Shoe Carnival Inc Q2 FY2020 Earnings Call

Good afternoon, and welcome to the Shoe Carnival's Second Quarter Fiscal 2020 Earnings Conference Call. Today's conference 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 material differently from those projected in such statements. Forward-looking statements should also be considered in conjunction with a 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 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. Cliff Sifford, Vice Chairman and CEO of Shoe Carnival for opening statements. Mr. Sifford, you may begin.

Thank you, and welcome to Shoe Carnival's 2020 Second Quarter 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 will provide a high-level review of our fiscal second quarter 2020 results as well as an update on the ongoing COVID-19 pandemic and the impact it has had on our business. Mark will then discuss our strategic initiatives and how our long-term investments have already begun to pay off, followed by Kerry, who will discuss the quarter's financial results. We'll then open the call for your questions. Our fiscal second quarter results clearly demonstrated the strength and commitment of our team as well as the resiliency of our concept. When we last spoke, we were in the process of reopening our stores. And as we have said, the health and safety of our employees and customers was our number one priority. I'm very pleased to report that thanks to the dedication and strong execution of our team members, we have successfully reopened all of our stores, welcoming our loyal customers back to fulfill their family footwear needs in person. Our corporate office will also complete the final phase of our reopening plan after Labor Day. Our results for the quarter were strong. In fact, second quarter revenues of more than $300 million established a new quarterly record for Shoe Carnival. Our sales were undoubtedly supported by our decision to not furlough any employees during the shutdown as we were able to get our team members back to the store faster than nearly all our competitors. Just as exciting is the enormous growth we continue to see with our e-commerce platform, which delivered another triple-digit gain in the quarter, even as customers were able to get back into stores. All in, our focus on our loyal customers, coupled with our team's excellent operational execution drove same-store sales growth of 12.6% overall. Looking exclusively at the days our stores were open, same-store sales growth would have been 22.5%. This increase comes despite the dramatic shifts and back-to-school timelines we experienced at the end of the quarter. For context, in a typical season, we see back-to-school shopping start in mid-to-late July. However, the pandemic has delayed start dates for nearly all the schools within the markets we operate. As we saw this materializing, we pivoted quickly and realigned our back-to-school marketing to correspond with the shift in the season. Through week 2 of July, our quarter-to-date comparable store sales were up in the mid-20s. As we approach the end of July, we saw sales decline for the last 2 weeks of the quarter in the high 20s as schools shifted their start dates, which continued through the first 2 weeks of August. It is worth noting, however, that even with these 2 important weeks of back-to-school sales shifting out of the quarter, our teams still delivered the highest quarterly sales in the company's history. Once we approached the revised back-to-school dates in late August, our comparable store sales began to increase with sales the last 2 weeks of August, up mid-single digits. For reference, typically, by the end of August, 95% of our schools are back in session. This year, as of August 31, only 65% of our schools were back. To this end, we believe the majority of back-to-school volume will be realized through September. We will extend our back-to-school season through the end of October to ensure we are timely serving our customers' needs. Despite these dynamics, we expect comparable store sales for August and September combined to be flat. Mark will provide additional color on this in his prepared remarks. Turning to our e-commerce business. Several years ago, we made the decision to significantly invest in our technology platforms, including our e-commerce business and CRM capabilities. This decision is paying off. Throughout the second quarter, we have delivered explosive growth in our e-commerce business, marking another period of triple-digit increases. Moreover, for the fiscal second quarter, our e-commerce revenues were just over 20% of total company revenue, exceeding our 3-year target level. In addition, our Shoe Perks loyalty program achieved a critical milestone, surpassing 25 million members, and our gold membership grew double digits. Looking at comparable store sales by department for the quarter, adult athletic overall were up 30%, driven by strong growth in both women's and men's product categories, each up approximately 30%. Sales in both men's and women's nonathletic categories were driven by sandals and sport casual products. Not surprisingly, dress shoes were down double digits, consistent with the change to a more casual and active lifestyle as a result of closed offices and schools. Kids' comparable store sales were down low single digits with nonathletic up double digits, driven by robust activity in kids' sandals and infants, somewhat offset by kids' athletic down low double digits, reflecting the shift of back-to-school sales into quarter 3. Our current inventory position is solid, yet lean. And we continue to work closely with our vendor partners to ensure we have the best product available for our customers. As discussed last quarter, during the shutdown, we canceled spring orders and shifted fall merchandise until later in the season. However, our strong sales trends have us moving that product back to a more normalized receipt time period. We're also working closely with our key vendor partners to replenish the categories and classifications that are driving our sales. We are very comfortable with the amount of inventory flow that we have coming in for the fall and holiday period. That being said, we do expect to end the year with inventory down on a per-store basis. While sales have far exceeded our initial expectation as COVID pandemic took hold in the first and second quarter, the uncertainty it has created has been substantial and continues to impact our business. Our strong relationship with our vendor partners has been critical as we plan for the future. As the vendor community has not taken any chances with inventory levels. Meaning, if it's not already bought, it is too late to buy it now. While the current environment makes it difficult to provide clearer guidance, absent a second wave of shutdowns, we believe we are well positioned to capture market share throughout the remainder of the year. We made quick decisions to support our employees, maintain appropriate inventory levels, and enhance our vendor relationships during this shutdown period. This has allowed us to remain nimble and fulfill our customers' needs from both back-to-school and into the fall and holiday period. Our financial strength and flexibility, combined with our laser focus on maintaining an impeccable balance sheet has proven to be invaluable during these unprecedented times. We ended the quarter with approximately $77 million in cash and cash equivalents and no debt. We also increased our line of credit from $50 million to $100 million to ensure we have ample liquidity, if needed. Our disciplined approach as well as our strategic investments in our business have allowed us to make incredible progress on our long-term strategic initiatives and will guide us through any unforeseen challenges ahead. Given the continued uncertainty as a result of the pandemic, we still believe it would not be prudent to provide guidance at this time. With that overview, I'd like to turn the call over to Mark Worden to provide an update on our strategic initiatives. Mark?

