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Edited Transcript of SCVL earnings conference call or presentation 22-May-19 8:30pm GMT

Q1 2019 Shoe Carnival Inc Earnings Call

EVANSVILLE Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Shoe Carnival Inc earnings conference call or presentation Wednesday, May 22, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clifton E. Sifford

Shoe Carnival, Inc. - President, CEO & Director

* W. Kerry Jackson

Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer

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Conference Call Participants

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* Christopher Svezia

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Gregory R. Pendy

Sidoti & Company, LLC - Consumer Analyst

* Mitchel John Kummetz

Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers

* Samuel Marc Poser

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Shoe Carnival's First Quarter Fiscal 2019 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, you may begin.

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [2]

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Thank you, and welcome to Shoe Carnival's First Quarter 2019 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 first quarter operating highlights and sales results as well as a review of our updated fiscal 2019 outlook. Kerry will discuss the financial results in more detail, then we'll open up the call to take your questions.

As most of you that have followed Shoe Carnival over the years know, like other retailers, our first quarter sales represent a shift in seasonal footwear from cold weather boots to more sandalized, warm weather categories. In addition, the timing and size of tax refunds can also impact our rate of growth in the first quarter. This spring, we experienced a very cold and wet start to the quarter and a delay in tax refunds, which resulted in a high single digit comparable store sales decrease in February.

That said, once our customers had a combination of warmer weather and tax refunds, we experienced a very positive change in sales for March and April. We believe the best way to view the Easter selling season is to look at the sales for March and April combined. With that in mind, March and April comparable store sales increased 3.6%, which compares to the first quarter's comp sales results, which were essentially flat.

Traffic for the quarter declined mid-single digits, while conversion increased low single digits and the average dollar per transaction were down low single digits. Average units per transaction were up low single-digits. We ended the quarter with inventory up 0.3% on a per store basis.

Our merchants did a great job at controlling seasonal inventory, which allowed us to keep merchandise margins relatively flat even though we were more aggressive in athletics due to the sales softness in February.

BD&O increased 50 basis points as a percentage of net sales and SG&A deleveraged by 15 basis points. As a result, operating income decreased by 58 basis points. EPS for the quarter was $0.91 per diluted share, an increase of approximately 9.6% compared to quarter 1 last year. Kerry will give you more detail on our financials in his prepared remarks.

Focusing on our first quarter comparable store sales by department. Women's nonathletic was up low single digits on a comparable basis. Women's boots and women's sandals were up mid-single digits on a comparable basis at higher margins compared to quarter 1 last year. With the combined Easter time period of March and April, women's nonathletic was up mid-single digits on a comparable basis due to the strong performance of sandalized footwear.

The men's nonathletic department continued its strong performance, posting a mid-single-digit comparable store sales increase. Just like the women's nonathletic department, increases were driven primarily from the sandal and boot categories. For the combined Easter time period, men's nonathletic produced a high single digit comparable store sales increase.

The children's shoe department was down slightly for the quarter on a comparable basis. We produced a mid-single-digit increase in nonathletic and a low single-digit decrease in athletic. For the combined Easter time period, children's shoes produced a mid-single-digit comparable store sales increase with nonathletic up double-digit and athletic up mid-single digits.

Adult athletic was also down low mid-single digits on a comparable basis. The lower comp sales from athletic footwear were primarily as a result of the February tax season. On a combined basis for March and April, adult athletic footwear posted a slightly positive comparable store sales increase. We believe that based on our sales results for the combined months of March and April that we are well positioned to take advantage of the key family footwear trends our merchants have identified as we progress through the remainder of the year.

We ended the first quarter with 395 stores in 35 states and Puerto Rico. During the quarter, we closed 2 stores, and we had no new store openings. Our CRM strategy continues to move forward nicely. We expect our initial implementation to be complete by the end of the calendar year. We remain convinced that our holistic approach to CRM will be a sales driver and will allow us to better align our real estate team to identify specific market areas where our typical shopper lives.

Over the past year, we have spent a great deal of time analyzing our systems and processes to make sure we have all the capabilities to achieve our aggressive growth plans for the next 3 to 5 years. In addition to building a world-class CRM capability, which will drive sales in both brick-and-mortar and online, we are now in the process of improving our capabilities in both supply chain and order management through investments in software and analytical tools.

