Shoe Carnival, Inc.
Q2 2018 Earnings Call Transcript

Published: 29 Aug 2018

[Operator:]

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 remarks. Mr. Sifford, please go ahead.

[Cliff Sifford:]

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 the 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 counts on us to offer a live selection of the best brands available to the family footwear channel. Our challenge is to communicate the 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 on to the call. Please remember that the 53rd week in fiscal 2017 resulted in a one week shift of our fiscal 2018 calendar. Our fiscal 2018 second quarter ended one week later as compared to the second quarter last year. In fiscal 2018, all of our quarterly year-over-your sales comparisons may be impacted if there are seasonal influences near the respective quarter-end days. Comparable store sales for the second quarter are presented on a comparable 13-week basis. Now, we’ll review our operating performance. We're very pleased to report a 6.7% comparable store sales increase for the second quarter. As I mentioned on our first quarter call, we were pleased with the start of the second quarter as May’s comparable store sales were exceeding our expectations. With the arrival of warmer seasonal weather, our women's non-athletic sales immediately accelerated, posting a double digit comparable store sales increase throughout the quarter. The performance in women's non-athletic footwear was driven through key items and brands. Our performance for the quarter was broad based, as most major product categories produced mid-single digit comparable store sales increases. I'm excited to tell you that this trend has continued into the important back to school season, where for the month of August through yesterday, we have generated a 7.6% comparable store sales increase on top of the 7% increase we reported for the month of August last year. We also continue to see improved merchandise margin due to our focus on inventory management. Merchandise margins improved 20 basis points, due primarily to the strong performance of our higher margin, seasonal product categories. BD&O was down 200 basis points as a percentage of net sales and we leveraged SG&A by 70 basis points due to the strong sales performance. The result was 132% increase in operating income, which when combined with 36% increase in tax expense produced EPS of $0.76 per diluted share, an increase of 217% compared to the second quarter last year. Traffic for the quarter declined low-single digits. Conversion was up high-single digit, and average dollar per transaction was flat to last year. Average units per transaction were up low-single digits and we ended the quarter with inventory down 2% on a per store basis. Focusing on our second quarter comparable store sales by department, women's non-athletic increased in the teens, driven by the sandal and canvas categories. Our strategy of identifying key categories and offering a broad assortment in depth paid off for us. The sandal category alone drove the comparable store sales increase in the high-20s. The men's non-athletic department was up mid-single digit on a comparable basis. Again, we were pleased with the performance of men’s sandals, which drove a double-digit comp store gain for the quarter. Children’s shoes were up mid-single digit on a comparable basis. This increase was driven primarily from the sandal and canvas categories. Adult athletic was also up mid-single digit on a comparable basis. Our buying team continues to offer our customers fresh new styles and colors from great brands that continue to drive the athletic and athleisure trend we have experienced over the past several years. Now, I'd like to spend a few minutes to update you on our key initiatives for 2018. We continue to work at improving the performance of those stores that we are originally slated to close this year. We continue to see some positive results through a combination of stronger sales and in some cases better terms from our landlords. With the improving metrics on those particular locations, we were able to reduce the number of projected store closures from a range of 20 to 25 to a range of 15 to 17. Our real estate strategy remains conservative, as we complete the implementation of our CRM initiative and allow the real estate market in total to settle down. Our CRM initiative will help us identify our high value customers who are driving a high percentage of our overall sales. For the remainder of this year, we will open up approximately three new stores. We expect to realize improved operating income and EPS performance as a result of our store opening and closing strategy. For fiscal 2019, we do not expect to continue the level of store closings we have experienced over the past several years. We believe better real estate opportunities are ahead of us, as we look to benefit from the evolving specialty retail landscape, including retail consolidation and store closures. We ended the second quarter with 402 stores in 35 states and Puerto Rico. During the quarter, we closed three stores and we had no new store openings. Our CRM initiative is moving forward nicely and we expect our initial implementation to be complete by the end of the calendar year. This strategy is a key element in understanding who our customer is and creating a one-to-one relationship with them. Although a large part of customer data comes from our loyalty program, it is not just about loyalty. By identifying our high valued customers and where they live, we will improve site selection and real estate. By understanding how they shop along with the brands and categories they prefer, a merchant team can improve the merchandise selection on a store-to-store basis and by understanding the pain points in our customers’ journey, we can improve the operations in our brick-and-mortar stores and online. We believe this holistic approach to CRM will give us a clear runway for growing Shoe Carnival now and in the future. I'm happy to announce that Shoe Perks Gold, our newest version of our loyalty program was launched just prior to back-to-school. This new program offers our high value customers a new tier of rewards that is designed to incentivize them to make Shoe Carnival their store choice for all their family footwear purchases. Even though this program was launched in July, we have already seen some encouraging signs that our customers are embracing the new program. Since the re-launch, we have added 200,000 new gold members to the program. Our gold member spend on average 30% more per transaction than basic shoe perk members and 60% more per transaction than non-members. We are also pleased to announce that we launched our e-commerce vendor drop-ship program. This enhancement allows us to offer a broader online assortment of styles not currently carried in a Shoe Carnival store. The advantage for us is we get the test styles, brands and expand sizes without the risk of inventory ownership. In order to stay relevant with the changing retail landscape and the ever evolving consumer, we must continuously improve and innovate. The investments we're making in technology and customer engagement are incredibly important as we take Shoe Carnival to the next level of growth. Finally, I'd like to give you an update on our financial expectation for fiscal 2018. As I said earlier, we have gotten off to a very nice start to the third quarter as our August sales are currently up 7.6%. We believe that the customer shops us at key time periods like back to school, because they press us to have the right styles and brands in depth at a compelling value. Once we get into the latter part of September and October, weather becomes an important element to fuel to sell, sales of seasonal categories. As you remember, last year, we reduced our dependence on low price promotional boots. This year, our booty sales will be driven by great styles and not purely by low price. We’re excited about the selection of boots and booties we have to offer our customers this fall and winter. The acceleration of sales in the boot category is weather dependent. Therefore, we have been cautious in our forward-looking guides. Based on these factors, we expect the comparable store sales increase for the fiscal year of approximately 3%. As a result of our revised sales guidance, we are raising our earnings per share expectation of $1.90 to $2.05 to a range of $2.05 to $2.15. That concludes my overview. I would now like to turn the call over to Kerry.

