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Edited Transcript of SCVL earnings conference call or presentation 21-Nov-19 9:30pm GMT

Q3 2019 Shoe Carnival Inc Earnings Call

EVANSVILLE Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Shoe Carnival Inc earnings conference call or presentation Thursday, November 21, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clifton E. Sifford

Shoe Carnival, Inc. - Vice Chairman & CEO

* Mark J. Worden

Shoe Carnival, Inc. - President & Chief Customer Officer

* W. Kerry Jackson

Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & 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 Third Quarter Fiscal 2019 Earnings Conference Call. Today's conference is being recorded. It's 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 also be considered in conjunction with the discussion of risk factors included in the company's SEC filings in 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 would now like to turn the conference over to Mr. Clifford -- or excuse me, Mr. Cliff Sifford, Vice Chairman and Chief Executive Officer of Shoe Carnival, for opening comments. Mr. Sifford, you may begin.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [2]

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Thank you, and welcome to Shoe Carnival's Third Quarter 2019 Earnings Conference Call. Joining me on the call today is Mark Worden, President and Chief Customer Officer; and Kerry Jackson, Senior Executive Vice President, Chief Financial and Administrative Officer.

On today's call, I'll provide a brief overview of our third quarter operating highlights and sales results as well as review our fiscal 2019 outlook. Mark will update you on the progress around our customer-centricity initiative and Kerry will discuss the financial results in more detail. Then we'll open up the call to take your questions.

I'm pleased to report comparable store sales for the quarter increased 3.5% on top of the 4.5% increase for the third quarter last year. This increase was driven across all merchandise departments in both the athletic and nonathletic categories and across all sales channels.

Each month of the quarter delivered positive comparable results. We generated our 17th consecutive year of positive comps for the month of August, demonstrating that Shoe Carnival remains the store of choice for shoes during the back-to-school season.

This year's August comp increase of 3.3% was on top of the 6.5% increase in August last year. Our customers trust us to have the latest trends from the best brands in-depth throughout the year. Our commitment to merchandising our stores based on the unique and differentiated customer demographics of each store has always been our focus.

Now with the initial implementation of our CRM program, we can customize our communication to each customer based on their individual shopping preferences. Mark will provide greater detail on this initiative in just a moment.

We ended the quarter with inventory up 1.4% per store on a per-store basis as our team continued to shift receipts earlier to avoid any possible future increase in tariffs.

Our merchandise margin was up 50 basis points to last year. BD&O expenses decreased 20 basis points as a percentage of sales, and SG&A was flat as a percentage of sales compared to the third quarter last year. As a result, operating income increased by 70 basis points as a percentage of sales, and EPS for the quarter increased 23.7% to $0.94 per diluted share, the highest quarterly diluted EPS in the company's history. These positive results give us confidence to increase our fiscal year outlook.

Focusing on third quarter comparable store sales by department, women's nonathletic was up mid-single digits on a comparable basis. We were pleased with the positive comp performance of women's dress shoes, which produced mid-single-digit sales gain, and sport casuals, which produced a high-single-digit increase. And once the weather turned more seasonal later in the quarter, our fashion boots generated positive results.

The men's nonathletic department continued to generate strong results, posting a mid-single-digit comparable store sales increase. Our merchants have done an outstanding job of building our surplus for both everyday wear and work, furthering our goal of making Shoe Carnival the destination for men's footwear.

Shoe Carnival remains a go-to store for children's shoes. The children's footwear department posted a mid-single-digit increase for the quarter on a comparable basis. The sales increase was broad-based, including both boys and girls product categories and both athletic and nonathletic departments.

The adult athletics continues to be -- there continues to be a shift from performance categories to more casual categories. Our merchant team has done a great job of recognizing this shift in preferences resulting in slightly positive comparable store sales.

I would now like to give an update on our financial expectations for fiscal 2019. As I mentioned earlier, once the weather became more seasonal, we saw an acceleration in our seasonal boot categories across all departments and sales channels. Seasonal boots account for approximately 25% of our total footwear sales for the fourth quarter, and we expect the positive trends that we have experienced since the arrival of cooler, seasonal weather to continue through the balance of the fiscal year.