Thank you, Cliff. I'd like to start by thanking our 5,000-plus team members for their truly outstanding performance and commitment to providing excellent customer service during 2020. While these last few months have been challenging on a variety of levels, our team has exceeded all internal expectations, driving our strategic initiatives forward and delivering winning Q2 results. As Cliff mentioned, we achieved comparable store sales growth of 12.6% in the quarter or approximately $33 million against the backdrop of a difficult external landscape. If we look at the comparable store sales growth exclusively for the days our stores were opened during the quarter, that number improves to 22.5%, a substantial increase and a testament to the team's hard work. For the last several quarters, we've discussed our 4 key strategic initiatives: CRM, brand and customer experience, e-commerce sales, and store development. The investments we have made are paying dividends not only in supporting growth, but allowing our team to be smarter and more efficient as we serve our customers. Our digital marketing and e-commerce efforts delivered results that far exceeded our expectations for the quarter. E-commerce sales grew 332%, achieving high double-digit conversion rates and growth of over $45 million in the quarter. E-commerce revenues exceeded 20% of total company revenue for the second quarter, which surpassed our 3-year strategic target. For comparison, Shoe Carnival's e-commerce sales represented less than 6% of fiscal second quarter revenue in 2019. Our long-term revenue growth driver and customer engagement strategy remains to rapidly build sales in this growing digital channel. Very encouragingly, e-commerce sales growth has proven to be sustainable even after all stores reopened, continuing to achieve triple-digit sales growth. I'm confident it will continue to be a meaningful platform of the Shoe Carnival business going forward. Investments in our leading CRM capabilities also continue to pay off. We've reached many key milestones during the second quarter, which contributed to our double-digit sales growth. We surpassed 25 million loyalty members for the first time, gold membership grew double digits and remain highly accretive to both sales and profits. The average basket size of a gold member was $16 higher than a nonmember. So converting our customers into gold members remains a winning strategy and a high priority for us. Our targeted marketing efforts rapidly expanded sales from nonmembers in the quarter as well, with sales growth of over 30% in this category. Connecting with new customers and customers not currently Shoe Perks members and converting them into loyal, highly engaged members remains a key growth area for us. Since the second quarter of fiscal 2019, we converted over 1.8 million nonmembers into basic members from these targeted connection efforts. We plan to continue expanding our Shoe Perks loyalty program well into the future. Our store teams navigated the challenges presented by COVID-19 with excellence. We closed all 390 stores we operated during the first quarter to support the safety of our teams and communities we operate in. By June 1, our team had safely and efficiently opened over 95% of the store fleet and the full chain by late June, while continuing to fill large numbers of e-commerce orders. Store traffic and conversion far outperformed internal expectations. For example, in May and June combined, we achieved a mid-single-digit store comp for the company, inclusive of all stores opened or closed due to COVID-19. The uncertainty created by COVID-19 did delay the start of our back-to-school selling season out of Q2 and into Q3. From a store operations, inventory, and marketing perspective, we were well prepared for this shift and have solid plans in place to support a lengthened selling period extending through Q3. For example, we've pivoted our marketing investment out of a traditional heavy TV and print plan in late July and early August into targeted digital marketing, social, CRM, and store experience elements. This decision enabled us to be nimble with our investments and react to school districts back-to-school date announcements as they happened. Sales trends have shifted later this year, in line with our planning for marketing investments. On average, school districts announced return-to-school dates approximately 2 to 3 weeks later than 2019 and approximately 40% are returning virtually. As such, our historical sales pattern has shifted out and is lengthening. As Cliff shared earlier, store sales declined double digits towards the end of July and early August, were flat around mid-August, and began to grow double digits by month's end. In our markets where schools have either fully or partially returned to in-person learning, we've seen double-digit same-store sales comps during the last weeks of August. In markets where schools have opted for virtual-only learning, same-store sales comps are declining low double digits. At the same time, e-commerce has experienced an acceleration of triple-digit growth. As a result, we anticipate total comparable sales for the combined August-September period to be flat with the continued momentum in e-commerce sales, offsetting negative results where schools have remained virtual. While this back-to-school season is unlike anything we have experienced historically, it's far from over, and we remain optimistic that Shoe Carnival will win market share and provide families with the shoes and accessories they need despite the date changes and uncertainty families face. As we navigate the current environment, we continue to progress against our long-term real estate and store profitability strategies. During the quarter, we opened 2 new stores within existing markets and finalized 2 additional store openings for the back half of 2020. We anticipate these 4 openings to be the total for the year as we've taken a more conservative stance on capital investments since the pandemic began. Additionally, we made the decision not to renew leases on 10 stores that generated a low ROI, taking the year-to-date total store closures to 12. We continue to monitor each store's profitability and sales closely with plans for one further store closure during 2020. In closing, I'm inspired by the efforts of our team during 2020 and the continued success of our strategic initiatives. Tremendous opportunities lie ahead for Shoe Carnival as we continue building on our strong customer relationships and introducing new customers to the brand. With that, let me now turn the call over to Kerry Jackson to provide more insight into our financial performance for the quarter.