[Kerry Jackson:]

Thank you, Cliff. Our net sales for the second quarter ended August 04, 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 of 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 during our Q1 earnings call, due to last fiscal year being a 53-week year, Q1, 2 and 3 this year end one week later than last year. This calendar shift moves an important week of back to school that was included in Q3 last year in to 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 have closed or will close and $1 million lease termination benefit for two stores in Puerto Rico where the landlord cannot make contractually required repairs within the allotted time. Based on the landlord's non-compliance in accordance with the lease terms, we cancelled the two store leases. SG&A expenses increased 7.0 million in the second quarter of fiscal 2018 to 68.9 million. As a percentage of sales, these expenses decreased 0.7% to 25.6% compared to second quarter last year. Significant changes in SG&A for the quarter included increases of 4.8 million in incentive and stock based compensation along with 2.7 million increase in advertising expense. These increases were partially offset by a 2.5 million decrease in expenses for stores that have closed or are closing, net of new store expenses. The calendar shift affected both advertising and incentive compensation expense for the quarter. The increase in advertising expense for the second quarter was to support back-to-school sales shift I discussed earlier. Given this was a shift in expense between quarters, we expect a corresponding decrease in advertising expense in Q3 this year. Incentive compensation expense of both Q1 and Q2 this year have been elevated due to the significant increases in sales and earnings. The calendar shift is concentrated on earnings growth over the last year and through the first half. Included in our annual guidance is the expectation that approximately 90% of the incentive compensation growth over last year is expensed in the first half of this year. Store closing costs included in both cost of sales and SG&A were minimal in the second quarter this year compared with store closing costs of 821,000 in Q2 last year. Three stores were closed in Q2 this year compared to closing 4 stores in Q2 last year. There were no new store openings in Q2 compared to five store openings in Q2 last year. The effective income tax rate for the second quarter of fiscal 2018 was 21.6% compared to 37.9% for the same period last year. For the full year of fiscal 2018, we expect our tax rate to be approximately 24%. Our Q2 tax rate this year was below the expected annual rate due to favorable period adjustments recorded during the quarter. As a reminder, in December 2017, the US Tax Cut and Jobs Act was enacted, which reduced our corporate statutory tax rate from 35% to approximate 21%. Net earnings for the second quarter of fiscal 2018 were 11.8 million or $0.76 per diluted share. For the second quarter of 2017, we reported net earnings of 3.9 million or $0.24 per diluted share. Now turning to our cash position and information affecting cash flow. In Q2 this year, we did not repurchase any of our common stock due to the accelerated stock price during the quarter. Based on our experience in Q2 and our optimistic viewpoint of the remainder of the year, we're not projecting further repurchases this year in our earnings guidance. We now expect diluted weighted average shares outstanding for the fiscal year to be approximately 15.7 million shares outstanding. This is an increase of about 500,000 shares over our previous guidance. We currently have 31.0 million available under our $50 million share repurchase authorization. Depreciation expense was 5.6 million in Q2. Depreciation expense is projected to be approximately 21 million for the full fiscal year. Capital expenditures for 2018, including actual expenditures during the second quarter are expected to be approximately 10.5 million, with a little more than half to be used for new stores, relocation and remodels. These incentives are anticipated to be approximately $500,000 to $1 million for the year. My final comment today will focus on adding a little color on earnings expectations for the third quarter this year. While the calendar shift benefited Q sales by approximately $20 million, we expect Q3 sales to be negatively impacted from the calendar shift by that $25 million. As a result, we expect Q3 net sales to decrease 7% to 8% compared to Q3 last year. On a comparable week basis, we expect a low to mid-single digit increase in our comparable store sales in Q3. Our gross profit margin is expected to decline approximately 30 basis points due to the de-leveraging of our buying, distribution and occupancy costs from the expected lower sales. SG&A will also de-lever despite a low single digit decrease in SG&A expense compared to Q3 last year. Our tax rate for the quarter is expected to be approximately 26% compared to 40% in Q3 last year. This concludes our financial review. Now, I'd like to open up the call for questions.