Retail is ever changing and Shoe Carnival will continue to make the necessary investments in technology and customer engagement to take Shoe Carnival to the next level of growth.

Finally, I'd like to give an update on our financial expectations for fiscal 2019. As we gain additional capabilities through our CRM implementation process, we are experiencing some quick wins that are promising. I have been pleased with the way we are personalizing and customizing our messages and the positive results we have seen from this initiative. Our goal from the beginning of our CRM process has been to reactivate any loyalty member that may have left, while finding and retaining new Shoe Carnival loyalists.

In addition, as we look toward back-to-school and holiday, there will be 1,700 fewer stores to buy back-to-school shoes and cold weather boots in the markets we serve. We have confidence that Shoe Carnival is poised to win our share of those shoppers looking for a new home that offers a large selection of footwear for the family at compelling values.

With that in mind, combined with our CRM early successes and continuing activation, we have confidence in the remainder of the year. We continue to expect net sales in the range of $1.035 billion to $1.043 billion with comparable store sales up low single digits. At the same time, we're raising our earnings outlook to reflect the first quarter tax benefit and now expect fiscal year 2019 EPS to be in the range of $2.73 to $2.83.

That concludes my overview. I would now like to turn the call over to Kerry.

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [3]

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Thank you, Cliff. Our net sales for the first quarter ended May 4, 2019 decreased $3.6 million to $253.8 million compared to $257.4 million for the first quarter ended May 5, 2018. Comparable store sales decreased 0.2% in the first quarter of fiscal 2019.

The $3.6 million decrease in net sales was primarily due to a $3.9 million loss in sales from the 16 stores closed since the beginning of fiscal 2018 and a $639,000 decrease in comparable store sales. These decreases were partially offset by an increase of $883,000 from the 3 new stores opened since the beginning of fiscal 2018.

Our gross profit margin for the quarter was 29.6% compared to 30.0% in the first quarter of last year. This was driven by a 10 basis-point increase in our merchandise margin, offset by a 50 basis-point increase in our buying, distribution and occupancy expense as a percentage of sales.

We deleveraged our occupancy expense for the quarter due to higher expense primarily from higher property taxes and CAM adjustments passed through from the landlords and a reduction of sales for the quarter.

SG&A expenses decreased $479,000 in the first quarter of fiscal 2019 to $59.5 million. As a percentage of sales, these expenses increased to 23.4% compared to 23.3% in the first quarter last year. Drawing expense controls during the quarter at a $1 million reduction in expense for stores that have closed resulted in a decrease in SG&A expense for the quarter. Other significant changes in SG&A for the quarter included decreases in incentive compensation and depreciation, and increases in wages and earnings on our retirement savings plan.

The effective income tax rate for the first quarter of fiscal 2019 was 12.8% compared to 25.0% for the same period in last year. For the full year of fiscal 2019, we expect our tax rate to be approximately 21.0% compared to 24.3% last year. The reduction in the tax rate for the quarter and year was a result of a $1.9 million tax benefit related to divesting of equity-based compensation in Q1 this year.

Net income for the first quarter of fiscal 2019 increased $918,000 over Q1 last year to $13.9 million. Diluted EPS increased $0.08 to $0.91 per diluted share, which includes the $0.13 benefit from the vesting of equity-based compensation during the quarter. For the first quarter of last year, we reported net earnings of $13.0 million or $0.83 per diluted share.

Now turning to our balance sheet and information affecting cash flow. We adopted ASC 842, the new lease accounting standard in the first quarter of fiscal 2019. This new guidance required us to recognize our operating leases on the balance sheet in the form of right to use asset and lease liabilities. Based on our assessment of the guidance, we recorded lease liabilities of $251.7 million upon adoption based on the present value of the remaining lease payments using an average incremental borrow rate of approximately 5%.

We recorded a corresponding right to use asset on the balance sheet for the same amount, reduced by accrued rent and amortized deferred lease incentives of $30.6 million. Additionally, we recorded a $3.5 million reduction in beginning retained earnings to reduce lease related capitalized costs, which no longer qualify for capitalization under the new standard.

In the first quarter of this year, we repurchased 411,168 shares of our common stock at a total cost of $14.0 million. $36 million remained available at the end of the quarter under our $50 million share repurchase authorization.