Based on our year-to-date results, we are raising and tightening our EPS guidance from a high of $2.83 to a range of $2.85 to $2.89. This updated guidance represents an increase of 16% to 18% compared to our actual EPS of $2.45 for fiscal year 2018.

In addition, we now expect total net sales for the full fiscal year to be in the range of $1,033,000,000 to $1,036,000,000, which is at the high end of our previously stated guidance.

Further, we continue to expect a low single-digit comparable store sales increase for the year.

With that overview, I'd now like to turn the call over to Mark Worden. Mark?

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Mark J. Worden, Shoe Carnival, Inc. - President & Chief Customer Officer [3]

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Thank you, Cliff. It's a pleasure to be speaking with you on my first earnings call with Cliff and Kerry. I've enjoyed getting to meet many of you from the investment community since joining the company in 2018.

Shoe Carnival has generated consistent results over several years. As Cliff mentioned, we deliver on everyday family footwear needs, and when consumers count on us most for seasonal or special occasions, we have what they're looking for. We believe the strong foundation with consumers is just the beginning.

Over the past year, our team has made significant progress on our long-term strategies. Our customer-centric organization is focused on delighting the family channel shopper and creating sustainable long-term growth for our shareholders.

Today, I'd like to share an update on 4 of our core strategic imperatives, fueling our growth: first, CRM; second, brands; third, e-commerce; and fourth on real estate.

Over the past 15 months, we've shared our enthusiasm about the world-class CRM platform we are building, and I'm excited to share that the CRM implementation phase has been completed ahead of schedule.

Our team has already begun to capture actionable insights and enhanced value for our consumers. The new platform provides our marketing, merchandising, analytics and real estate teams with a holistic view of our customer shopping behaviors. This, in turn, helps us identify tomorrow's most valuable customers and deploy resources toward building long-lasting loyalty with them.

A few early CRM wins include, with new customer insights, we were able to build customer engagement plans that has grown our loyalty program membership 11% this year to over 23 million loyal members. Our most valuable lifetime customers are Shoe Perks Gold member, generating on average over $15 more per transaction than our basic loyalty member transaction value. With focused marketing activities, Gold membership is up over 50% year-to-date. And in Q3, we grew sales with this group by over 20%. Our teams are capturing new shopper insights, giving us confidence that our CRM capability is fueling profitable growth for multiple years ahead.

A second core strategy is to build Shoe Carnival brand awareness and preference within the family footwear channel. During Q3, we launched our first fully integrated campaign with our agency of record, McCann Detroit. This new marketing campaign, in combination with our strong merchandising, resulted in our 17th consecutive year of comparable store growth during back-to-school.

Growth was driven by increased traffic in both our bricks-and-mortar stores and e-commerce platform, resulting in a high single-digit growth rate of customers shopping at Shoe Carnival during Q3.

Store conversion continued to be a long-term success driver, growing low single digits for the year with growth every quarter, demonstrating the excellence of our store operators and our buying organizations.

The third strategic imperative I would like to provide an update on today is e-commerce. Our short-term objective is to grow our online business to over 10% of our total net sales from approximately 7% today. We launched our online business in 2012, and since then have been rapidly building capabilities that are driving customer traffic growth and conversion growth online.

I'm proud of the acceleration we have achieved with our online growth plan for in 2019.

Fourth, opening and repositioning stores to capture customer shopping preferences is a core strategic growth opportunity. During Q3, we opened a new store in Jeffersonville, Indiana; we rebuilt a store in Panama City, Florida that was destroyed by a hurricane in 2018; and we repositioned the store in Peoria, Illinois. Customer responses into early sales performance at all 3 stores are very encouraging.

With our CRM implementation phase now completed, we're able to mind for and leverage new insights to resume profitable new store growth. As part of our strategic initiatives, we are pleased to confirm our plan to open 6 to 8 new stores in 2020 and 8 to 12 new stores in 2021. The strategic plans are focused on growth within our existing 35-state geographic footprint.

Finally, our customer-centric focus and strategic progress during 2019 reinforces our confidence in delivering the increased annual earnings per share outlook Cliff shared with you.

I'll now turn it over to Kerry Jackson to provide more insight into our financial performance.