[Operator:]

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

[Mitch Kummetz:]

Yeah. Thanks for taking my questions. Kerry, on the comp guide, I am just trying to figure out how conservative you guys are being, because you're running at 7.7 comp through three weeks and those I think are the three biggest weeks of the month. So you're kind of a third in low-to-mid single-digit comp. What does that sort of imply for the rest of the quarter and then again just the full year comp of 3, you’re running I think at 4 through the first half. I’m 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 a flat to plus 1% range, somewhere in there.

[Kerry Jackson:]

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

[Mitch Kummetz:]

And again, in Q4, you’ve got a tougher compare. Again, I'm still kind of trying to do the math just to 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 is it a lack of visibility into the boot category?

[Kerry Jackson:]

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 are being cautious against that, not knowing how that is going to respond and how the weather will be on a year-over-year basis.

[Cliff Sifford:]

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 the 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 once the weather does turn cool. So we are being cautious, but it is weather dependent.

[Mitch Kummetz:]

Got it. And then lastly, 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 that obviously helped you on that line item? And then as far as the Q3 gross margin guide goes, I think you set down 30 bps, how are you thinking in terms of merch margins versus the negative impact on BD&O by losing that week of back to school?

[Kerry Jackson:]

Well, the occupancy expense in, so I’ll talk 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 we’re closing or will close, and the other half was, we received that lease termination benefit where those two 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.

[Mitch Kummetz:]

And on Q3, the 30 bps of pressure, how are you thinking about merch margin versus BD&O de-leverage.

[Kerry Jackson:]

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

[Operator:]

Our next question will come from Chris Svezia with Wedbush.

[Chris Svezia:]

Good afternoon, everyone. Thanks for taking my questions. Congrats on the quarter and more importantly, thanks on 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 there are, products or just any clarification about that and/or how maybe the CRM activities might be helping that comp performance in August as well.

[Kerry Jackson:]

I’m going to address CRM activity first. It’s really early in our CRM. In fact, we don't expect to get a full rollout of CRM until the end of the year. However, we did re-launch our loyalty program in July, and we have seen some nice improvement and some nice reaction from our highest value customer, which we label 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, sandles continue to sell throughout August. We're very, very pleased with opening up category, opened up sandal category.

[Chris Svezia:]

Okay. And how are you planning, just to clarify, how are you planning the boot business for the back half, just from a – when we 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 do you think about the boot business and how that plays in from a comp perspective?

[Cliff Sifford:]

Your point that our boot business is basically flat. We want to be able to react to it. We think that placing a large bed on the seasonal category that is so weather dependent, it could be a little dangerous. So we would rather react strongly toward a good trend than buy into it based on expectations. So we are planning to move sales to be flat.