Depreciation expense was $4.3 million in the first quarter. Depreciation expense is expected to be approximately $17 million for the full fiscal year. Capital expenditures for fiscal 2019, including actual expenditures during the first quarter, are expected to be between $20 million and $22 million. With approximately $9 million to be used for relocations, remodels and one new store, and $7 million for our corporate headquarters, which we repurchased in the first -- which we purchased in the first quarter of this year.

The remaining capital expenditures are expected to be incurred for various other store improvements, normal asset replacement activities and continued investment in technology, including investment and upgrades to our supply chain.

My final comments today will focus on adding a little color on our earnings expectations for the second quarter of this year. We expect Q2 comp store sales to increase low single digits. While we expect our merchandise margin to be relatively flat compared to Q2 to last year, we do expect to moderately deleverage our buying, distribution and occupancy expense. This deleveraging will be more than offset by the leveraging of our SG&A expense resulting in a small increase in our operating margin.

The deleveraging of occupancy cost is a result of recording in Q2 last year, a $1 million lease termination benefit for 2 stores in Puerto Rico where the landlord could not make contractually required hurricane repairs within the allotted time.

The leveraging of our SG&A is due to expected lower equity and incentive compensation during Q2 this year. Based on our strong earnings in Q2 last year, we incurred an increase in incentive and equity compensation expense of $4.8 million. In Q2 this year, we're expecting a more typical level of expense.

This concludes our financial review. I'd now like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Mitch Kummetz with Pivotal Research Group.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [2]

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I got a bunch, I'll ask a few and then jump back in. Just on the quarter itself, I know when you guys reported the last quarter, you were pretty far into Q1, I know March was trending ahead of plan at that point, February, obviously, was bad. I'm just curious, was -- did April miss your expectations?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [3]

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April was positive because Easter moved into April. So we have -- April was positive so it did not miss our expectation.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [4]

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Okay. I guess, I'm surprised you were guiding to a low single digit comp at that point unless we see...

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [5]

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Mitch, I believe what we said was that we were guiding for the year at a low single digit comp. And I believe Kerry even mentioned the fact that it would be loaded toward the back half of the year.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [6]

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Got it. Can you say what Q2 to date looks like?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [7]

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No. We're not going to talk about Q2 to date.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [8]

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Okay. Fair enough. And then on sandals, I know Q2's a big sandal quarter, can you remind us what percent of sales it is in Q2? I want to say it's maybe in that 20% range. And how you guys are planning?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [9]

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It's between that 20% and 25% range. We'll get that for you and report that in just a second, but it is between that 20% and 25%.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [10]

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It was a really strong sandal quarter last year. I'm just wondering how you're thinking about lapping that. When you're guiding to a low single digit comp on Q2, are you expecting more of that to be coming from the athletic side as you start to flow in some of this new Nike product? Or are you thinking that you can comp the comp on sandals?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [11]

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Well, we believe we can comp the comp on sandals, that's number one. And without giving you a quarter to date or even a season to date, we're not unhappy with our sandal performance. We do, however, expect and we don't talk about -- really don't want to get into brands, but we are excited about the product that we see coming in for back-to-school, which has begun just slightly to flow in and will be coming in truly in earnest in June and early July. So very excited about that and excited about what we've received so far.

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Operator [12]

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We'll take our next question from Greg Pendy of Sidoti.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [13]

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Just I guess, maybe bigger picture, you mentioned earlier, 1,700 fewer stores, can you kind of put that into context? I think maybe 2 years back, there was a big wave of store closings. I mean is this sort of the biggest wave you've seen? Or is this maybe going to be similar to maybe what you experienced in 2017 in terms of a reduction of competition out there in the markets you serve?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [14]

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Basically, what we've seen over the past several years has been a reduction in department stores closing, and that was a big boost in '17 and '18. This happens -- the reason I bring this up and the reason I believe this is compelling is the fact that this is a shoe retailer, which was at one time, the largest shoe retailer in America closing stores, and we have 1,700 of them are within a market area where we have a store.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [15]

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And then I guess, just in '17 and '18, you guys had mentioned maybe the competent -- are the impacts from liquidation going on? Is that something that you're thinking about in Q2 just from competitors closing stores?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [16]

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We are thinking about that in Q2. One of the reasons I really didn't want to talk about quarter-to-date, the key retailer that is closing 1,700 stores in our market area will be gone by the end of June. There would be 1,700 fewer stores this shop outcome in July. They're closing stores throughout the quarter, consolidating product into other stores, and so we see that 1,700 as a building process, if that makes sense.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [17]