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & Treasurer [4]

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Thank you, Mark. Our net sales for the third quarter ended November 2, 2019, decreased $5.5 million to $274.6 million compared to the third quarter of last year. Of this increase in net sales, $9.2 million was attributable to the 3.5% increase in comparable store sales and $1.2 million was attributable to the 4 new stores opened since the beginning of the third quarter of fiscal 2018. This was partially offset by a loss in sales of $4.9 million from the 13 stores closed and other non-comp stores over the same period.

Our gross profit margin for the quarter was 30.9% compared to 30.2% in the third quarter last year. Our merchandise margin increased 50 basis points during the quarter, while buying, distribution and occupancy expense decreased 20 basis points as a percentage of sales. The increase in the merchandising margin was primarily the result of an increase in sales of nonathletic products, especially women's nonathletic, which carry a higher margin than our athletic category. The decrease in buying, distribution and occupancy expenses as a percentage of sales was the result of lower distribution costs and the leveraging of expenses against a higher sales base.

SG&A expenses increased $1.4 million in the third quarter of fiscal 2019 to $66.6 million. As a percentage of net sales, these expenses were flat compared to the third quarter of fiscal 2018. Significant changes in SG&A in Q3 included increases in payroll, incentive compensation, employee benefits and store closing and impairment charges, which were partially offset by decreases in equity compensation, depreciation, advertising and operating fewer stores during the quarter.

The effective income tax rate for the third quarter of fiscal 2019 was 24.9% compared to 25.9% for the same period last year, primarily related to the reversal of valuation allowances on certain NOLs that we now expect to utilize. For the full year of fiscal 2019, we expect our tax rate to be approximately 21.3% compared to 24.3% last year. The reduction in the annual tax rate this year was a result of a Q3 reversal of valuation allowances and a $1.9 million tax benefit related to the vesting of equity-based compensation in the first quarter of this year.

Net income for the third quarter was $13.7 million compared to net income of $12.0 million last year. Earnings per diluted share for the third quarter increased $0.18 to $0.94 per diluted share. Weighted average diluted shares outstanding for the third quarter of this year decreased 8%.

Now turning to our cash position and information affecting cash flow. Depreciation expense was $4.3 million in the third 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 9 months of the year, are expected between $18 million and $19 million, with approximately $11 million to be used for new stores, relocations, remodels and the purchase of our corporate headquarters.

In the third quarter of this year, we repurchased, under our share repurchase program, 528 -- 521,800 shares of our common stock at a total cost of $16.9 million. For the first 3 quarters of this year, we have repurchased approximately 933,000 shares at a total cost of $30.9 million. We currently have $19.1 million sales remaining available under our $50 million share repurchase authorization. We continue to expect diluted weighted average shares outstanding for the full year fiscal year to be approximately 14.7 million shares.

My final comment today will be adding a little color on our financial expectations for the fourth quarter. Implicit in our annual sales guidance is the expectation of our Q4 sales to range from $236 million to $239 million. This compares with Q4 sales last year of $234.7 million.

In addition, at the high end of our earnings guidance, our expectations for Q4 include a low single-digit comparable store sales increase, a flattish gross profit margin and a healthy leveraging of our SG&A.

Diluted earnings per share are expected to range from $0.18 to $0.22 in Q4 compared to only $0.09 in Q4 last year.

This concludes our financial review. Now I'd 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) Our first question comes from Mitch Kummetz with Pivotal Research.

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

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Congrats on the quarter. Kerry, let me start where you ended on the guide. I just want to be clear. So you're saying that the high end of your Q4 range is a low single-digit comp, flat gross margin and substantial SG&A leverage. If that's correct, is there -- are there assumptions embedded on the low end? And if there are, do you care to share those with us?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & Treasurer [3]

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Well, you could take a little bit of -- see things. So we ended up on the low end on the sales, you could end up with a flattish to slightly down gross profit margin, and we'll probably would not have quite as high a leverage. We'd still be leveraging our SG&A because of the comparisons, but they want to be priced high that we're expecting.