[Chris Svezia:]

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

[Cliff Sifford:]

We believe we can comp the improvement. Whether we can improve against it remains to be seen and is definitely weather driven. I hate to keep saying weather driven, but the fact is, is if we get decent fall and winter weather, we’ll sell the boots through at at least the margin that we sell 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.

[Chris Svezia:]

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

[Kerry Jackson:]

So, we expect -- we're looking at having a low single digit positive comp at September and a slight negative in October, which will come out to a smaller comp increase for the combined September and October.

[Chris Svezia:]

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

[Kerry Jackson:]

That's correct.

[Chris Svezia:]

Okay. So mathematics – just to walk through it for one second, mathematically, I'm getting a low $0.60 we’ll call it earnings number for Q3 fall apart. That would imply to get to the high end of your guidance that Q4 is roughly a loss of a time, ballpark. I'm curious, given the fact you’re closing a lot fewer stores, there's a lot of savings related to those stores in terms of not during the accelerated closings and markdowns, there's no expense related to those closings. How does that play into the thought process around Q4 and profitability?

[Kerry Jackson:]

We haven't given guidance, so I’m hesitating a little bit on Q4.

[Chris Svezia:]

Or you can [Technical Difficulty]

[Kerry Jackson:]

You can 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, so once you back into the Q3 number.

[Chris Svezia:]

Okay. It looks like you're being somewhat concerned, like I’m saying, just mathematically for Q3 and getting to like a low $0.60 number. If Q4 is flat and you talked about your guidance.

[Operator:]

Our next question will come from Sam Poser with Susquehanna.

[Sam Poser:]

Good afternoon. Just a couple, I just wanted to follow up on that. Just -- 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?

[Kerry Jackson:]

So, about 15 million in Q4. Yeah, because of the extra week.

[Sam Poser:]

And then I guess the question is, is, in 2016, when you had a negative one two [ph] comp, you managed to earn $0.07 in the fourth quarter. What are these -- I guess, is this -- I assume, this is an SG&A issue in the fourth quarter even on the low single digit comp. Why would this go to zero earnings?

[Kerry Jackson:]

It’s less of a SG&A. There are two things that affect Q4. So we expect to have higher, on a year-over-year basis, higher incentive and equity compensation. That's one of the standout items just other than the natural growth in SG&A, if we hit those numbers, even though, we front loaded in the first half, on a year-over-year comparison, Q4 has a difficult compare on that also. And we're also looking at, from a 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 basis. The one thing that creates opportunity with that extra week, it didn’t create a lot of income, it did create a little bit of EPS as the extra week, but it does create strong leverage of your expense structure for the quarter, which we won't see coming out of this quarter, in Q4 of ‘18. The combination of some margin and higher SG&A is the question.

[Sam Poser:]

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

[Kerry Jackson:]

It's a combination of factors that like Chris talked about, there 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 to store and you do that with coupons and discounts. So we expect some pressure 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 low margin pressure inherently too. And also with closing stores. There's a lot of things that is 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.

[Sam Poser:]

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?

[Kerry Jackson:]

I don't know, Sam. I haven’t calculated like that. We really hadn’t anticipated giving fourth quarter guidance right now.

[Sam Poser:]

Well, you're doing a very nice job of it. I guess when you're looking at this comp last year, so you had like three [Technical Difficulty] can you walk through what the comps by month were in Q3 last year?

[Kerry Jackson:]

Last year, the August was by far the standout month. We were up 7. In September, we came back with a low single digit comp and then October was basically just about flat.

[Sam Poser:]

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

[Kerry Jackson:]

Yes. 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.

[Sam Poser:]

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 of 1 to 10, how would you rank the mix this year versus last year and then why should we expect such deceleration.

[Cliff Sifford:]

I’m happy with the mix. I'm not going to give a scale, but I'm happy with the mix on the stores. I will tell you this that I'm really happy with where our women's business is performing. But we -- there is some concern, whether or not, the athletic trend will continue at the current rate through the rest of the fall season. So that is 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 a little concerned on the athleisure trend.

[Sam Poser:]

What's giving you a pause there?