Thank you, Mark. As Cliff mentioned, this quarter was much stronger than we anticipated given the current market environment, and we were incredibly proud of our team and their hard work. We delivered record sales of $300.8 million in the quarter, beating the prior sales record set in the third quarter of 2017 by 4.6%. Comparable store sales were up 12.6%, and our e-commerce business sustained its triple-digit growth and represented more than 20% of fiscal second quarter sales. Our brick-and-mortar store sales were negatively impacted by COVID-related closures early in the second quarter and, as Cliff mentioned earlier, the COVID-related delays for back-to-school shopping late in the quarter. Gross profit margin for the quarter was 27.5% compared to 30.6% in the second quarter of last year. Merchandise margins decreased 370 basis points, while buying, distribution, and occupancy expense decreased 60 basis points as a percentage of sales. The decrease in merchandise margin was related to an increase of 250 basis points in shipping costs associated with e-commerce sales, with the remainder of the decrease due to a higher mix of adult athletic sales, which typically carry lower margins than nonathletics. The decrease in buying, distribution, and occupancy expenses was primarily due to the leveraging of expenses against the higher sales base. SG&A expenses increased $1.8 million in the second quarter of fiscal 2020 to $68.2 million, primarily reflecting higher e-commerce-related operating expenses. As a percentage of net sales, SG&A decreased to 22.7% compared to 24.8% in the second quarter of fiscal 2019, primarily due to the leveraging of expenses against the higher sales base. The effective income tax rate for the second quarter of fiscal 2020 was 29.6% compared to 24.5% for the same period last year. The rate increase was primarily due to the reversal of the net operating loss carryback recorded in the first quarter due to improved financial performance. Net income for the second quarter of fiscal 2020 was $10.1 million compared to net income of $11.8 million in the prior year quarter. Income per diluted share for the fiscal second quarter was $0.71 compared to income per diluted share of $0.80 in the prior year quarter. Now turning to our cash position, information affecting cash flow. Depreciation expense was $4.0 million for the second quarter compared to $4.1 million in the prior year quarter. Capital expenditures for fiscal 2020, including actual expenditures during the second quarter, are expected to be between $15 million and $16 million, with approximately $8 million to $10 million to be used for new stores, relocation, and remodels. We also expect to spend between $3 million to $4 million on upgrades to our distribution center in fiscal 2020 as we continue to focus on enhancing our supply chain. As Cliff mentioned, we continue to work closely with our vendor partners to strategically manage our inventory. As a result, we ended the quarter with inventory of $298.9 million, which was down $38.1 million compared to the prior year or down 8.7% on a per-store basis. As of August 1, 2020, we had no outstanding debt and working capital of $200 million. Cash and cash equivalents were $76.9 million, and our borrowing capacity was $98.8 million at the end of the quarter. Free cash flow was $65.1 million during the second quarter, resulting from record sales, lower inventories, and higher accounts payable. This concludes our financial review. Now I'd like to open up the call for questions.