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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. And then you guys raised -- so you raised the sales outlook for the year, but you're still seeing kind of a low single-digit comp on the full year, right? So are you -- is the -- do you now expect -- so I'm not sure what your definition of a low single-digit comp is. I'm going to say like maybe 1% or 3%. Are you now expecting something more towards the higher end of the range of low single digits? Is that the reason why you raised the sales guide by a few million for the year?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & Treasurer [5]

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Look, keep in mind, that's a flow-through primarily of what we saw come through in the third quarter. We exceeded what our expectations have been on the third quarter, and we're following it through 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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Okay. And then could you make any comments on Q4 to date? We're 2-plus weeks, I guess, into the quarter. You talked about improving trends on the boot side. Is there -- can you give us any numbers around kind of how you're trending?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [7]

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We're just not going to give fourth quarter to date. And let me tell you the #1 reason why is that, Thanksgiving moves out of the third week of November into the fourth week of November. And that changes a lot of metrics. So we're going to stay silent and tell you that we expect low single-digit increase for the fourth quarter.

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

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Cliff, can you talk a little bit about that calendar shift? If I'm not mistaken, I think the last time we saw Thanksgiving on the 28th, it was in 2013. I don't know if you have any recollection as to how that impacted your fourth quarter results that year.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [9]

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I don't -- no, I'd have to go back and specifically look at that. Kerry is looking at that right now. It creates 1-week less between Thanksgiving and Christmas, which doesn't affect the shoe business, there is much as it does the department store business. It has a pretty good effect on the department store business, but not so much in shoes. We're more concerned in the fourth quarter about weather trends than we are about calendar shift.

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

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Sure. And then speaking of weather on boots. So I just want to be clear as to what you said about the third quarter, and then I want to ask you a little bit about your Q4 outlook there. But in third quarter, I think you said that women's fashion boots were positive. I wasn't sure if that would comment on the quarter itself. Or if that was more...

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [11]

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I think what I said was that as we -- as the weather got cooler throughout the quarter. Women's boots turned positive. I might have said less positive, once it turned cooler. We were not positive early in the quarter in boots. We needed the weather to change. And once it did change, the customer did show up and started buying boots.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [12]

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Can you say what boots were for the quarter? Were they down for the quarter, were they -- is there just sort of an overall boot number that you could give us?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [13]

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Well, if you look at our overall boot business, it was flattish. But that would include men's. Our women's fashion boots were slightly down.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [14]

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Okay. And then I guess, just lastly, on your outlook for boots in Q4. I think you said that seasonal boots were -- are 25% of the total. Is that just the weather dependent? I guess, all boots are weather-dependent to some degree, but is that like more like insulated boots? Is your overall boot business bigger than 25% of that?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [15]

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What I'm trying to say in that, and maybe I need to figure out a way to clean it up, is that excluding work. So if you look at boots [buffer] for everyday wear fashion, that's approximately 25% of our total fourth quarter of footwear sales.

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Operator [16]

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And our next question comes from Greg Pendy with Sidoti.

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

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The new store guidance that you gave, was that a net? Or is that just the new stores, and we can expect some -- that was going to be offset...

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [18]

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Greg, I'm afraid that the first part of your question was muted. So if I can get you to ask it out more time.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [19]

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Sure. Can you hear me now?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [20]

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I can hear you fine now.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [21]

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Okay. Sorry about that. I just wanted to understand on the new stores, was that just new stores? Or is that the net of stores and store closings. I think you were targeting 6 to 8 new stores in 2020, but can we expect that to be offset by some closings?

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Mark J. Worden, Shoe Carnival, Inc. - President & Chief Customer Officer [22]

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Greg, you're right. Those are new stores we're talking about there. 6 to 8 is the range of new stores. And then 8 to 12 for 2021. And if we look into that -- if you look further into that trends, we are forecasting climbing to net store growth towards the end of 2021 or into early 2022, depending on the success of finding a highly productive, highly profitable sites and markets we know we can win with.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [23]

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Okay. And then can you just talk a little bit about as you're evaluating these new stores, what you're seeing in the real estate environment for these new stores and how you're thinking about that?

