Shoe Carnival, Inc. (NASDAQ:SCVL) Q2 2023 Earnings Call Transcript

Shoe Carnival, Inc. (NASDAQ:SCVL) Q2 2023 Earnings Call Transcript August 29, 2023

Shoe Carnival, Inc. misses on earnings expectations. Reported EPS is $0.71 EPS, expectations were $0.81.

Operator: Good morning, and welcome to Shoe Carnival’s Second Quarter 2023 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 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 and today’s earnings press release. Investors are cautioned not to place undue reliance on those forward-looking statements, which speak only as of today’s date.

The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements discussed on today’s conference call or contained in today’s press release to reflect future events or developments. I’ll now turn the conference over to Mr. Mark Worden, President and CEO of Shoe Carnival, for opening remarks. Mr. Worden, you may end.

Mark Worden: Good morning, everyone, and thank you for joining us today for Shoe Carnival’s Second Quarter 2023 Earnings Conference Call. Joining me on today’s call are Carl Scibetta, Chief Merchandising Officer; Erik Gast, Chief Financial Officer; and Steve Alexander, supporting Investor Relations. Let me start today by saying that conditions impacting customer trends improved in Q2. As the quarter progressed, we saw encouraging signs that the impact of inflation on our customers was starting to moderate. Customer engagement in-store and online picked up, average transactions climbed to a new second quarter high, product margins were robust and customer conversion remains strong. Based on these improving conditions, we see an opportunity to invest to increase our market share to accelerate sales growth and to grow earnings per share results compared to the soft market and results in Q1 of this year.

As such, we accelerated investments to fuel profitable brand-building activities and drive our excellent customer experience. We continued to roll out our store modernization plans and drive customer engagement with new stores in new markets to capitalize on improving conditions. Sales in Q2 grew approximately 5% versus Q1 2023 to $294.6 million. Earnings per share increased at an even faster rate of 18% growth versus Q1 to $0.71, demonstrating the success of our investments to accelerate profitable growth as the year has progressed. While the back-to-school season is not yet complete, August results provide further signs that inflationary conditions have moderated during the year. In Q3, while we’re not seeing growth versus prior year yet, we continue to see modest improvement versus Q2 in sales, margins, transaction size and strong conversion.

Competitive intensity has been high in both Q2 and the Q3 back-to-school season with many competitors, deep discounting products and running profit-losing promotions. We been committed to our profit transformation and targeted promotional strategies that are based on customer analytics and deep knowledge of our loyal customers. That strategy is working. For example, the August back-to-school shopping period accounts for half of the company’s third quarter gross profit. August sales and product margin results were among the highest of any month in the company’s 45-year history. With strong profit results achieved Q3 to date, the company is on track to deliver its full year gross profit margin guidance of 36% to 37%. Given the inflationary environment our customers face, we are very pleased with this result, including our ability to gain market share and our customers’ response to investments in brand building and customer experience.

As such, we plan to continue to invest in those areas in the remainder of Q3. Erik will provide more detailed guidance in his section. Although customer trends and results have improved, it would be premature to declare that the inflationary and economic headwinds are no longer significantly impacting our customers. While gross margin remains strong for Q2 and results accelerated versus earlier in the year, total sales declined 5.7% versus the year ago period and comparable store sales declined 6.5%. Store traffic performance improved in Q2 versus Q1, but still declined versus prior year. We continue to see softness in the segment of our customers with household income under $30,000, including our urban lower-income customers. We see this headwind as an ongoing challenge throughout the remainder of the year.

We are also seeing a favorable mix shift to higher income, more profitable customers, led by our Shoe Station banner and our online transactions. For some perspective, historically, over 50% of our customers were from households with income under $50,000. This year, we are seeing a meaningful shift with over half of our customers now in households with income over $50,000, including a significant percentage increase in households with income over $75,000. As part of our long-term strategy, we continue to invest to build our brand and acquire these higher income, more affluent customers to expand our customer base. At the same time, we also continue to invest in our very important value customer base. The broader inflationary environment continues to make it more expensive to compete for share growth, to attract and retain talent and to capture new customers.