Our first question comes from Mitch at Pivotal Research.

Congrats on the record quarter, and I want to start with just I want to make sure I understand all the moving parts around Q3 with back-to-school and kind of what your assumptions are there. So I know that you said that August started slow and then it picked up. But could you give us a same-store sales number for August as a whole?

Mitch, we wanted to share our observations from the quarter without providing a specific number because it's not relevant at this time. Since back-to-school sales are occurring much later than last year, we believe it's more meaningful to look at August and September together, similar to how we analyze Easter. Our back-to-school sales have shifted significantly into September, and we want to convey that the beginning was quite slow. However, we saw an improvement at the end of August, and we anticipate that the combined performance for August and September will be relatively flat.

So you spoke to the trajectory that you have through the last couple of weeks of August. Is that what you need in September to get to flat for the combined period?

What we need is for schools to return, and we believe all schools will resume by the end of September, or at least that’s what we are hearing from the governors. Mitch, we have consistently stated that our customers purchase based on their needs, and while they have been engaged in remote learning, the immediate demand for new back-to-school shoes has not emerged. We believe this will change, and we have observed it occurring. As schools have reopened, our business has thrived in those areas, and I anticipate this trend will persist. I do not use the term thriving lightly; it has genuinely happened as schools resume.

Got it. So that's my next question. I want to make sure I understand everything clearly. Cliff, I believe you mentioned that by the end of September, you expect all the schools to be back. But I just want to clarify, you don't expect all the schools to be in-person by the end of September, right? The flat performance for August and September assumes all schools are back and kids are back in school, but not necessarily all in-person. Is that how I should interpret that assumption?

Mitch, it's Mark. We are assuming that the trend continues very similar to now where about 60% of the schools are in some type of combination, either back fully or back part with some virtual and approximately 40% are in a virtual scenario. We anticipate that schools haven't gone back yet. There's still a large tranche of those, particularly in the Northeast and North. As they go back, we'll keep similar rates. And if they do something of that nature that leads to the flat combined back-to-school season that Cliff and I were talking about.

Got it. Okay. And then when I think about August, September being flat, obviously, that's being negatively impacted by the schools that are virtual. Is there anything else that you guys are seeing to kind of compare that flat for those 2 months versus the 20%-plus that you were doing before? I mean are you seeing any falloff because of stimulus going away with the enhanced unemployment or any sort of falloff in pent-up demand or any other things out in the market?

I think the biggest thing we're seeing is the impact of the virtual-only schools. That's the key impact to our back-to-school. And we're incredibly encouraged that despite that approximately 40% being virtual-only right now, our e-commerce business has seen an accelerated trajectory during the last few weeks as kids start to shop and triple-digit continues to accelerate as that month progressed. So we feel like we're well positioned to deliver that flat despite schools staying virtual. And with some progression of that more shifting to a combo or others, as Cliff said, once they go back, we're seeing outstanding comp store sales results. So if it gets better than that, there is some potential to be flat.

Yes. Just a couple of other things. Cliff, as you consider the second half of the year, your adult athletic business has been exceptionally strong in this quarter. How do you see those trends continuing into the latter part of the year, particularly as we approach boot season? You've mentioned that if it’s not purchased, it won’t be available. I'm curious about your planning in that regard. Additionally, regarding boots, it seems that on the nonathletic side, there was a significant demand for slippers and comfort items during the spring-summer. Are you thinking about offering more shearling styles compared to fashion boots for the holiday season?

Yes. I don't think we'll reach the level of boot sales we aim for, especially since retailers probably can't find boots they haven't already purchased. Our decision to keep our employees on staff has allowed them to adapt and adjust orders continuously as business evolved, knowing that we were reopening our stores. We believe we are in a stronger position regarding boots than most of our competitors who did lay off workers. I'm optimistic about the upcoming boot season, as I think we will gain market share. However, I prefer not to specify if we will focus on casual or fur-lined options. I want to keep our strategy confidential in case unexpected opportunities arise.