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Mark J. Worden, Shoe Carnival, Inc. - President & Chief Customer Officer [24]

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Yes, we're focusing it on our 35 core states, first of all, where we know our shoppers very well and where we have a strong propensity to succeed with growth. We're finding, in our core markets, it is a challenging marketplace to find robust opportunities because we're being incredibly selective to find ones where we know our shoppers are. And so from our perspective here, we're going to stay really focused on finding stores, we believe, can be accretive to our revenue per door averages and accretive to our profit for the corporation long term.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [25]

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If I can -- and Greg, if I can add to that, it's -- there are sites out there. But we're being very, very selective. And that's -- one of the things that CRM has brought to us is that we know exactly -- we have a very real idea as to who our customer is and who's shopping in our stores. And so we're making sure that the sites that are being brought to us, our real estate team, as we go out to visit those stores, we make sure that the demographics and the customer profile in and around those stores match exactly who we are.

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Operator [26]

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Our next question in the queue comes from Chris Svezia with Wedbush Securities.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [27]

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Congratulations on the quarter, and welcome, Mark, to the conference call.

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Mark J. Worden, Shoe Carnival, Inc. - President & Chief Customer Officer [28]

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Thank you, Chris. Thank you.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [29]

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I guess, first, Kerry, for you. Just what's the -- when we think about Q4, remind me again what the comp by month or what you're up against? Just walk through that, if you could?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & Treasurer [30]

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So last year, our November was up high singles. Our December was up -- and December and January were up low singles, and we ended the quarter at 4 7.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [31]

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Okay. Okay. And then, I guess Mark, for you, just on the CRM. I'm just -- I know you went live during the quarter. And I know you've been getting incremental wins throughout the year. But I guess, was there anything material that developed during the quarter that drove comp acceleration to the loyalty program when you talked about your Gold membership and the growth there? Just anything you did maybe that you suddenly -- was incremental in terms of turning on that CRM or no?

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Mark J. Worden, Shoe Carnival, Inc. - President & Chief Customer Officer [32]

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Absolutely, Chris. We were able to capture multiple quick wins. And one I'd say is, we're able to utilize the data to understand the shoppers who used to shop at corporations that no longer exist in our competitive space and try to communicate to those folks to help them understand we're a new alternative for family footwear when they used to shop at a place that no longer is there. That was really very profitable use of our early analytical data this quarter.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [33]

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I'll also add to that, that we saw an increase in traffic from our Gold members so not only did we -- were we able to attract new members, but our most loyal customers, which are our gold members, shocked us. We saw an increase in basket size from them as well.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [34]

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Okay. That's great. Good to hear. I want to go just from a product perspective, just on the athletic, seeing a slight increase. I know you're talking about there's some shift to casual from technical athletic. What's sort of your thoughts about the outlook as you go into Q4 and maybe early next year? Any color about Q4 as sort of availability of certain product becomes more heightened or whatever the case? They are trying to continue, or do you expect something to can change a bit in Q4?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [35]

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I definitely expect the casual trend that we've seen over the past couple of quarters to continue and maybe even accelerate a little bit. However, I also think that as we head into 2020, and the product that we've seen, and as you know, not all like to talk the categories and our brands, but the product we've seen was very encouraging. And I believe we're going to see continued growth out of the athletic, maybe not -- I think we'll see growth out of the casual categories, but I think you're going to see even the technical, or what we would consider to be technical, accelerate as well.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [36]

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Okay, got it. And then just on another just category question. Just on the dress category performing well. Any -- I know it's been spotty there, but I think you have some recent success. Just kind of what's driving that? Or any color you want to add about that?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [37]

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Well, 6 months ago, I would not have told you that the third quarter our dress shoe business would be good, okay? It was a -- I'm not going to tell you, it caught us by surprise. I'm just going to tell you our merchants did incredible job of going after the right item. And I don't want to get specific on the categories that are selling because I got competition, as you know, listening to this call. But I was very pleasantly surprised to see our women's dress shoe business accelerate the way it did.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [38]

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Okay. Final thing for me. Just on a margin question and just on the boot. Just curious, how do you think about demonstrating fashion boots and cold weather boots and what you saw in the quarter and your expectation in Q4? And Kerry, why flat gross margin if you comp up low single? Are you assuming the merchandise margin is down and that's just because of difficult comp? Or is that predicated on how well the boot business performs?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [39]

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Chris, I'm going to take the easy question, which is what's the difference between fashion boots and all other. When I say fashion or seasonal boots, all I'm doing is excluding work. You guys don't really want to know about work because that's an ongoing business for us. You want to know how the fashion business, which is where the -- all the risk is. So when I talked about fashion boots or seasonal boots, it really is just excluding work.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [40]

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Okay. But is there any difference between the 2 of them, between a fashion, which is like a boot or something (inaudible) weather...

