to $235.1 million for the second quarter ended July 29, 2017. Comparable store sales for the 13-week period ended August 4, 2018, increased 6.7% compared to the 13-week period ended August 5, 2017. The increase in net sales was primarily due to an increase of $37.9 million for stores included in our comparable store sales base along with an increase of $2.6 million from the 12 stores we have opened since the beginning of the second quarter last year. These increases were partially offset by the loss of $7.2 million in sales from the 27 stores closed since the beginning of the second quarter last year. As discussed in our Q1 earnings call, due to last fiscal year being a 53-week year, Q1, 2 and 3 this year end 1 week later than last year. This calendar shift moves an important week of back-to-school that was included in Q3 last year into Q2 this year. The net effect of the week shift compared to last year increased sales in our comparable stores in Q2 this year by approximately $19.7 million. Our gross profit margin for the quarter was 31.2% compared to 29.0% in the second quarter last year. This was driven by a 20 basis point increase in our merchandise margin and a 200 basis point decrease in buying, distribution and occupancy expenses as a percentage of sales. The reduction in buying, distribution and occupancy expenses as a percentage of sales was primarily a result of lower occupancy expenses during the quarter and the leveraging effect of higher sales. Occupancy expense for the quarter was lower than in Q2 last year due primarily to lower rents from stores we…

[Operator Instructions] Our first question will come from Mitch Kummetz with Pivotal Research.

Kerry, on the comp guide, I'm just trying to figure out how conservative you guys are being because you're running a 7-7 comp through 3 weeks. And those, I think are the 3 biggest weeks of the month. So you're kind of a 1/3 in low mid-single digit comp. What does that sort of imply for the rest of the quarter? And then again, just a full year comp is 3. You're running, I think, a 4 through the first half. Just trying to figure out kind of what you guys are thinking about in terms of Q4. I mean, are you looking at something like in the flat to plus 1% range somewhere in there?

It depends. In September, we expect a low single-digit decline. But then in October, we're actually expecting a small comp loss, primarily because we're going against the hurricane-affected stores where we saw some really nice rebounds when -- particularly in Puerto Rico started opening up again and then the Houston area. So we're -- we are being cautious. We don't know how strong we are going to comp against those large comp numbers we saw last year from the rebound of that.

And then again, in Q4, you got a tougher compare. What -- again, I'm still kind of trying to do the math just get to your expectations for the fourth quarter. But again, I'm guessing, you're looking for a very, very slightly positive comp in Q4. Is that just a function of the tougher compare? Or just a lack of visibility into the boot category?

It is a low single-digit comp for the quarter. And it is -- we had strong boot sales last year -- with the booty sales also. And we're -- we are being cautious against that, not knowing how that is going to respond and the how the weather will be on a year-over-year basis.

Mitch, this is Cliff. Our customer shops at need, and we've proven that time and time again. And when the weather turns cool, our boot sales will accelerate. We're always somewhat cautious this -- on this call because we, obviously, don't have any visibility to weather. We're very happy. I do have to say this. We're happy with the initial sales of our booty -- especially our booty category, which is trending very, very nicely right now, which bodes well for us if the weather -- once the weather does turn to cold -- cool. So this is -- we are being cautious, but it is weather dependent.

Got it. And then last thing, Kerry, on the calendar shift, particularly on the gross margin. Obviously, it helped you in Q2. You leveraged BD&O by 200 bps. Could you say how much of that was just a function of the calendar shift versus the fact that you guys have closed some stores and that, obviously, helped you on that line item? And then as far as the Q3 gross margin guide goes, you're saying down -- I think you said down 30 bps. How are you thinking in terms of merch margins versus the negative impact on BD&O by the -- losing that week of back-to-school?