Got it. And then lastly, can you just speak a little bit to the kind of bankruptcy store closures? I know Hibbetts, I don't cover Hibbetts, but they reported on last Friday, and they talked about starting to see some benefits there. I don't know if there's anything you can quantify or maybe sort of speak to sort of the overlap that you have with some of your stores and some of the stores that you're seeing closed?

I can't specify whether a particular store or region is performing better because we have lost competition, except for one market in the Northeast. I'm not sure how to address that since I don't think there has been enough time between the bankruptcies and the store closures for us to provide that kind of information, especially with the changes in back-to-school.

We will take our next question from Sam Poser of Susquehanna.

Let's begin. When considering the latter half of the year and taking into account the inventory and the flow of goods, do you anticipate Q3 will perform better than Q4 or the other way around?

Better in what respect, Sam?

Year-over-year sales.

Well, Q3 is traditionally a higher sales period than Q4, and we expect that pattern to continue because...

Percent increase. Percent increase year-over-year.

We're not ready to provide guidance at this time, as it's quite challenging to make predictions. We want to see how the back-to-school season unfolds and how many schools return. While we feel optimistic about the second half of the year in terms of our position for back-to-school sales and boots, quantifying it is difficult, which is why we have decided against giving guidance right now.

Okay. You mentioned that the first two weeks of August remained challenging before improving. Can you discuss the period from July 15 to August 15 regarding back-to-school sales that fell short? What do you need to recover from that segment? It seems that, given the stable performance in August, you're not expecting to make up for the shortcomings in July during the third quarter. Is that an accurate perspective?

Sam, it's Mark. Yes, that's a fair way to think about it broadly. As Cliff said and I alluded to, it was that period you're referring to, we saw double-digit declines until it really pivoted towards the mid-part of August to flattish comp store sales as the school started to return. And by the latter part of August, we were seeing very strong double-digit comp store growth in the school districts where kids went back a combo. And in aggregate, with e-commerce with the virtual and with those that went back, we saw a double-digit comp gain by the end of August. So we think we're very well positioned to deliver flat overall comp growth for the corporation in the combined 2-month period, and we're optimistic.

And that's sort of implying like a low double-digit growth then in September to sort of get there, given the weakness in the first half of August?

We're not going to specify the exact percentage of increase or decrease we experienced in August or September, but we will discuss the combined period due to various shifts. We believe these fluctuations, similar to those we experience during Easter, are not particularly relevant outside of discussing the overall combined period.

Okay. I will leave the dead horse alone.

Thank you.

It appears that Nike has recently chosen to withdraw products from several retailers that compete with you, including Dillards, Belk, and possibly Boscov's, and I assume you were referring to Modell's in the Northeast, Cliff. How do you expect this to benefit you? It won't impact this quarter, but considering this is happening, do you anticipate gaining access to different types or greater quantities of products because of these changes?

I believe all these decisions are still being worked out. I can tell you that whenever a competitor loses a brand as significant as that one, it typically benefits the retailers that continue to carry it. So in that sense, I can't say I'm unhappy about their decision to pull back products. In fact, I'm quite pleased.

Two more questions. One, how many stores do you have the Nike shop in right now?

Right now, it's a bit over 100 of the fleet. So we're approaching the 25% to 35% during the year ahead.

Okay. And then lastly, given the strength of athletic shoes and sandals, is the main focus here on comfort, particularly in athletic comfort compared to dressy options? Are there signs of change as we progress through the year regarding the types of products being used, particularly in terms of comfort? Will this lead to a shift towards furry boots as opposed to dressy or non-cozy comfort categories?

Well, I can tell you that...

And does that keep athletic going? And did you have a good slipper business in Q2 as well, which...

I believe the best way to answer that question is to note that the trends we've observed since the onset of COVID, alongside the closures of offices and schools, indicate that the casual lifestyle trend will persist. We are fully prepared for this to continue, which includes both casual nonathletic products as well as athletic products and casual boots. I don't foresee any reasons that would suggest a resurgence in dress products as we progress through the rest of this year.

We will take our next question from Greg Pendy of Sidoti.

Can you just remind me, I think last year, you said the fourth quarter e-commerce revenues were 8%, but I don't believe you guys gave a third quarter. So just kind of trying to get a sense of what we'll be anniversarying in terms of e-commerce sales?

For the third quarter, it was approximately 6% of revenues. In the fourth quarter, it's a little stronger, closer to 8%.

Okay. Just to clarify, when you mention 8% of revenues, are you referring to total revenues or is that 8% incremental to what you achieved with the store base?

On total.