With unemployment levels remaining near 50-year lows, hiring and retaining employees in the retail space requires continual innovation to ensure a great place to work as well as higher investments in wages, health care and benefits. With our team of nearly 6,000 talented customer-focused members, we pride ourselves on delivering the best customer experience. By investing in our team, we are driving continued new customer engagement, strong conversion levels and customer loyalty. With increased strategic investments in our brand and customer experience and the slower economic recovery, we decided to lower our expectation for new store openings this year. We now plan to open 6 to 10 new stores in 2023, likely on the lower end of the range and less economic conditions improved rapidly during Q3.

Importantly, there is no change to our long-term plan to operate over 500 stores in 2028. We’re taking a more measured approach to near-term organic growth until market conditions improve further. Economic and inflationary conditions are not improving as quickly as we had projected, and we expect that they will remain challenging as we navigate the remainder of 2023, particularly with urban customers. Given that and reflecting our updated new store plans, we are updating our full year 2023 sales guidance to $1.19 billion to $1.21 billion. Erik will discuss detailed guidance in a few moments as part of his commentary on the quarter. Now I’d like to discuss how our continued strategic investments are positioning us for profitable growth when the economy improves.

Our store modernization program and in-store experience investments continue to drive fleet profitability and productivity. A little over 2 years into the program, we have 52% of the Shoe Carnival fleet remodel complete. We’re on track for approximately 2/3 of the fleet to be completed by summer of 2024. I’m also very excited that we opened our 400th store since our last earnings call. The last time we operated 400 stores was back in 2018 when we were at the very early stages of our multi-year productivity improvement and store rationalization program. Since that time, our fleet productivity and profitability has dramatically improved. For comparison, sales now for our 400 stores per door has increased 15%. With the productivity increases in revenue per door, combined with our targeted promotional strategy, profit per 400 doors this year has increased more than 40% versus 2018.

As shared in preceding quarters, our highly profitable fleet of stores has us in a solid position to self-fund our investments in the business. Additionally, the investment in our CRM platform continues to drive customer membership growth, reaching 33.3 million members, an increase of 12% over prior year. Sales from loyalty members now represent over 70% of the company’s net sales and our most profitable Gold Tier membership grew over 25% in Q2. Transaction size for gold members was over 15% higher than non-members. One of the brand-building areas we invested in was to reactivate last athletic shoppers. Specifically, those members did not purchase a top global athletic brand with us in 2022. During our period where the slide chain disrupted our assortment and availability.

With this year’s solid assortment in stores, we utilized our CRM assets to reengage many of those shoppers and get them to retry Shoe Carnival. This, among other targeted campaigns led to a significant number of customers reactivated into active buyers during Q2. We are very encouraged by these results and continue to invest in targeted brand building and customer programs. As I discussed earlier, we’re seeing a shift to more affluent customers, which in part is being driven by our e-com and CRM capabilities. In short, our always-on digital marketing strategy is working very well, capturing and converting customers and is partially offsetting the traffic softness we are seeing in some of our urban customers. We have significantly more untapped customers to reengage in the years ahead, making CRM a core continued driver of profitable customer engagement.

As I mentioned earlier, conditions are improving with our more affluent customer base across the business, and this improvement is particularly evident in the performance of Shoe Station. Q2 sales for Shoe station increased low single digits, and Q3 sales to date grew mid-teens versus prior year, outperforming the overall company each quarter and driving profitable growth. Our investments to harmonize our online and CRM platforms where customers are working, enabling Shoe Station to build top line sales and margin momentum. We continue to advance value capture programs and gain synergies across the Shoe Carnival and Shoe Station banners to drive further efficiencies and margin expansion. Given the challenging economic landscape, we continue to prioritize reducing inventory levels, sustaining strong margins and providing the right mix of branded products for our customers.