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [41]

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No, I probably just seem to get work -- that's just probably -- no, I include cold weather into that because, it's crossing the line. I mean, what you can include for boots as cold weather, or would you say cold weather is strictly cold weather that keeps dampness away from your foot? I don't know. So what we do is, anything that's not work, that's our fashion boot category.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [42]

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Right. Okay. And on margin?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & Treasurer [43]

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So Chris, we're expecting to be able to leverage our -- as I said, our flattish gross profit margin. We expect to see some leveraging out of our [buying discretion acting cost on that] on a little more cost base than the year before, plus having the comp store sales increase. We also expect, though, there's 2 parts of our merchandise margin. The actual sale and cost of the shoe. But then we have some accounting adjustments we have to add into it. And one of them is you have to put capitalized costs into the cost of the shoe. As your inventories are increasing, those reserves increase along with it. We are expecting, due to offering fewer stores and putting -- lowering our per store inventory, they have actual total dollar inventories down at the end of this year versus last year. That's reversing out some of those capitalized costs that we had accrued in prior periods into Q4 and causing that to be -- so the overall merchandise margin will be down because of those accounting adjustments, even though we expect the pure profit on the sale of the shoe to be up on a year-over-year basis.

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Operator [44]

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(Operator Instructions) And we'll take our next question. This one comes from Mitch Kummetz with Pivotal Research.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [45]

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I've got some follow-ups. So first of all, I didn't -- because I didn't hear what you said about adult athletic. I think maybe you specifically just said it was up slightly in the quarter. What was it up -- was it up in the quarter?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [46]

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Adult athletic was basic -- was dead on flat.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [47]

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It was -- I'm sorry, it was flat?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [48]

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It was flat. That's correct.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [49]

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Okay, okay. So I think that's a slight improvement from last quarter, right? I think last quarter was down slightly.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [50]

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(inaudible)

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [51]

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I guess this isn't my really -- my question. I find interesting that you're talking about 2020, and you like -- you like what you're seeing on the product side for 2020. Correct me if I'm wrong, but I kind of feel like going into this year, you guys were pretty bullish on what you were seeing product-wise as well on the athletic side, and it seems like 2 of your more important athletic quarters, Q2 and Q3, didn't really play out as well as maybe you would have anticipated going into this year. I'm just wondering, if you could do like a postmortem on that. I don't want to say what went wrong, but did that not lived up to your expectations? And if so...

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [52]

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That's a great question. We were excited coming into the year unscathed and we expected, as we entered into the second half of the year, for certain brands to strengthen. We knew that we have brands that were not going to be strong for the first half of the year, but we expected the other brands to strengthen as we headed into the second half of the year. And I really don't want to get specific on whether that brand disappointed us or came along. But I am -- to be honest with you, I think, what happened to the fact that athletic was flat and we showed a 3.5% comp store increase for the quarter, shows the strength of our concept that as customers shift from one category to the other, we can take advantage of that, and I believe we did.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [53]

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Okay. And then on Payless, I think last quarter, you guys talked about how it didn't really have much of an impact because Payless was dumping a bunch of product and then their customer kind of went away for a little bit because they weren't -- didn't have much of an appetite to buy after that, but you were kind of expecting them to kind of come back this quarter. I'm wondering if you could maybe talk about the impact of Payless. Is there any way to kind of break out your comp versus stores that overlap (inaudible) Sure.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [54]

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I can tell you that our comps within a -- I'm not going to break out the comps between overall Payless and non-Payless. But I will tell you that the stores that were closest to where a Payless store was within a mile or 2-mile radius, those stores had better sales results than the stores that were more than 5 miles away from a Payless store. But you got to remember, Payless has got a lot of stores so -- a lot of our stores. I'm sure a lot.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [55]

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So in those stores, that you -- yes, in those stores that you overlapped, did you see any real difference in terms of how you [cost]by category? I think when you were talking about -- I know that from a price point standpoint, there was only so much overlap. But I think you'd said that you thought you could -- that could benefit you on the athletic side a little bit. Maybe some other sides? Maybe work? I'm not sure. Did you see it help you?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [56]

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I think that benefited us in dress shoes. We were asked earlier why our dress shoes business was up. We think it's the Payless effect. They sold a lot of dress shoes.