Well, the occupancy expense in Q -- so I'm talking about Q2 first. So it was a combination. We actually incurred less occupancy expense for the quarter. Half of it was due to -- approximately half of it was due to stores were closing or will close. And the other half was we received lease terminations benefit were those 2 Puerto Rico stores. The landlord was not able to turn them over to us in a contractual time frame for us to rebuild. And therefore, we just canceled the lease. And we received about $1 million benefit in that number. So overall, our BD&O was down on a year-over-year basis. You combine that with the 6.7% comp for the quarter that helped leverage the BD&O very nicely.

And then on Q3, the 30 bps of pressure, how are you thinking about merch margin versus BD&O deleverage?

So we're going to expect a merch margin increase. And it will be completely offset and more by the deleveraging of our buying, distribution and occupancy costs. We don't expect to see the dollar -- we expect to see lower buying, distribution and occupancy cost, primary occupancy cost in the third quarter but much more muted compared to the second quarter. And so, therefore, the lack of sales creates a pretty significant deleveraging effect on BD&O.

Our next question will come from Chris Svezia with Wedbush.

Congrats on the quarter and more importantly, on the August comp. So I'm just curious, for the August comp, what are some of the drivers to that year-over-year improvement? If you can add any color about what potential there? They are product or just any clarification about that, and/or how maybe the CRM activities might be helping that comp performance in August as well.

I'm going to address CRM activity first. It's really early in our CRM. In fact, we have a -- we don't expect to get full rollout of CRM until the end of the year. However, we did relaunch our loyalty program in July. And we have seen some nice improvements and some nice reaction from our most -- our highest-value customer, which we labeled as Gold. And I'm really happy with where that is. From a back-to-school selling, it's always about athletic shoes, Chris, as you know, and our athletic business is comping up nicely. Although I will tell you, sandals continue to sell throughout August. We're very, very pleased with the open-up category -- open-up sandal category.

Okay. And how are you planning -- just to clarify, how are you planning the boot business for the back half? Just about -- when you think about third quarter, fourth quarter comp, low single-digit -- low to mid-single for Q3, but I'm seeing a slight increase in Q4. How are you thinking about the boot business? And how that plays into that from a comp perspective?

We're planning our boot business basically flat. We want to be able to react to it. And we think that placing a large bet on the seasonal category that is so weather dependent could be a little dangerous. So we would rather react strongly toward a good trend than buying into it based on expectation. So we are planning our boot sales to be flat.

Do you think, by any chance, as you go into that fourth quarter, that your merchandise margin improvements in boots were very strong last year? I think we remember that you can comp that improvement, or will that be difficult to do?

We believe we can comp the improvement. Whether we can improve against it remains to be seen and is definitely weather-driven. [indiscernible] weather-driven. But the fact is, is if we get decent fall and winter weather, we'll sell the boots through at least the margin that we sold them through last year, if not better. But if we don't get the weather -- as you know, our customer does shop at need, and if we don't get the weather, then we'll have to react to that as well to keep the inventories clean.

So just a couple of quick questions for Kerry, just on the model. Just want to understand in answering to Mitch's question, the comp trajectory you anticipate for Q3, you -- did you say a negative low single-digit comp for September and October? Could you just clarify that one more time?

No. We expect -- we're looking at having a low single-digit positive comp in September and a slight negative in October, which will come out to a small comp increase for the combined September and October. [Audio Gap]

Okay. And then SG&A, you anticipate it to be down low single in dollar but deleverage significantly. Is that correct?

That's correct.

Okay. So math -- just to walk through it for 1 second, mathematically, I'm getting a low $0.60, we'll call it, earnings number for Q3, ballpark. That would imply, to get to the prior year guidance, that Q4 is roughly a loss of $0.10, ballpark. I'm curious, given the fact of closing a lot fewer stores, there's a lot of savings related to those stores in terms of not doing the accelerated closings and markdowns. There's no expense related to those closings. How does that play into the thought process around Q4 on profitability?

Well, we haven't given guidance. I'm hesitating a little bit on Q4.

Or you can back into [indiscernible]. That's why...

You could extrapolate it off of the guidance. We're looking for a flattish earnings quarter in Q4 -- or flattish -- of EPS being close to 0 on the quarter, if that's what your question was. If -- so once you back into the Q3 number.