Okay. Perfect. Just to continue on the topic of e-commerce, it seems like the landscape has changed, and your economics have shifted a bit. When considering the long-term trajectory for 2021, how are you approaching the development of new stores now that e-commerce has gained traction? Historically, you anticipated that e-commerce might reach about 12% of your sales, but it appears to have exceeded that level. How do you plan to prioritize your efforts between e-commerce growth and store expansion moving forward? What should we anticipate regarding this over the long term?

Going into the pandemic, we had a 3-year target to grow our e-commerce business to that high teens, 20% of the corporation. And as we just shared, we exceeded 20% during this period of time and far accelerated our capabilities as customers truly have made a choice, not just in our category but many others, but the e-commerce business can satisfy their needs. So we're really thrilled with what we're seeing, and we think we're very well positioned. If you look towards the tail end of the quarter, as all stores started to reopen, we saw our e-commerce business stabilize with triple-digit growth, and it stabilized in that mid-teens percent of the total corporation's revenues at that point in time. And while we're not clear if that is where it stabilizes with so much uncertainty, we're using that as a guiding principle for Q3, Q4, thinking that the business will stabilize from a revenue and a cost perspective in the mid-teens percent of corporate revenue. When you put that in context then of stores, we're still incredibly committed to our long-term strategy to grow our store base and we're laser-focused where our brand is strong, where we get great ROIs in our existing DMAs where we're market leaders, in our key 35 states where we already have brand building and loyal customers. So we remain committed to building our store footprint in those existing markets. But right now, we're taking a very conservative approach to capital. We're taking a conservative approach until we get to the other side of visibility to the pandemic, and we're not putting out guidance nor are we aggressively going after new store growth at this time for 2021. But we're incredibly encouraged by what we are seeing with the customer shift to us, our market share gains in e-commerce, that 3 years or so acceleration of e-commerce capabilities and revenues as well as our stores, as we talked about earlier, when open, delivered comp store growth during Q2. When we exclude those, as we talked about in Q2, delivering 22.5% growth for the quarter during a period of time when there's great challenges our customers and employees were faced with. So I couldn't be more proud of what they achieved during the quarter.

We will take our next question from Chris Svezia of Wedbush.

Couple of things. I guess I'm still going to beat the horse a little bit. So I guess, first, just can you remind me, last year, just August, September, October, just what the comp cadence looked like? I think you had a strong backlog and some flow back October, if memory serves me correctly. So the compare in October is easier or just remind me on that, Kerry?

Last year, it was low single digits, August and September and mid-singles in October.

Okay, so it's actually stronger. I just want to clarify to ensure I understand this correctly. In August, the performance was negative in the first two weeks, then it stabilized and by the end of the month, it was in the mid-singles range for the total company, including e-commerce. Did I get that right? You mentioned both areas that were open and schools that have reopened. I'm just trying to piece everything together to understand the data.

Chris, it's Mark. Yes. Regarding total company revenues, whether considering open or closed schools and e-commerce, we experienced a double-digit decline in the first two weeks of August. We did not specify the exact figures, but there was a significant drop during that period. By mid-August, total company performance had stabilized, and then in the final weeks of August, we began to see double-digit comp growth returning.

And that is by week, so not in total.

Right. So it's double-digit growth toward the end of the total company.

Yes. Exactly. Driven by the strength of schools that went back in any fashion live and accelerated triple-digit growth in e-commerce, offsetting the headwinds we are facing for school districts that have decided to go virtual-only. But again, we're incredibly encouraged at the strength of our concept in stores as well as an incredibly strong e-commerce platform is enough to offset those things that are out of our control where school districts are deciding not to go back yet.

And Mark, you referenced acceleration in e-commerce. I just want to be clear. So if you're kind of still in that triple-digit as you came through the tail end of the quarter, you made some comment you did accelerate from that, call it, July-August trend as you came through the tail end of August? Is that fair?

We saw that the e-commerce business during that end of July, early August, also went similar to what Cliff was saying, it was not high to mid-triple digits like we were pacing. We saw it slow down a bit closer to high double digit, low triple digit during that period where kids, we're not going back-to-school. So it was excellent, but it wasn't ranging in the mid-triple digits then. And as we progressed, just like the school districts, the stores open, it started to accelerate in the middle of August to a solid triple-digit and continuing to accelerate to very strong triple-digit by the end of the month.

Okay. Okay. Got it. And final thing on all this stuff so just I'm clear. You anticipate just to get to this flat for both those months, August and September, is basically 60% of schools go back, either partial hybrid or full and 40% go virtual in all your markets. That gets you to flat, just to confirm for those 2 months.