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Yes, that makes sense. That helps a lot. And is that something you're thinking about in terms of I know right now, your target is 2020, I think, for returning to store growth, but are you kind of looking for real estate opportunities actively now? I know you're probably waiting for the CRM completion or more data to come from that, but are you -- you mentioned the real estate team kind of combining with the CRM, is that something that's taking place now?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [18]

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We have asked our real estate team to find the sites but unfortunately, if they were to find a site today, any sites they find today and going forward most likely won't open until 2020. So unfortunately -- well, I'm [akin here] to say unfortunately, it was a strategic move to put all store openings until we got our CRM program implemented, and we feel like we're far enough along now and we have some incredible learnings on our customers to date that we can start looking for store sites. So you'll see growth out of us from a store -- new store perspective beginning next year.

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Operator [19]

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We'll take our next question from Chris Svezia of Wedbush.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [20]

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I guess, first, I just want to start, just what was the comp cadence second quarter last year by month? Can you just remind us what that is?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [21]

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So last year, we had a low-teens increase in May, a high single in June and a low single in July.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [22]

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Did liquidations at all have any negative effect? Or are you seeing any negative effect as Payless pulls out of -- starts to liquidate some of these stores? Are you seeing anything in these trading areas that is affecting your business? Or no, you're not?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [23]

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We have stores that compete with Payless head on within a short distance. Our comps there are -- have been affected slightly. And the -- and conversely, the stores where Payless are further than 5, 6 miles, comps have not been affected as much. In fact, it would have been a low single digit comp.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [24]

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Okay. With regard to, I just want to go back to the athletic comment for February, that was just a function of rebate tax, not having money to spend, therefore, the biggest area of that pressure was your athletic business. I mean, your premium price athletic business for that urban shopper, is that how I would characterize that for just February? And then it improves...

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [25]

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Yes, it did improve as we moved through the quarter but the number one reason, and you're on it, the number one reason was the checks did not get out. We're affected -- our customer has a moderate income and they are definitely affected by tax refund checks at the beginning of the year.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [26]

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And then just refer to -- Kerry, I just want to go back to your Q2 -- your 2Q, I guess, guidance, I'm not really sure. Just on the comments you're throwing out there. So just to kind of nail you down a little bit if possible.

So I understand that you're expecting gross margin net to be down, looks like margin up BD&O, more than offsetting it down, are we talking similar to Q1 down and then sort of kind of 40 basis points? Or do you have some color about that? Then I'm going to ask about similar observations about SG&A.

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [27]

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That will be about right. Because it's primarily -- I was trying to give some qualitative guidance for the quarter to help you to see the quarter as we're seeing it. And with a relatively flat merchandise margin with that $1 million benefit that we received in Q2 last year, which reduced the occupancy cost, if you calculate that, you'll find that's about that 40 basis-point reduction that we saw, so it will be similar to Q1.

But we had such an increase in equity and incentive compensation in Q2 last year, which we don't expect to repeat. We expect to see some leverage in excess of the deleveraging of the BD&O so that we have an increase in our operating margin for the quarter.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [28]

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Okay. So operating margin could be somewhere in the up 20 to 40 basis points, am I in the right domain when I think about that?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [29]

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It's probably closer to the lower end of your scale.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [30]

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Okay. All right. Got it. And then just last two things, just with regard to your confidence as you go into back-to-school, you've got some big numbers you'll go up against. You've got better athletic product from some of the major vendors, you're getting, seeing better access, you might be doing some things on loyalty.

So I guess, just stepping back, your confidence level and the ability to hit at least low single digit comp is again to the July, August time frame, just kind of maybe walk through confidence level around that, if you could?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [31]

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Well, we're in the process now of putting together our marketing -- finalizing, not putting together, but finalizing our marketing efforts. But I can -- best way to answer that question, Chris, without telling everybody on the call exactly what we're doing is that we have high confidence that we can achieve the numbers that we have to go against for back-to-school.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [32]

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Congrats.