We started this year with inventory approximately $105 million higher than prior year, with plans in place to rapidly rightsize our inventory position by back-to-school. We ended the second quarter with inventory up only $24 million versus prior year, continuing to reduce inventory levels versus a year ago. And importantly, as I mentioned earlier, we are maintaining strong margins. Carl will cover more details in a few moments, but our inventory is on track to be below prior year levels in the coming weeks and to achieve the annual guidance for inventory to be approximately $40 million lower by year-end 2023 compared to the year-end 2022. Our balance sheet is building to an even stronger position with over $90 million in cash and marketable securities on hand as of yesterday.

And equally as important, we continue to operate with zero debt. As we have in the past, we’re funding our significant investments to grow the business profitably from the strong operating cash flows generated by the business. Before I hand it over to Carl, I will summarize by saying that our second quarter results demonstrated the momentum of our strategy within the context of a challenging economic backdrop. We delivered improvement on net sales, earnings per share and increased investment in advertising, branding and customer experience during the quarter versus Q1. Our strategic investments drove growth in our customer loyalty program, high conversion and continued market share gains in the family footwear channel. We opened our 400th store as we continue to invest in the business with new stores, our CRM strategies, store modernization and best-in-class store experience for our customers.

We saw improving conditions related to the impact of inflation on consumers in the second quarter but some of our highly-valued lower-income urban customers remain challenged, and we expect will continue to be cautious in the current economic environment. We’re taking a measured approach to the best of the year as we expect economic conditions likely will remain challenging. But importantly, our balance sheet is strong, and our strategy to drive growth continues to be a priority. When the lower-income consumer segment starts to improve, we’ll be in a great position to drive profitable growth. And now I’ll hand it over to Carl to provide further color on the quarter and year ahead. Carl?

Carl Scibetta: Thank you, Mark. As you discussed, we saw some improving customer trends as the quarter progressed that the impact of inflation on our customers moderated. Customer engagement picked up meaningfully. Product margins remained healthy. Average transactions climbed to new second quarter highs and customer conversion was strong. Back-to-school season ongoing and our athletic and children’s inventory is exactly where we want it. While competitive intensity has been high in Q2 and early Q3, we remain committed to our profit transformation and our targeted CRM strategies. We continue to focus on driving our strategic objectives, which include connecting with our consumers using our CRM program to maximize sales, continuing to reduce our inventory throughout the year and delivering strong product margin.

We have many more untapped customers to reengage with going forward, making CRM a core driver of profitable customer engagement. Moving to the quarter. Total Q2 comp sales were down 6.5%, which was an improvement versus the low-double-digit decline we saw in Q1 2023. Including August [BTS], we are seeing a trend of improved but down versus prior year, continuing for the balance of ’23. From a category perspective, second quarter comp sales in women’s nonathletic footwear were down low teens with dress down over 25%. Boots and sandals were both down mid-teens. Sport was down mid-single-digit with leisure down low singles. Casuals were up low single digits in the quarter, led by [indiscernible]. Men’s non-athletic comp sales were down mid-single digit, casuals were up low single digit with strong performance in both Canvas and slip-ons.

Men’s dress was down high teens and boots were down mid-teens in the quarter. Children’s comp sales were up low-single-digit, led by Children’s athletic, up low single digit, driven by performance in court, partially offset by children’s nonathletic down low signals. The trend improvement during the quarter in children’s led by athletic, reflected our strong inventory position for back-to-school, and we continue to see that improved trend in August. Comp sales in adult athletic improved to down low single digit with men’s down slightly more than women’s. As we optimize inventory levels, the improved trend of down low-single-digit continued in August as part of back-to-school and was led by court in basketball and with continued softness in skate and running.

As I mentioned earlier, competitive intensity was high in Q2. However, our merchandise margin decreased by only 20 basis points in the quarter versus the prior year, improving sequentially versus Q1 performance and reflecting our disciplined strategy and investments in CRM, which are based on data, customer insights to drive strong product margin. We continue to prioritize inventory levels providing the right mix of the freshest products for our customers and sustaining strong margins. We entered the first quarter with inventory up approximately $105 million or 37% versus the previous year with a strategy to right-size our inventory. We ended the first quarter with inventory up approximately $44 million or 13% versus 2022. And importantly, we ended second quarter with inventory only higher than the prior year by approximately $24 million or 6%.