Those are the rough numbers we've seen so far at this point for the school districts, and as long as it doesn't get any worse than that, that's built into our assumptions. And we have the school announcements for the districts ahead. So we believe it could get better if the situation on the ground where some are virtual decide to go back in some form of combination. But yes, you had it right, Chris.

As a general statement regarding the gross profit margin, we faced the toughest comparison in Q2 due to shipping costs. As Mark mentioned, we achieved over 20% penetration of our e-commerce business for the total quarter, but we do not anticipate this level of penetration in Q3 and Q4. Additionally, in Q3 and Q4 of last year, we accelerated our e-commerce business. Consequently, the gap in overall penetration narrows as the year progresses. Therefore, the negative impact from shipping charges on a year-over-year basis is not as significant in Q3 and is even less in Q4. We expect some pressure on our overall gross profit margin in Q3, but with a leaner inventory, we believe we can offset the negative impact of shipping charges in Q4 and potentially see growth in our overall gross profit margin during that quarter.

Okay. So just to pull all that together, you'd probably expect still some down Q3 gross margin, though not nearly as much as Q2, and that's a function of just largely the e-commerce mix. Q4 even becomes less of a factor, and therefore, you would expect some level of possible gross margin improvement potentially in Q4.

If we have a normal selling period, I should clarify that there is a lot that is currently not renewable. However, if we experience a more typical selling period in Q4, I wanted to illustrate that the impact of shipping charges would not prevent us from achieving a positive gross profit margin.

Got it. That's helpful. Regarding inventory, how should we consider it as we move forward? Specifically, are you receiving enough products, or are you potentially losing sales because the products are not arriving quickly enough?

I think the merchant team has done an excellent job engaging with the vendor community. We have held virtual meetings with every key vendor for our business. We are receiving tremendous support from the vendors to help us restock the popular items. The list of items we are focusing on is quite specific, as customers are really concentrating on certain brands and categories. Our team is working diligently to get back in stock and maintain availability in those targeted brands and categories.

Do you mind filling us in on what those are? Just kidding. I'm joking.

We don't talk about brands.

Okay. Last thing for me. Just how do I think about cash? And where you end roughly the year, I think you've always tried to end with $50 million on the books or thereabouts $50 million, $60 million of books. I guess, the view is maybe you want a little bit more. And I don't know, how do you think about potentially going back to buying back stock? Or how does that sit on the grand scheme of things in the cash position?

We believe our cash balance is currently at a temporary peak as we end Q2. This is mainly because we managed our inventories efficiently and had higher accounts payable than usual. We expect to pay down these obligations in Q3 and return to a more standard situation. By the end of Q3, we anticipate our cash balance will be lower than where it is today. However, after we adjust our inventories during the holiday season, we expect to achieve a cash balance similar to that at the end of Q2.

Okay. And share repurchase?

Our belief right now is we're more inclined to heal our balance sheet and be cautious in this time when there's so much volatility. So we're not yet saying that we're interested in buying shares back right now this year.

And we do have a follow-up question from Mitch Kummetz of Pivotal Research.

I still have like a handful, and I promise to stay away from that dead horse. So just a follow-up on Chris' margin questions, Kerry. I think you kind of addressed merch margin pretty well. But I'm curious on the BD&O because if you guys are running sort of flat comp, August, September, can you remind us sort of what the leverage point is on BD&O? And do you expect some deleverage to occur in the third quarter?

It's hard to know. What we've given you is August, September, October, as we've said so many times before, it all depends on the weather. If it cools down and we can sell our boots, that makes for a good October. So it's hard to say. But look, I would say you're looking at a flattish to maybe slightly down or deleverage BD&O in Q3 impact.

Okay. Yes. And how about SG&A dollars. SG&A dollars, I think you said were up $1.8 million year-over-year in Q2. It sounds like there was some marketing that pushed out of Q2 into Q3. Is there any way you can give us a sense around SG&A maybe from a dollar standpoint? I assume you expect it to be up year-over-year, but maybe that's not the case.

We anticipate an increase for two main reasons. First, there will be a shift in advertising spending into the third quarter. Second, and more significantly, the growth in e-commerce sales will lead to increased operating expenses, similar to the substantial rise we observed in the second quarter. We expect to see this trend continue in the third quarter, and these two factors will contribute to higher spending compared to the previous year.

Okay. And then, Cliff, a couple on the product. On adult nonathletic, you gave us some color around that, but I didn't hear you give an actual comp for that business. If you didn't, could you tell us what it was? Or if you did and I missed it, could you remind me?