Okay, okay, okay. It looks like you're being somewhat conservative. Like what I'm saying, just mathematically for Q3, I'm getting like a low $0.60 number. If Q4 is flat, then you're above your guidance. But maybe I'm missing something. I'll talk to you guys about it off-line then.

Our next question will come from Sam Poser with Susquehanna.

Just a couple. I just wanted to follow up on that. You're still planning on -- you're going to lose about $25 million in Q3, and then you're going to lose another around $16 million because of the extra week in Q4. Is that correct?

So about $15 million in Q4, yes, because of the extra week. Because the extra week...

And then I guess the question is, is, in 2016, when you had a negative 2 -- negative 1-2 comp, you managed to earn $0.07 in the fourth quarter. Is it -- what are these -- I guess, is this an -- I assume this is an SG&A issue and -- in the fourth quarter -- on a -- even on a low single-digit comp. Why would this go to 0 earnings?

It's less of a SG&A -- there's 2 things that affect Q4. So we expect to have a higher -- on a year-over-year basis, higher incentive and equity compensation. That's one of the standout items of just other than the natural growth in SG&A if we his those numbers. Even though we front load it in the first half, on a year-over-year comparison, Q4 has a difficult compare on there also. And we're also looking at some merchandise margin pressure on the merchandise margin. And we will have some leverage. It will be more difficult, obviously, to leverage our BD&O on a declining sales base. The one thing that creates opportunity was that extra week. It didn't create a lot of income, though it did create a little bit of EPS, the extra week. But it does create a strong leverage of your expense structure for the quarter, which we won't see coming out of this quarter in Q4 of '18. And the combination of some pressure on the merchandise margin and the higher SG&A is the question.

And that merch margin pressure is just because last fourth quarter was so good, you're not counting on it happening again?

It's a combination of factors that, like Cliff talked about, there's some cautiousness around we had really good boot margins last year. And if we have the right weather, we can push against it. We also expect, with the CRM initiative, to see some pressure against some of the opportunities to drive customers in the store, and you do that with coupons and discounts. So we expect some pressure on -- from that standpoint also. And there's a mix shift. We're seeing a strong athletic shift. And therefore, with stronger athletic sales, you'll see a little margin pressure inherently too. And also, closing stores. Like I said, there's a lot of things that are putting pressure on the fourth quarter. Closing stores will be another item that we're anticipating seeing some pressure against on a year-over-year basis.

So what -- so if we wanted to see some leverage in the fourth quarter, what kind of comp would be needed on, let's say, BD&O and SG&A?

I don't know, Sam. I haven't calculated it like that. We really hadn't anticipated to give you fourth quarter guidance right now.

Well, you're doing a very nice job of it.

I didn't know I had a choice.

I guess, when you're looking at this comp last year, so you had a good -- you had like 3 good months. Could you walk through what the comps by month were in Q3 last year?

Well, last year, August was by far the standout month. We were up 7%. And September, we came back with a low single-digit comp. And then October is basically just above flat.

And that was with the help of that recovery from the hurricane?

Yes. Well, it also...

In October.

But after we saw the effect of the stores not being open also. So yes. And then Puerto Rico was down longer. Then Houston bounced back rather quickly, whereas Puerto Rico was down for a while.

Okay. And one last thing. Cliff, if you just look at the overall mix of the merchandise mix in the stores now compared to a year ago and the trends that are going with them, I mean, how would you on a kind of scale 1 to 10, how would you rank the mix this year versus last year, and then why should we expect such deceleration? You guys have...

I'm happy with the mix. I'm not going to give a scale, but I'm happy with the mix in the stores. I will tell you this, that I'm really happy with the way our women's business is performing. But I'm -- we have areas of some concern of whether or not the athletic trend will continue at the current rate through the rest of the fall season. So that's part of the cautious outlook, is that we see a strong women's trend continuing throughout the fall period, especially with boots and booties. But I'm a little concerned on the athleisure trend.

What's giving you pause there?

