Shoe Station Group, Inc.

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 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 turn the conference over to Mr. Cliff Sippard, Vice Chairman and CEO of Shoe Carnival, for opening comments. Mr. Sippard, you may begin.

Thank you, and welcome to SHU Carnival's 2020 Third Quarter Earnings Conference Call. Joining me on the call today is Mark Wharton, 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 high-level review of our fiscal third quarter 2020 results, as well as an update on our business operations. Mark will then provide an update on how our strategic initiatives are driving growth, followed by Kerry, who will discuss the quarter's financial results. We'll then open the call for your questions. Our fiscal third quarter results clearly demonstrated the strength and dedication of our team and their ability to execute on our strategic initiatives, as well as our enduring competitive differentiators, When we last spoke, we had successfully reopened all our stores, welcoming our loyal customers back to satisfy all their footwear needs in person. Since then, our corporate offices also reopened, and we were excited to welcome our dedicated team back. With that being said, the health and safety of our customers and employees remain our number one priority. As such, we are diligently watching and adhering to each state's COVID-19 developments and any subsequent policy change. For the fiscal third quarter 2020, we delivered exceptional results. In fact, the third quarter was our most profitable quarter in the company's history. As we had anticipated and communicated, we achieved same-store sales growth in spite of the extended back-to-school season, an achievement you are unlikely to hear from other fashion retailers. We believe our continued strong performance in an incredibly volatile operating environment is the direct result of us putting our employees first and making the decision not to implement furloughs during the mandated Instead, we kept our employees engaged, which has proven to be a tremendous competitive advantage, allowing us to reopen our stores quickly and efficiently. Back-to-school played out largely as we had thought, with sales occurring later in the fiscal third quarter due to delayed start dates for nearly all the schools within the markets we operate. Our loyal shoppers trust Shoe Carnival to have the latest trends and the best brands to make their shopping experience simple and enjoyable. In fact, Shoe Carnival has a history of delivering strong back-to-school sales results. This year marked the 18th consecutive year of comparable store sales increases during the back-to-school season, despite the delay in in-person learning. We are incredibly proud of this track record and our ability to deliver the products our customers want and need when they want it. Mark will provide more detail on back-to-school results in his prepared remarks. At the same time, we continue to see sustained growth in our e-commerce platform, delivering another triple-digit gain in the quarter, even while our brick-and-mortar stores were open. The execution of our merchandise strategy in the third quarter was second to none. Our merchants, in partnership with our vendors, were able to keep our inventory fresh and in line with key trends and brands to ensure shoe cargo maintained a superior selection of the merchandise our customers were looking for. This focus allowed us to significantly reduce our promotional cadence, which in turn drove higher ASPs and a 260 basis point improvement in product margin. As a result, gross profit increased 110 basis points for the quarter. We replenished fast-selling products, including higher-performing sandals and athletic, further driving sales growth and providing the shoe caramel customer a differentiated and satisfying shopping experience. Once our merchant team solidified our back-to-school assortments, they quickly turned their attention to holiday, and by the time we ended third quarter, we had transitioned our stores to a great selection of product across all categories for fourth quarter selling. Our investments in technology continue to drive growth across the organization. E-commerce sales this year are exceeding our three-year target level while achieving a significantly higher merchandise margin. And I'm very happy to report our Shoe Perks loyalty program continues to expand, now reaching nearly 26 million members. Looking at comparable store sales by department for the quarter, adult athletics continue to outperform. The category was up high single digits overall, driven by strong growth in both women's and men's product categories. Women's athletic were up low double digits, while men's athletic was up mid-single digits for the quarter. Sales in both men's and women's non-athletic categories were driven by sandals, canvas casuals, and utilities. Consistent with last quarter, dress shoes were down double digits, reflecting a more casual and active lifestyle as many offices remained closed. Kids' comparable store sales were down low single digits as a result of a delayed back-to-school and remote learning. Kids' non-athletic was up mid-single digits, while kids' athletic was down mid-single digits with a quarter. However, sales rebounded significantly in October as began to return to in-person learning. We ended the quarter with inventory down 5.6% on a per store basis. However, as I mentioned a moment ago, we continue to work closely with our vendor partners to replenish key 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 holiday period. And I'm especially happy with the terrific selection of fall and winter boots as colder weather will dictate the transition to more seasonal footwear. We remain focused on our financial strength and