[Cliff Sifford:]

Just the streak of the boot and booty category. Athleisure, athletic has been strong now for the seventh straight year. But, I think it's judicious to get a little concerned as we enter into this, as we complete the seventh year of that trend. I think I'm right on seven years.

[Operator:]

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

[Steven Martin:]

Yeah. 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?

[Cliff Sifford:]

I'm not sure I’m willing to say we’ve scared the landlords. What we've done -- what our real estate team has done a very good job of is sitting now with landlords and working out a couple of year extensions, sometimes 3 to 4 year extension with some rent reduction or a 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, we want to save as many of these stores as we possibly can, where it makes sense. So if we've seen, with the current trend and 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, as a myriad of reasons why we continue to reduce the number of store closures.

[Steven Martin:]

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

[Cliff Sifford:]

Well, 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 number for ’20 or ’21.

[Kerry Jackson:]

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, that’s just too early for us to give you guidance on that.

[Steven Martin:]

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

[Cliff Sifford:]

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 and by the end of the year, we're learning new things every day, and at that point, we will start to open up stores again. So, yes, I expect to see net growth of stores by 2020.

[Steven Martin:]

Okay. And Puerto Rico?

[Cliff Sifford:]

It’s early on Puerto Rico yet. We've seen a really nice rebound in sales in Puerto Rico, a very nice rebound that continues to -- in the six stores that we have opened and we expect we’re keeping a very closed eye on the island and [indiscernible] there, but we're very happy with the way Puerto Rico is performing right now.

[Steven Martin:]

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

[Cliff Sifford:]

I think it’s a combination of several things. Competition has -- there is less competition there today than it was before. I think there was a lot of BMO [ph] 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 as – because once the BMO money and the insurance money runs out, we have to see how the island continues to progress. Today, we only have six stores opened. And we have no plans at closing these six stores this year.

[Steven Martin:]

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

[Kerry Jackson:]

It’s left to be seen where the sales level out at. So it's too early to say.

[Operator:]

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

[Mitch Kummetz:]

Yeah. 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 just aggregate that.

[Cliff Sifford:]

I think it's both. 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're seeing has to do with the fact that, we made a decision entering into this year that we were going to go after key categories. And sandals, in particular, and a particular category is sandals. We decided to -- 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 all. There are certain categories I don't want to get into on the conference call, but certain categories we've 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 [ph] and we're going to be successful. And I think that's one of the things that sets Shoe Carnival apart from our competitors. We do have large stores and we have -- we're not afraid to buy in depth. So key categories and items.

[Mitch Kummetz:]

And then on sandals, you mentioned -- you made this particular category and that you've seen momentum continuing to grow, how long can you kind of chase that? I mean, you still have sort of inventory, enough inventory on hand to just let that go a little bit, are you able to get more inventory at some point, are you concerned about 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?

[Cliff Sifford:]

Yeah. From that category, we have bought for the season. So we're done and we believe we have product that carry us into the warmer weeks of September and October. And at that point, I think it's time to transition actually, the end of September, it’s time to transition more of fall product and booted categories, especially booties, and you’ll see that as you go in our stores, transition away from the sandal category and into the booty category.

[Mitch Kummetz:]

And then lastly on the merch margins, I know [Technical Difficulty] up in Q3. When I think about kind of where our inventory, particularly sort of channel inventory stand, 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 a merch margin lift for you guys? And then also even on boots, as the boot category starts to kind of tick off, I would guess that maybe last year, there were maybe some more packaways 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?

[Cliff Sifford:]

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 next season. We are very focused on being clean of seasonal product at the end of the season.

[Operator:]

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

[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’re allocating capital in that regard.

[Kerry Jackson:]

Well, from that point of view, we're not foregoing -- haven't gone -- foregone anything in the past that we need to invest in our business, so that we can buy back stock. We always just used excess capital that didn't have a higher and 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'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 flow. It is not as large as some of our competitors and we want to make sure that we're not impeding shareholders trying to take a position on and 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 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'll find it when you run your models, raising that share count for the years, took about $0.02 out of our guidance, by raising those -- that 500,000 shares that we've planted on repurchasing. We may go ahead if we see the right opportunity. We might -- we're not saying we won’t, we’re just saying it’s more likely than not, if we have a strong stock price, we weren't – and 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.

[Operator:]

Thank you, 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.

[Cliff Sifford:]

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

[Operator:]

That will conclude today’s conference. Thank you all once again for joining and you may now disconnect.