Just the strength of the boot and bootie category. We're on it's what -- athleisure, athletic has been strong for the seventh straight year that it's -- I think, it's judicious to get a little concerned as we enter into the -- as we complete the seventh year of that trend. I think I'm right on 7 years.

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

Now that you've got a better visibility on Puerto Rico, can you talk about where that's going to end up when everything opens, closes, doesn't open? And second of all, you reduced the number of stores you were going to close. What are the implications of that vis-à-vis rent expense and next year going -- and closings going forward? Have you scared the landlords enough?

I'm not sure if I'm willing to say we scared the landlords. What we've done, what our real estate team has done a very good job of is sitting down with the landlords and working out a couple year extensions, sometimes a 3- to 4-year extension with some rent reduction or kick-out that will allow us to see if the current trend of the store will continue to accelerate. So we want to save these -- as many of these stores as we possibly can where it makes sense. So if we've seen a -- with the current trend in our sales accelerating, not only in our legacy stores but in our new stores as well, we want to give them an opportunity to ramp up. So it's a combination of working with the landlords, of increased sales, productivity in these stores. It's a myriad of reasons why we continue to reduce the number of store closures.

And what are the implications for that going out in '19 and '20?

Well, it -- we don't really -- Kerry, correct me if I'm wrong, but we don't really announce store closures for as far out as '20. Right now, we have not increased the number of store closings for '19. And I don't anticipate doing that at this point. And we haven't released any numbers for '20 or '21.

Steve, it's too early to say. Just like we were able to find ways to get enough savings and performance in stores to take a lot of stores off of the closing list this year, we're still working on stores that are on our radar for next year. And we don't know where that's going to end up, so it's too early for us to give you guidance on that.

I know you're not ready to give guidance for '19, but are we going to reach a place where on a net basis, possibly, you don't close stores or you're plus or minus just a couple?

We anticipate to start opening stores again once we get our CRM program up and running and we have a better understanding of exactly who our customers are and where they live and how they shop. We've said that all year long. So that program is supposed to be up and running by the end of the year. We're learning new things every day. And at that point, we'll start to open up stores again. So yes, I expect to see net growth of stores by 2020.

Okay. And Puerto Rico?

It's early on Puerto Rico yet. We've seen a nice rebound of sales in Puerto Rico, a very nice rebound, that continues to -- in the 6 stores that we have opened. And we expect -- we're keeping a very close eye on the island and -- to determine what is our long-term viability there. But we're very happy with the way Puerto Rico is performing right now.

Do you think that's a function of...

We've reopened all the stores [ within the Rio ].

Sorry, Steven.

Okay. Do you think that's possibly a function of some competition maybe going away?

I think it's a combination of several things. Competition has -- there is less competition there today than there was before. I think there is a lot of FEMA money and a lot of insurance money that landed on the island. That's why we're cautious. And I don't want to say that everything in Puerto Rico is fine and dandy and we're going to stay there. Because once the FEMA money and the insurance money runs out, we have to see how the island continues to progress. Today, we have only 6 stores open, and we have no plans to close any of those 6 stores this year.

But is the market viable with 6 stores and the added expenses of shipping and transportation and of travel to go down there?

It'll -- it's left to be seen where the sales level out at, so it's too early to say.

We'll take a follow-up from Mitch Kummetz.

Yes, I just got a few quick follow-ups, hopefully. So Cliff, when you look at the strength of the business this quarter, which has obviously continued into August, especially the strength that you're seeing in sandals, how much of that strength that you're seeing would you say is kind of a function of favorable weather and product trends, particularly in sandals versus maybe just a more buoyant consumer? Is there any way to kind of disaggregate that?