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

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Yes. Okay, that's helpful. And then on boots. I'm just curious in terms of -- it sounds like boots are probably a little worse than what you thought in the quarter. I know you had a tough comp last year. I know what the weather was doing. How do you feel about your boot inventory? Do you feel like there's any risk? Or can you just sort of shut off the spigot, if need be? Could you probably push things back to your vendors? And then how do you think about just sort of channel inventory for boots more broadly outside of kind of what you guys are carrying?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [58]

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Well, I think maybe you're asking me, if it's gotten more promotional. That's a way of asking me if it's more promotional. We haven't seen that yet. Our boot inventory is in great shape. The reason for that, right, is the way we had run our business is that we buy what we need upfront and then we place backups. And if the boots don't take off the way we originally thought they were going to sell, then those backups are cancelable. And we're aggressive on that as we go through. So I -- my inventory is in great shape, and I give the merchants all the credit in the world. If you -- because I -- we had a decent third quarter in boots. And actually, we had a flat third quarter in boots, we're having a pretty decent fourth quarter in boots, and I think we're going to be in good shape.

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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 last question, maybe for Kerry. I know that you guys said that you were a 3.3% comp in August. I don't know if you can tell us, October -- or I'm sorry, September and October. I'm guessing October was stronger than September, just from a weather standpoint. But...

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & Treasurer [60]

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No. What we saw was September was low single-digit comp increase. And in October, we accelerated to a mid- single-digit comp increase.

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Operator [61]

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Our next question in the queue comes from Sam Poser with Susquehanna.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [62]

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Congratulations, guys. Phenomenal quarter. Best quarter I've ever seen from you guys.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [63]

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Thanks, Sam.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [64]

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But anyway, let's keep moving. Yes. Can you -- I want to follow up. How many stores are you planning in closing next year and the following year? Could you just give us an idea? You said you were going be to net opening -- prior to the net opening maybe in '21. But next year, I mean, can we expect you're going to net flat or net close? Could you give us some idea?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [65]

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It's going to be a net flat is where our thoughts are now, and we haven't talked about that as much to date, Sam, because we're working really hard to actually show store growth for next year. And we've been...

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [66]

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But I mean if we were going to model it, we're not -- if we're going to model it, it's better modeling it in

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [67]

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Then modeling is net flat.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [68]

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Flat -- net flat and then it will get an improvement. And then the following year, I mean, what, like net 5 open would probably be a good starting point? Or you think it might have...

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [69]

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Right now, I tell you, the following year, it would be a little lower than that. Somewhere net flat to 5.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [70]

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Okay. And then, can you talk -- could you talk about like you're -- given -- and I'm going to get to CRM in a second, but can you -- given the CRM and given what you're learning from it with the new stores, can you talk about what that productivity expectation will be for those new stores that you open with the new information that you're garnering?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [71]

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We would fully expect that a new store within a reasonable point in time. And let's say, between the year 3, around year 3, to be at the company average.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [72]

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So you don't expect those to outperform given the new information and open faster and like open stronger because of the new manner by which you're taking the patience and the manner...

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [73]

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It really depends on -- Sam, it's a difficult question because it depends upon where you're at, where do you open the store. What we found this year is, and we haven't opened many stores, but where we open up stores where they already know us, they're outpacing -- they outpaced our current comp (inaudible).

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [74]

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Got you. If they know who you are -- if they know who you are, your work shows itself more quickly. Fair?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [75]

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That's right. That's fair.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [76]

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Okay. How much help -- I know you just kicked off the CRM sort of in earnest this quarter. But if you could -- I know -- and I know this isn't going to be scientific, but how much do you think this improved communication with the customers vis-à-vis the CRM helped your comp in the quarter?