Inventory at the end of Q2 ’23 was higher than Q1, but with back-to-school in progress, we expect our inventory level to be lower than the prior year in September, and we continue to expect that our inventory level at the end of fiscal 2023 will be approximately $40 million lower than the end of fiscal 2022. Currently, our inventory content is clean, and we see no reason to change our strategy to achieve our goals. We will continue to optimize inventory levels and diligently manage inventory flow to ensure our stores are stocked with the most desired product offerings that are time appropriate as we move through the balance of fiscal 2023 and going forward. To be clear, our strategy to right-size inventory while maintaining the freshest product selection for our customers is ongoing and will continue even after we achieve our guidance for fiscal year-end 2023 to be $40 million lower than the prior year.

And with that, I will turn the call over to Erik for a review of our financials. Erik?

Erik Gast: Thank you, Carl, and good morning, everyone. Moving to the financial results. In my remarks, I will be comparing our second quarter results with the second quarter of 2022, not in comparison to Q1 2023 and year-end 2022, if needed, for context. Starting with top line. Our net sales in Q2 were $294.6 million. This was down 5.7% on a comp decline of 6.5% versus prior year. To offer some perspective on our performance, while net sales in the quarter were lower than the prior year, the Q2 performance represented an improvement of 5% as compared to Q1 2023. The comp decline was driven by approximately 7% reduction in traffic versus prior year, partially offset by a 5.4% increase in e-commerce net sales. Some customer trends are improving, but inflationary and economic headwinds are still impacting traffic.

Shoe Station banner sales for Q2 came in at a low-single-digit increase versus prior year and Shoe Carnival banner sales came in at a mid-single-digit decline. In August, we opened our 400th store with the fleet now comprised of 373 Shoe Carnival stores and 27 Shoe Station stores. Our overall productivity and profitability have increased significantly since 2018, which was the last time we operated 400 stores. Q2 gross profit margin was 35.8%, reflecting the 10th consecutive quarter at or exceeding 35%. The margin reflects continued advancement of our CRM capabilities, resulting in high customer conversion and increased loyalty members in the quarter. Compared to prior year, merchandise margins decreased 20 basis points, reflecting an improvement versus Q1 2023, led by our CRM strategy, which is driving strong product margin.

Buying, distribution and occupancy costs declined in the quarter. However, we’re deleveraging by 20 basis points as a result of the sales decline. The buying distribution and occupancy expense reductions were primarily the result of lower freight and distribution costs, partially offset by higher occupancy costs related to new stores and store modernization. SG&A expense in Q2 was $80.8 million, representing an increase of $6.5 million over Q2 2022, driven by our investment decisions in branding and customer experience during the quarter. We are pleased with the customer response to our investments, and we plan to continue to invest in those areas in the remainder of Q3. As a percentage of net sales, SG&A expenses were 27.4% in the quarter as compared to 23.8% in Q2 2022 and 27.6% in Q1 2023.

Q2 operating income was $24.7 million or 8.4% of sales compared to $38.8 million and 12.4% of sales in Q2 2022. Net income for the second quarter of 2023 was $19.4 million or $0.71 in diluted earnings per share. While lower than Q2 2022, earnings per diluted share in the current quarter reflected an 18% increase versus Q1 2023. We closed out the second quarter with inventory of 499, which was up approximately $24 million compared to the prior year or 5.1% on a per store basis. This higher inventory level of $24 million compares favorably to $44 million higher than the prior year for Q1 2023 and $105 million higher at year-end 2022. With back-to-school shopping in progress, inventory is on track to be below prior year levels in September 2023, and we expect it to be approximately $40 million lower by year-end 2023 as compared to 2022.

Importantly, our aged and seasonal carrier inventories are in line, and we have no expectation of deep discounting to liquidate merchandise. Moving now to our strong balance sheet and liquidity position. At the end of Q2, we had total cash, cash equivalents and marketable securities of approximately $47 million. And as of yesterday, that total was over $90 million with no outstanding debt. At the end of 2022, the company had maintained no debt for 18 consecutive years as continued funding its operations without debt through the second quarter. During the quarter, there were no share repurchases and we currently have the entire authorized amount of $50 million available for the share repurchase program. We provided a detailed updated guidance for fiscal 2023 in our earnings press release earlier this morning, and so I will cover a few of those items now.