I think it's both. We have -- I think the consumer does have more money in their pocket to spend, and I think they're out spending it. But I believe that a good bit of what we are seeing has to do with the fact we made a decision entering into this year that we were going to go after key categories in sandals, and in particular -- in a particular category of sandals, we decided to -- we wanted to be -- we wanted to own that category. And it truly has driven the sandal sales all season. And we see that continuing through back-to-school. We've taken the same philosophy for fall. There are certain categories that I don't want to get into in the conference call, but certain categories that we have decided to be the destination shop for. And as long as our buyers have a lot of faith in them, have selected the right categories, and they have definitely bought the depth, then we're going to be successful. And I think that's what sets -- that's one of the things that sets Shoe Carnival apart from our competitors. And we do have large stores, and we have -- we're not afraid to buy in-depth on key categories and items.

And then on sandals, you mentioned a commitment you made to this particular category and that you've seen momentum continue with back-to-school. How long can you kind of chase that? I mean, do you still have sort of enough inventory on hand to just let that go a little bit? Or are you able to get more inventory at some point? Do you -- are you concerned with the season as the weather starts to change because you don't want to get kind of caught with too much to where you then have to get promotional? How are you sort of thinking about that, the opportunity to sort of leverage what you're seeing currently?

Yes. From that category, we have off for the season. So we're done. And that we believe we have product to carry us into the warmer weeks of September and October. And at that point, it's time to transition -- actually, by the end of September, it's time to transition more to fall product and boot and bootie categories, especially booties. And you'll see that as you go into our stores that transition away from the sandal category and into the bootie category.

And then lastly, on the merch margins. I know [Audio Gap] margin up in Q3. When I think about kind of where inventory, particular sort of channel inventory stands, I would guess, and correct me if I'm wrong, but I would guess on the sandal side, given the strength of the category, things are probably pretty clean out there. And maybe versus a more promotional environment a year ago that, that would possibly provide a bit of the merch margin lift for you guys. And then also, even on boots, as the boot category starts to kind of take off, I would guess that maybe last year, there were maybe some pack-aways that were being brought out that were already discounted that you don't have to deal with this year, and that might help the merch margins. Is that a reasonable way to think about it kind of going -- transitioning into Q3?

It's a reasonable way to think about it. But let me be really clear on one thing. We don't pack anything away and bring it back for the next season. We are very focused on being clean of seasonal product when -- at the end of the season.

We'll take a follow-up from Sam Poser.

Kerry can you walk through the decision not to buy back stock and given this -- I mean, what is going to trigger you to buy back stock, or are you using those dollars for building out something else? I mean, can you talk about how you allocating the capital in that regard?

Yes. From that point of view, we are not foregoing -- haven't gone -- forgone anything in the past that we needed to invest in our business so that we could buy back stock. We've always just used excess capital that didn't have a higher -- better use at that point in time. So we're not redeploying it. If we don't spend it on share repurchases, we'll let it accumulate on our balance sheet a little bit higher than what we may -- we've had in the past few years. We really don't get into what our triggers are. But we do have to be cognizant of our float it is not as large as the -- some of our competitors. And we want to make sure that we're not impeding on shareholders trying to take a position on -- in the stock prices on an uplift basis. And that's why we stayed out of the market in Q2. If we see strength in the second half -- we're concerned that we're going to see strength in stock in the second half, and that's why we thought it would be better to take those shares that we had previously guided that we were going to buy back and take them out. And you will find that when you run your models, raising the share count for the year took about $0.02 out of our guidance by raising those -- that 500,000 shares that we had planned on repurchasing. We may go ahead if we see the right opportunity. We might. I'm not saying we won't. We're just saying that it's more likely than not if we have a strong stock price, if we weren't, it would be better to take it out of the guidance at this point in time and be opportunistic if we do find an opportunity to buy the stock.

Ladies and gentlemen, that will conclude our question-and-answer session for today. Mr. Sifford, I will turn the call back over to you for any additional or closing comments.

Thank you. I want to take this opportunity to thank our Shoe Carnival associates who dedicate themselves to making Shoe Carnival a unique, fun and exciting shoe-shopping experience. Also, I want to thank you for participating in our call. And we look forward to announcing our third quarter results in November. Thank you.

That will conclude today's conference. Thank you all, once again, for joining. And you may disconnect.