Well, excuse me.

Adult nonathletic?

Nonathletic.

Sure. I heard you talk about sandals and dress, but I don't recall you actually giving a comp number on it.

Overall, our sales in the nonathletic business were down for the quarter, and there was a slight decrease in women's nonathletic sales. However, due to the work category, we saw a mid-single-digit increase in men's sales.

Could you provide more details on the strong performance of the adult athletic business this quarter? Specifically, can you break down its strength between running, basketball, and sneakers? Also, how do you categorize the Nike Court Vision? Foot Locker considers Air Force 1s as basketball shoes, but that doesn't seem to be a universal perspective. I'm interested in understanding if there were specific factors that significantly boosted your athletic business.

The running category was very strong for the time period. But our customer uses a running category to walk in, and there are a lot of walking being done during that quarter as people were not working. And you called out one of the hottest items in the marketplace, and that's as close as I'm going to get to talking about individual.

Fair enough. My last question is for Mark. We have many schools that are operating virtually. If some of them transition to in-person classes at any point, whether in October or November, do you see that as an opportunity for additional sales? Also, if a school remains virtual for the entire first semester but returns to in-person in the second semester, will that create an unusual back-to-school season later, or will it simply be absorbed into the usual holiday sales?

It's an interesting question. We do know factually, kids' feet are going to grow, and we absolutely are confident that we're in a great position to satisfy those needs. So let's take the 40% of stores that are schools that are going virtually. If they do sell during October, November, we do think there is potential to be capturing more of them in our stores during that moment in time. There's some great joy in the experience of Shoe Carnival. We do believe there is a second wave of Shoe Carnival back-to-school shopping if they do pivot later.

And we will take our last question from Sam Poser of Susquehanna.

Kerry, how has the closure of the 10 stores impacted the SG&A costs? Specifically, how much have you been able to offset those expenses, and what additional costs are you seeing from e-commerce? What savings have resulted from having fewer stores? It seems that the store closures have not led to an increase in performance.

There's a lot of volatility in the SG&A number right now and some positive, some negative. Like, for example, you can imagine due to the pandemic, our travel costs are down dramatically on a year-over-year, but our supplies for PP&E were up. So what I think you can rely on the guidance that if you teased out only the 2 issues I talked about, that would account for the increase in the SG&A and all the rest of it seems to kind of net against each other to be immaterial.

When considering that net increase, are we expecting it to be similar to the net increase we saw in Q2? I'm just curious about what sales that might be referring to.

I'm not sure I understand, Sam.

I mean if you could do $1 million, you do $5 million, your SG&A is going to be different depending on how much revenue you do. So what's that increase based on?

So it's based on the expectation of e-commerce sales. When we mentioned that the operating expenses for e-commerce would be in the mid-teens, we anticipate Q3 and Q4 to represent a percentage of total sales. Additionally, regarding advertising, we have shifted our strategy as Cliff mentioned, moving our advertising efforts into Q3 to align with the later back-to-school timeline, which is later than last year.

And your e-commerce business, has it ramped up? Is it performing like it did in Q2, or is it now advancing into triple-digit growth? Or are we expecting Q3 to resemble Q2 in that regard?

Yes, Sam, it continued to deliver triple digit, but the nuance, as I said earlier, of the pacing. And after all stores opened, we settled in from above 20% to the mid-teens, and that gave us a triple-digit growth. We think now that all stores continue to remain open. We do anticipate that mid-teens is a place we'll start to grow from, again, as a more stable base, and we will start to grow because we're seeing tremendous traffic and conversion and feedback from people shopping our e-commerce side.

When considering 2021, with stores open and the hope for a vaccine, your e-commerce business is likely to maintain some level of consistency in terms of revenue. Additionally, having all your stores open should provide an increase in business as you enter a more typical year. Would you agree with this perspective?

We except...

Yes. We expect that e-commerce will be around the same percentage of our total business as it is today, between 15% and 20%. That's what I meant when I said we're three years ahead of plan. That's the direction we indicated we were heading. Now that customers have discovered our site and enjoy it along with the service we provide, we believe it will stabilize at that percentage.

And this concludes today's question-and-answer session.

I want to take a moment to thank everyone for joining us today and to express my pride in the Shoe Carnival team and our achievements during these unusual and unpredictable times. Our commitment to maintaining financial strength and flexibility will ensure the ongoing success of our business. Please stay safe, and we look forward to speaking with you again in November.

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.