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Operator [33]

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We'll take our next question from Sam Poser of Susquehanna.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [34]

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So I just want to -- for the full year, are we looking -- what are we looking for gross margin at first of all? I got a whole bunch of questions. I mean, as -- is that going to be -- are you planning to -- are you planning for gross margin to be flat or up a little for the full year?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [35]

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We expect it to be flat to slightly down.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [36]

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Okay. And then SG&A, I mean, you spent -- your SG&A was actually down in dollars in Q1, it's going to be down in dollars again in Q2. Is that something that again should continue for the full year to be down, likely with Q2 being down more than any other quarter, is that -- am I thinking about that right?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [37]

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Well, for the full year, we expect it to be slightly down in dollars, which will create some -- at the high end of our guidance, will create nice leverage on our SG&A line.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [38]

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To what degree, I mean, like, so what kind of leverage for the full year are you thinking about on SG&A up sort of in the midpoint?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [39]

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30 to 40 basis points.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [40]

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The midpoint, okay. And then the -- so we don't have this problem again...

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [41]

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I should say -- I'm sorry, at the high end of that, that would not be the mid-point. At the high end of our guidance, that's the leverage you might expect.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [42]

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Okay. So higher is 30 to 40 bps of -- all right. So we avoid the problem with that one-time event. I mean, shouldn't we just adjust -- I mean, next year, your tax rate for Q1 is going to be in that 25% range again, and then you're going to have to explain why your earnings are down, why not just call it $0.78, $0.79, and move on?

I know we can do that, but the problem is your real tax rate was just under 25%. I mean, why not just call it what it is and move forward and then just maintain your full year guidance on a non-GAAP basis?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [43]

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Well, Sam, this isn't a one-time issue. Anytime there's a vesting, there will be -- there was an accounting change a couple of years ago that said any of these changes for tax purpose won't run through retained earnings, but it will run through your income statement. Up till now, we haven't had anything that was a magnitude that would bring it to forward and bring attention to it.

In Q1 next year, we would expect to be vesting some more stock. We don't think it'll be at the same magnitude. It also depends on what the stock price is as to what level of benefit or expense gets recorded in a quarter. We'll have more vestings the rest of the year, but they will be immaterial, so we really haven't broke them out. But next year, I'd expect it to be material but not to the level it is this year.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [44]

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So I mean, so we can always count on the tax rate in the first quarter theoretically, being under, like -- if you take the midpoint, you call the tax rate 18%, 19% in Q1 as a number to work with that captures some of that, and it could be a little higher, it could be a little lower, is that the way to think about it because of the vesting.

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [45]

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Well, the problem with that Sam is that the tax benefit or expense, it could be -- it depends -- you compare your grant price against the best price and if there is an increase in price over time, and depending on the magnitude of that increase, that would create a benefit. If the grant price is higher than the best price, then you have to record additional expense. Now what we see...

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [46]

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Yes, I understand. I mean, this is something that's totally out of your control, it's abnormal, it isn't part of ongoing operations or anything, it's just your tax rate was better so you got a $0.13 benefit. You're going to raise your guidance on that and then next year assuming whatever happens, higher or lower, I mean, it should just be -- shouldn't we just normalize it at the normalized tax rate and call it a day?

Because, I mean, it also happened with the deleverage in the BD&O because of the extra $1 million. You had this $1 million one-time last year that nobody took out. So I mean, shouldn't we sort of be carving around all this and not -- and so we can really easily look at apples-to-apples, and then understand that the tax rate -- the run rate of the tax rate's 25%, and it's 12 -- it's 21.4% only because of the 12.8% in the first quarter?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [47]

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Well, Sam, we'll let you make that judgment as how you want to characterize it and you are right. What I'd caution is it is not as simplistic as you may be laying out because the expense side of it, which is part of it is included in the SG&A side of it. So it's not like it's all by itself, it's matching up to an expense but it may not be in the same quarter. So over time, the 2 pair up against each other. So we chose not to show it as adjusted earnings partly due to that reason and we'll that the analysts characterize it as they see fit.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [48]

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Okay. And then lastly, with -- Cliff, with Payless, you commented that your athletic business was tough but your nonathletic business is really held in nicely, they didn't get pounded that much relative to athletic in February, and they seem to outperform going forward.

Payless' athletic business, branded athletic is nonexistent, so you're really competing with them on more fashion, especially women's fashion products. I mean, how much headwind could this really -- are we at the beginning of this? In the middle of this? How much headwind could this really provide? And how much headwind are you building into your second quarter guidance or your full year guidance for that matter?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [49]

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We've taken that in consideration for our full year guidance. So let me answer your last question first. First question, right now, they are still, believe it or not, taking shoes. Their people tell us that they're going to -- they're closing stores at the end of June but they're still taking in shoes.

