Shoe Carnival management said they were on a bit of a roller coaster ride in the third quarter ended October 30 as they saw late back-to-school traffic boost comps later in September this year, but fall off again as the customer “went to sleep” later in the month. October was another up and down month and they experienced mid-single-digit comps in the early part of October before business “fell off again” later in the month.

Sales in the quarter were driven by the Athletic end of the business, especially during periods when the weather was unseasonably warm. Boots and other cold-weather product lagged Athletic until the later part of October as weather turned colder in more portions of the country.

The Children’s and Athletic categories were up in mid-single-digits in the quarter, with management pointing to Skate and classic Chuck Taylor’s as key performers in all genders. Athletic is now about 55% of total sales.

Gross margin was hurt in part due to increased promotions in “under-performing” categories in Men’s and Women’s Fashion Classics, Women’s Running, and Men’s Classic Running. Merchandise margins declined 30 basis points. The balance was due to an increase in buying, distribution and occupancy costs, as a percentage of sales, due to lower sales.

SCVL pointed to the more promotional Mid-Market department stores and some mall-based retailers as culprits in increased promotional activity, particularly the “TwoFer” promotions. The retailer also laid some of the blame at the feet of the vendors that have failed to differentiate product tiers by retail channel.

The Women’s Dress business increased double-digits, but was offset by declines in the Casual and Boot categories. Accessories saw a high-single-digit comp increase for the month. In addition to handbags, SCVL called out backpacks and sport bags as key performers.

SCVL is working through their marketing initiatives for 2005 in an effort to turn around declining store traffic counts. A new marketing VP (SEW_0442) and a new ad agency are expected to help boost traffic and bring in the women’s shoe customer again to offset traffic patterns that have slowed as Carnival curbs its use of BOGO promotions. Mark Lemond, president and CEO of Shoe Carnival, said that they hope to get the Women’s non-Athletic business back to 30% to 32% of total sales they had seven to eight years ago from the current 26% to 27% of sales.

Carnival has reduced the number of planned store openings for next year to 15 stores from the 22 stores opened this year. They will focus on backfilling current markets — focusing on the right real estate in each region — while shifting more funds to remodeling existing stores to attract the women’s dress shoe customer and away from new stores.

Carnival inventories at the end of the period were down roughly 2.7% on a per-store basis.
SCVL is forecasting Q4 EPS in the one cent to four cents per diluted share on a 7% to 8% increase in total sales and comps flat to up 2% for the quarter.