Given the Q2 results driven by lower traffic and consumer trends that remain challenging, we are updating our sales guidance for fiscal 2023 to $1.19 billion to $1.21 billion compared to the prior range of $1.23 billion to $1.25 billion. We now expect comparable store sales of down 8% to down 6%. Given our increased strategic investments in brand and customer experience and the slower economic recovery, we now plan to open a total of 6 to 10 new stores in 2023. We continue to expect gross profit margin to be between 36% and 37%. We now expect total SG&A expense to be between $321 million and $327 million or approximately 27% of net sales as we continue to invest in brand building and store experience. For the year, including the extra week, we are lowering our diluted EPS guidance to $3.10 to $3.25 from our previous expectation of $3.60 to $3.85.

As I discussed earlier, we continue to expect inventory at the end of fiscal 2023 to be approximately $40 million lower than the prior year. To close, we are seeing some improving conditions but we expect inflationary and economic headwinds will continue to significantly impact our lower income urban customers. We are taking a measured approach to the balance of the year. Our strategy to drive growth will remain a priority. Our balance sheet is strong with cash and we have no outstanding debt. This concludes our financial review. Now we would like to open the call up for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question is from the line of Mitch Kummetz of Seaport Research.

Mitch Kummetz : I’ve got maybe a handful. Mark, I was hoping you could start by just elaborating on what you’re seeing with the lower income consumer, especially if you could maybe reconcile that with your prepared remark that the inflation impact is starting to moderate. Maybe you could just start there.

Mark Worden: Thanks for joining us today. [indiscernible] the trends we are to see as Q2 began. In Q1, we saw significant declines from traffic with the urban markets and the broader market challenge. The guidance — the beginning part of Q2, we started to see meaningful improvements within the base and that led to us investing into that, driving advertising, the building brand activity. And we saw continued improvement as the quarter improved — progressed through the quarter. If you unpack that a little, we’re seeing 2 different situations, 1 in our more urban markets, inter cities across the geography being traffic challenged. On the other side, we’re seeing improvement conditions where the inflationary impact is starting to show encouraging signs. So 2 different situations, but we’re very pleased with what we started seeing as the quarter progressed. And that continued through Q2 and continue to moderate as we went into Q3.

Mitch Kummetz : Okay. That’s helpful. And then on the merch margin, it was down 20 bps year-over-year. Can you say what that is compared to 2Q of ’19. And then also, I’d be curious to know, I know you guys have really changed your BOGO strategy. Is there any way you can kind of provide us information on merch margin like BOGOs in this quarter versus maybe BOGOs 4 years ago.

Carl Scibetta: Mitch, this is Carl. From a BOGO strategy, BOGOs 4 years ago, we would have run the entire stock of our inventory for the most part — on a buy 1 get 1.5 of strategy. We no longer do that. When we see any buy 1, get something from us, it’s a very curated product bought specifically for that particular event. And those margins are — tend to run a about a 1000 basis points higher than they would have back when we were running BOGO on the entire inventory.

Mark Worden: And Mitch, let me build on that for a second. If you take that back to 2019, we run a little over 550 basis points higher gross margin than we — this Q2 compared to what we ran in 2019. 2019, we’re 30.1 gross margin in front of us right for 4 years back, we can follow up with that. But on a gross margin perspective, we’re still landing at over 500 basis points improvement versus 2019.

Mitch Kummetz : Okay. Good. And then, Erik, just on the guide, we can kind of back into the second half of the year, but is there any color that you could provide 3Q versus 4Q, whether it’s comp or margin anything — there?