So my guess is that -- and by the way, they're not as promotional today as I think they'll be in another 2 to 3 weeks, but they're going to sell a lot of pairs between now and the end of June.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [50]

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And so -- but I mean, and you're guiding with low singles, that means 1% or better...

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [51]

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We're guiding with low singles for the year. Sam, and it's important that you understand...

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [52]

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But you expect -- I think Kerry said low singles in the second quarter too.

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [53]

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That's due to the bounce that we expect to get at back-to-school for July when there are -- there's no -- there's 1,700 less of those stores along with the better product.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [54]

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So theoretically, the low single-digits is -- you're really saying the low end of low single digits in second quarter?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [55]

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That's correct. And Mitch asked about sandals, and I didn't have the number in front of us but sandals represents about 14% of our total company's volume and about 35% of our total women's business. So we expect that business to continue to stay strong in the second quarter.

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Operator [56]

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We'll take our next question from Mitch Kummetz of Pivotal Research Group.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [57]

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Kerry, just on the guide, on the earnings guide. It sounds like you're just -- you're taking the $0.13 tax benefit and you're flowing that through to year-end. I'm curious how you're thinking about this year. You guys bought back a lot of stock in the quarter, has your view on weighted average diluted share count changed for the year?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [58]

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We're projecting a slightly lower number than we did at the beginning of the year.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [59]

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Okay. And then I don't know, can you quantify that? I don't know what's slightly lower -- another 100,000 shares or...?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [60]

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No. And the reason I want to be cautious about it is because we had an estimate of what we're going to buy for the year and we accelerated and bought more than we had anticipated because we saw an opportunity in Q1, and that may -- we may choose to limit our purchase later in the year and stay within the original guidance. So all you're doing is shifting it between quarters.

Now if we were to buy to the level that we had originally expected in Q2, 3 and 4, as we put in our guidance, we had overachieved what we had expected, it's left to be seen. So I really don't want to -- it's fair to say that our original guidance was around 15 million shares outstanding, now we're expecting slightly lower than that but it's left to be seen how much slightly will be.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [61]

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Got it. Cliff, on the back half of the year, I mean, I know you guys are really bullish on that -- well, I think you're bullish on the athletic business starting for back-to-school given some of the product that you're flowing. I'm curious how you're thinking about the nonathletic side, particularly boots?

I'm wondering in order to fund some of the increases you might be expecting in athletic, are you pulling some dollars away from boots or are you finding some other categories that just, whether it's dress or something like that, that hasn't been working well for you and taking the dollars from there to go to athletic or...?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [62]

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You're right. We expect to see a nice back-to-school from an athletic standpoint due to some of our top vendors and what they've shown us. And as you know, I don't really talk about specific vendors on the call.

But as we leave August and move into September and October, especially in the October time frame, we absolutely expect that boots will start to accelerate and it's going to come out of a lot of different categories, you mentioned one, and that is true. And we expect to see an acceleration of boots throughout the latter part of the second -- excuse me, third quarter and in the fourth quarter.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [63]

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And I guess my last question is Cliff, any thoughts on tariffs and your exposure there. I don't know what conversations you're having with your vendors. I don't know how much you've bought for the back half of the year. I don't know how you're thinking about your ability to raise prices. Anything on tariffs would be helpful.

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [64]

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Well, I don't know if you've heard about the organization called FDRA, but they represent the footwear business in Washington, and I happen to be on the Board of that along with other retailers and wholesalers. And we are working very hard to try to make sure these tariffs don't go through.

We are, I don't know if you know this, Mitch, but we are already the highest tariffed apparel industry, and it just makes absolutely no sense. But we can't just sit back and hope that it doesn't happen, so we are making changes. We are -- we have begun to move product away from China, and into other countries in Southeast Asia.

And the good news is that much of our athletic product has already been moved out of there by the brands. So we've taken a very proactive approach through FDRA and through our vendor community. So we can't just sit back and hope that it doesn't happen.