flexibility as our discipline in this area has proven to be invaluable as we navigate these ever-changing conditions. As I've mentioned, we have continued to support our employees. And even with this investment in our people, we remain debt-free. We ended the quarter with approximately $47 million in cash and cash equivalents. Our strong balance sheet, combined with our strategic investments and superior execution, has allowed us to make incredible progress on our long-term goals and will continue to guide us through any challenges ahead. The current environment continues to make it difficult to provide clear guidance. Therefore, we will not be providing Q4 guidance. I will say that we are encouraged by our market share gains in Q3 and feel we are well positioned to continue capturing market share in the future. We are being vigilant to ensure our employees and customers remain safe and that Shoe Carnival continues to execute and create long-term value for all stakeholders. With that overview, I would now like to turn the call over to Mark Wharton to provide an update on our strategic initiatives. Mark? Thank you, Cliff. The SHU Carnival team achieved incredibly strong results in the third quarter, despite a macro environment that continues to be unpredictable. At the same time, we advanced our core strategic initiatives we acquired new customers, we grew our market share, and achieved record quarterly profits. I'm very proud of and so thankful for our 5,000-plus employees' commitment and their customer focus during this challenging macro environment. During Q3, we achieved our 18th consecutive year of sales growth for the back-to-school sales period. During our last earnings call, we shared that we anticipated the back-to-school selling period would start later than it has historically and extend further into early October. This is precisely what happened. Our 2020 back-to-school season occurred throughout fall of August, September, and continued into early October. While the course selling period ended by mid-October, not all school systems have returned to in-person education, with 36 school districts, or nearly 10%, still continuing virtual-only education by the end of October. The key to our third quarter profit results was the team's ability to quickly and efficiently shift our marketing investments out of our traditional TV and print plan in early August into targeted digital, marketing, social, CRM, and store experience elements spread later in Q3. This decision enabled us to be nimble with our investments and react to school districts' back-to-school date announcements as they happened. As a result, we're very pleased with our ability to capture market share during Q3 and to deliver same-store sales growth of nearly 1% for the quarter. Our digital marketing and e-commerce efforts continue to far exceed expectations. Even with all of our brick-and-mortar stores open for Q3, e-commerce sales grew over 150%, achieving high double-digit traffic growth and sales growth of over $20 million. E-commerce revenues surpassed 13% of total company revenues for the third quarter. For comparison, Shoe Carnival's e-commerce sales represented less than 6% of fiscal third quarter revenue in 2019. Our world-class merchandising team had the product customers wanted to purchase whenever and wherever they chose to shop. This strong inventory position enabled us to achieve substantial conversion growth both online and in our stores. while significantly reducing our promotional intensity. For example, we delivered an increase in e-commerce product margins of over 200 basis points for the quarter by eliminating low return on investment promotions. Our efforts against our e-commerce growth strategy remain well ahead of our strategic plan, and we will continue to invest to grow this business in the years ahead. Our industry-leading CRM strategy continues to provide valuable customer insights to our business, resulting in more efficient and effective marketing outreach. We delivered a nearly 10% increase in Shoe Perks loyalty membership compared to the third quarter of 2019, and are rapidly approaching 26 million members. We also continue to see Gold members track significant sales, margin, and profit dollar growth in the quarter versus Q3 2019. The average basket size of a gold member was over $18 higher than a non-member in the quarter. So converting our customers into gold members continues to be a high-priority strategy. Additionally, our investments in essential technology infrastructure continue to enable our growth strategies. Despite the pandemic, during Q2 and Q3, we effectively rolled out a new warehouse management system and a new order management system. These technology platforms helped enable the realization of our triple-digit e-commerce sales growth achieved in 2020. Importantly, these technology enhancements enable a long runway of profitable e-commerce growth in the years ahead for Shoot Carnival. As we continue to navigate the current environment, we are making continued progress against our long-term real estate and store profitability strategies. During the quarter, we opened one new store within existing markets and did not close any stores. We anticipate one opening and one closing through the end of the year, bringing our year-end store total to 383 stores. We continue to closely monitor the markets in which we operate and make strategic decisions based on store and market profitability. In closing, I continue to be very proud and thankful of our team members driving sales growth the record profits achieved during the quarter, and the continued success advancing against our long-term strategic initiatives. With that, let me turn the call over to Kerry Jackson to provide more insight into our financial performance for the quarter.