Mark Worden: Mitch, this is Mark. I’m going to grab that. So again, we’ve seen conditions improving throughout the year. Q1 was down double digits, and that progress, as I shared in Q2 to down mid-single digits. Q3 started off, and we’ve continued to see nice but moderate improvement versus Q2. So when we look at the whole year, we’re taking balance the perspective that the back half of the year continues with similar results that we’re seeing right now. So take a better approach. We said we’ll be at minus 8% to minus 6%. So very similar to what we’ve just achieved in Q2, very similar to what we’ve just achieved in the month of August, but a measured conservative approach. However, if we start to see the economic conditions improve or sequentially get better as they have been each quarter, then we have upside potential, and we’re going to continue to invest in the brand building and advertising to go after that should we see it.

Mitch Kummetz : Okay. And then on the SG&A, just a little help here because SG&A dollars were up $6.5 million in the quarter, and you talked about accelerated investment. If I back into the back half, it looks like SG&A dollars are actually down a little bit year-over-year, it sounded like you expect investments to continue. So I guess maybe really 2 questions. One, were any investments accelerated into 2Q, which led to that big dollar increase and — and why is SJ down in the back half if you’re continuing to invest? Or are you finding some dollars to kind of pull out of the business in other areas?

Erik Gast: Sure, Mitch. This is Erik. I’ll get to speak with you. As I think about it, when we saw the market conditions improved, we did do some acceleration in our growth. And as you can see, the sales did improve with up 5%. EPS was up 18%. And Mark talked a little bit about where we invested and I’ll just elaborate a little bit, for half of that was in the brand building, and we did have pull-forward investments, particularly in advertising you’ll continue to have spend in new stores. We also talked a little bit about it, but we launched our Shoe Station business in February of ’23. So there’s a digital cost related to that end. The other half of that increase was the in-store experience. We had modernization costs that strategy will continue.

These investments are working, and we will continue to invest. So when I think about the back half of the year, however, as I mentioned, we did pull forward some of those expenses. So we will moderate and continue to watch that expense and we’ll see how that plays out. And as Mark talked about, we’ll see how opportunistic we are.

Mitch Kummetz : And then I guess last question for Carl. You talked about sequential improvement in the athletic business? It sounds like you’ve got better inventory. I mean 1 of the things that I just noticed online is that there’s a lot of kind of promo Air Max product. And I’m just curious — maybe just your broader thoughts on how you’re positioned in athletics. And I’m curious to know if like a lot of that product was on closeout? Or are those promos margin dilutive?

Carl Scibetta: So Mitch, we’re in a much better position heading into back-to-school and coming out of back-to-school soon with our athletic inventories versus a year ago really had to do with the delivery, on-time delivery of products from our key vendors. As far as promotional activity, as we’ve stated, since we are not in a global promotion environment at since — we have sort of remodeled our promotion strategy and we’re able to take products that we need to move on, get very aggressive pull them up while we maintain price the most valuable product that we have and that balance is us to achieve margin goals and continue to liquidate distressed inventory and remain competitive in the market place with most frankly that are doing more global promotions.

Operator: Your next question comes in line of Sam Poser of Williams Trading.

Sam Poser: I want to talk about the inventory and how you’re getting to $40 million below at the end of the year. My math tells me, and I know it includes other things that your receipts in the back half of the year would probably have to be down almost 17%. And even if you get to that number, the inventory is still going to be well above where it is. And my question is, if your receipts have to be down in that range, then how do you bring enough newness in for both holiday and for spring early, and keep things going? Or should you just be more aggressive with the inventory you have now to drive it down to open up more of to buy for better goods and still achieve the inventory you want to at the end of the year?

Carl Scibetta: The inventory reduction is an accumulation of several strategies. Receipts would be down to a year ago. If you remember a year ago, receipts balloon significantly in the fourth quarter when the late inventories due to supply chain issues, came in at the same time as the early receipts due to improved supply chain situation that caused a big blip in inventory. We’re down to that and more in line with the appropriate amount of receipts at that time frame. That’s part 1. Part 2, we continue to work very closely with our vendor partners to get creative on many ways to reduce inventory as we go through the back half of the year as well as reevaluating mild stocks, letter plants, everything based on the sales trend that we’re seeing.