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Mark J. Worden, Shoe Carnival, Inc. - President & Chief Customer Officer [77]

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Sam, it's a material contributor and a diagnosis I could give you is, if you look at our Shoe Perks Gold members, as I shared earlier, that membership grew 50% plus for the year. And if we look at the comp with that growth, they're growing at a rate more than 2x faster than our total company comp rate we just did. So said it differently, the insights are allowing us to bring consumers into our loyalty program, rapidly trade them up to our highest tier, our most valuable location and their comps are growing at a pace we're extremely excited with.

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

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Cool. And I have a few more. One, did you buy back any stock after -- since quarter end that would be reported in the Q?

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W. Kerry Jackson, Shoe Carnival, Inc. - Senior EVP, Chief Financial and Administrative Officer & Treasurer [79]

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No, because we've been in -- we're locked up until after we released earnings. So we weren't -- we're in a blackout period until after the release of earnings. So we're not allowed to buy back.

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

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Okay. The athletic business, Cliff. Do you -- when do you foresee that, on a year-over-year basis, sort of gaining momentum, turning around, given, as Mitch brought up, the expectations coming into the year and sort of what you've learned in the meantime?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [81]

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Yes, I think -- let me say this. We're -- as we looked at new product for spring of 2020, we're excited about the things that we're seeing from some of our top vendors.

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

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one of those vendors from the Northwest, by chance?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [83]

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To Mitch's point, we were not unexcited about entering into 2019. But -- and as you know, we've been flattish all year with athletic. So I feel good about it. I can tell you that I feel really good about where Shoe Carnival is right now with their customer and the fact that not many people are reporting increases in traffic and increases in sales the way we have. And based on whatever happens in the spring of 2020, we'll be prepared and we'll move with the customer as quickly as possible.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [84]

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And you just mentioned your traffic in the stores for the quarter were up or not?

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Mark J. Worden, Shoe Carnival, Inc. - President & Chief Customer Officer [85]

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Traffic was up, Sam, in both bricks-and-mortar and are our online. We were successful both from a traffic and conversion.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [86]

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Okay, cool. Congratulations on that. Two more questions. Furry boots. How are you doing with them? How does it look? I know that had some fashion, some weather. So any initial read on furry boots?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [87]

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So far, we're not unhappy with furry boots and in fact, that's probably as close as I'm going to get to talking about product categories.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [88]

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Okay. And then -- all right. So you brought in some product earlier in the quarter partially to offset tariffs. But it's going to be hard to offset tariffs and we're still waiting to find out if the December 15 ones happen. But assuming they don't, when you're looking at tariff impact into next year or prices that you're seeing, if those -- the additional 25% happens, can you give us an idea of the magnitude of the increases and the progress you're making with factories and vendors and so on and so forth?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [89]

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So far, and we've talked about this quite a bit internally. So far, we haven't seen a lot of price increases. We did have a major vendor that you're familiar with, that did institute across the board price increase, and we were able to mitigate that somewhat by the product we bought. Some product is worth more than others. And so we were able, I think, in my mind, able to mitigate that price increase, but we haven't seen a lot of price increases. I think the majority of the vendor community is waiting to see exactly what happens. The good news within athletic is that the majority of the athletic goods are made in Vietnam, not in China. So that's 52% of our total volume. So not seeing a lot there. Not seeing a lot in any of the -- other than the one brand I talked about. I'm not seeing a lot of increases.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [90]

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And I mean on your dress -- women's dress product, I mean, most of that is nonweather, and most of that would be impacted by the -- by 4B tariffs. And so everybody is sort of holding their breath on that is sort of how to think about it?

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [91]

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They're holding their breath on it at this point. And orders have been placed with cost given. So no, Sam. I don't expect that we're going to -- in fact, Carl nor myself think we're going to be affected, at least in the spring time period, with tariffs.

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Operator [92]

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There are no further questions in queue. At this time, I would like to turn the call back over to speakers for closing remarks.

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Clifton E. Sifford, Shoe Carnival, Inc. - Vice Chairman & CEO [93]

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I'd like to thank you all for your participation on today's earnings call. We look forward to announcing our fourth quarter and full year results in March. I also want to wish each of you a great Thanksgiving and a very happy holiday season. Have a great evening. And thanks again for tuning in.

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Operator [94]

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