Thank you, Mark. As Cliff and Mark both mentioned, we saw another strong quarter in an unpredictable environment thanks to our team and their continued commitment to delivering on our strategic priorities We delivered sales of $274.6 million in the quarter, with comparable store sales up nearly 1% driven by e-commerce sales. This quarter's comparable store sales growth was on top of a 3.5% comparable store sales increase in the third quarter of fiscal 2019. Our e-commerce business sustained triple-digit growth while our brick-and-mortar store sales during the quarter were negatively impacted by delayed back-to-school shopping and COVID-related uncertainty in the quarter. Our gross profit margin for the quarter increased to 32.0% compared to 30.9% in the third quarter of last year, making it SHU Carnival's most profitable quarter ever. Our merchandise margin increased 160 basis points, while buying distribution occupancy expense increased 50 basis points as a percentage of sales. The increase in the merchandise margin was primarily due to lower promotional activity during the quarter. An increase of 260 basis points in our product margins offset 120 basis point increase in e-commerce shipping expense. The increase in buying, distribution, and accuracy cost as a percentage of sales was primarily due to higher distribution expense. Investments in our distribution center this year resulted in higher software, depreciation, and labor costs for implementation during the third quarter. These investments will allow our distribution center to assist the stores in filling e-commerce orders as we rapidly grow our e-commerce sales. SG&A expenses increased $1 million in the third quarter to $67.6 million, primarily reflecting higher advertising and e-commerce-related operating expenses. As a percentage of net sales, SG&A increased to 24.7% compared to 24.3% in Q3 last year. The effective income tax rate for the third quarter was 26.8%, compared to 24.9% in the same period last year. The lower tax rate in the prior year was due to a favorable adjustment last year, which did not recur this year. Net income for the third quarter was $14.7 million compared to net income of $13.7 million in the third quarter last year. Net income per diluted share for the third quarter was $1.03 compared to income per diluted share of $0.94 in the prior year third quarter. Net income and diluted net income per share in the quarter were all-time records for the company. Now turning to our cash position and information affecting cash flow. Depreciation expense was $4.2 million for the third quarter compared to $4.3 million in the prior year quarter. Capital expenditures for fiscal 2020, including actual expenditures through the third quarter, are expected to be between $14 and $15 million, with approximately $8 to $9 million to be used for new stores, relocation, and remodels. The previously mentioned upgrades to our distribution center are expected to be about $4 million. As Cliff mentioned, we continue to work closely with our vendor partners to strategically manage our inventories. As a result, inventory declined 5.6% on a per-store basis, and we ended the quarter with inventory of $274.3 million, a decrease of $23.7 million compared to the prior year third quarter. As of October 31, 2020, we had no outstanding debt and working capital of $215 million. Cash and cash equivalents were $46.7 million, And our borrowing capacity was just shy of $100 million at the end of the quarter. This concludes our financial review. Now I'd like to open up the call for questions.