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Operator [65]

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We'll take our next question from Chris Svezia of Wedbush.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [66]

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Just following up on Mitch's question. Just curious, how are you guys actually planning your boot business? Just kind of given the performance last year, how inventories -- inventory levels looked in fashion versus cold-weather or seasonal? Just any color you want to give about how you're thinking or planning about that business, maybe from a comp perspective or anything around that?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [67]

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I really hesitate to give any plan of how we're going to -- where our increases and where inventory increases. Now if I was just talking to you, talking to The Street, that's one thing, but I'm also talking to my competition. I'd really hate giving you that. I'm going to pass.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [68]

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All right. An easier one for you just on the supply chain order management, just maybe elaborate a little bit more on that, what are you doing? When does that take effect? And just any color about that would be helpful? It sounds like something new so I'm just curious.

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [69]

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Well, we've recognized that in order to achieve our long-term goals of accelerating our digital sales and beginning to become a growth company, we need to have a better supply chain system put in place and an order management system.

So we're going to kick off our program in June, that will be a multi-year program that will basically replace many -- our major components of our supply chain being a warehouse management system. We're going to bring in a more sophisticated transportation management system to help us control cost and get our product to our distribution center in a more efficient manner and getting them to our stores more efficiently.

And we'll replace the order management system on top of that to give us greater functionality and to be able to leverage the costs better as we accelerate those costs over time, we'll be able to show cost reductions by going to a new program. So we find this really exciting, it's a long-term program, it's not going to yield dramatic benefits, if any, this year but it'll set the stage for some long-term growth with some world-class systems.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [70]

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Got it. And just last thing, just on -- you didn't talk too much about Shoe Perks. Customers there, purchasing habits, e-commerce, that kind of thing, any color about that?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [71]

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No. We're very happy with our Shoe Perks program, 72% of our first quarter sales came, the sales of Shoe Perks customer actually up mid-single digits. Unfortunately, our nonmember revenue fell but we are -- we continue to put a lot of emphasis on our stores and getting the customers signed up. Our goal of the program is working very, very strong and I'm excited about the growth we have there.

So real happy about what's going on with Shoe Perks. Even happier with how we've been able to -- how we're taking that Shoe Perks data and the customer data and we're building a CRM strategy around it, which is allowing us, Chris, to talk to the customer, I mentioned it briefly in my prepared remarks, to talk to the customers one-on-one based on their shopping patterns and based on what they look to us for, and I'm very pleased with the way that is working.

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Operator [72]

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We'll take our next question from Sam Poser of Susquehanna.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [73]

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I have just one more. One, are you pulling orders forward into the second quarter due to the threat of the tariffs? And two, do you have any information on tax free holidays at back-to-school thus far?

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [74]

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The answer to your first question is yes, we are, especially the price-sensitive product we are pulling as much of that forward as possible. So we've been working hard on that over the past several weeks. And tax-free holidays are pretty much comp this year versus last year. There's one very small market that went away but overall, they are fairly comp.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [75]

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And then just to follow up on the pulling orders forward. So Kerry, how high -- I mean, how far up -- I mean, we're going to expect to see elevated inventory levels for a good reason at the end of the quarter, to what degree do you think we're going to look at? I mean, your inventories were down year-over-year in Q1 but that doesn't sound like that's going to happen in Q2.

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior Executive VP, Chief Operating & Financial Officer and Treasurer [76]

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It will be up low single digits on a per-store basis but to give a more specific answer is very difficult because we're still in the process of trying to see what we could do to move forward. So it's indeterminate about how much we're going to be able to do that.

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [77]

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And much of the product that we're moving forward, we're moving forward out of September and October and into August. So that won't show up in the second quarter. I do fully expect that our inventory levels at the end of August will be higher than we had originally planned.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [78]

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But not at the end of July at the end of the quarter? Or (inaudible)

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [79]

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Part of the reason for that -- okay.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [80]

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No, go ahead, go ahead.

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [81]

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Part of the reason for that, Sam, is that we build our inventory so dramatically for back-to-school that we really can't bring out -- put a lot more product into our stores. Obviously we could hold some in our distribution center but -- by the way, the reason we call it a distribution center is because we don't hold a lot of product there. But so our goal right now is to move as much product as we can into August before the tariffs hit.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [82]

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If they hit, which we hope they don't.

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [83]

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That's correct.

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Operator [84]

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And at this time, we have no further questions. I'll turn it back to the speakers for closing remarks.

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Clifton E. Sifford, Shoe Carnival, Inc. - President, CEO & Director [85]

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All right. Thank you for joining us today, and we hope that you all have a very enjoyable Memorial Day weekend. We look forward to talking to you about our second quarter results in August.

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Operator [86]

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Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.