Shoe Station Group, Inc.

Good afternoon and welcome to SHU Carnival's fourth quarter and fiscal year 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 after 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. If 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 call over to Mr. Cliff Seppard, Vice Chairman and CEO of SHU Carnival for Opening Conference. Mr. Seppard, can you do it again?

Thank you and welcome to SHU Carnival's 2020 Fourth Quarter and Fiscal Year Earnings Conference Call. Joining me on the call today are Mark Gordon, President and incoming Chief Executive Officer, Carl Scibetta, Senior Executive Vice President, Chief Merchandising Officer, and Kerry Jackson, Senior Executive Vice President, Chief Financial and Administrative Officer. As you saw last week, we announced that I will be transitioning to the Vice Chairman role on September 30th of this year. And Mark Warden, currently President and Chief Customer Officer, will succeed me as President and Chief Executive Officer. On today's call, I want to focus my comments primarily on this transition, which has been well planned and marks a new and exciting chapter for our company. I have always had complete confidence in our team throughout your organization. Our stores are run by the most tenured management team in the shoe business. They open the doors every morning as if they're opening their own business. They have passion and skills, which creates an unstoppable combination. We have built the best merchant team in the shoe business, made up of tenured professionals who have industry-leading institutional knowledge of our customers and how they shop. Our management team on every level also has a tremendous track record and passion for the success of this unique concept. This announcement is a culmination of a multi-year succession plan we established when Mark joined the company in 2018, which was aimed at ensuring a seamless transition of leadership. This is critical as we position the company to continue our strong track record of financial and operational performance, while at the same time maintaining our commitment to our employees, customers, vendors, and shareholders. Mark and I have worked closely together over the last several years, and his clear passion for our concept and vision for this business gives me great confidence in his ability to lead Shoe Carnival into our next chapter. His strategic direction, deep knowledge of our customers, and unwavering commitment to our employees make him the perfect fit for the job. He has been instrumental in the company's growth since the day he started in 2018. I transitioned to vice chairman with unwavering confidence that Shoe Carnival will not miss a beat, and I have tremendous confidence that Mark will take Shoe Carnival to new heights. We also made several other leadership changes we believe will enhance the current leadership and provide deep bench strength across the organization. Mark will talk more about these changes in his comments. Looking back on my time as CEO, I am extremely grateful for the opportunity to have led a team as talented as the Shoe Carnival family. We have accomplished so much together, both financially and operationally over the last nine years. From a financial perspective, we grew revenues to over $1 billion, delivered 11 consecutive years of comparable store sales growth leading into 2020. realized best-in-class merchandise margins, and maintained disciplined capital management throughout various economic cycles, most recently as it relates to the COVID-19 pandemic. I could not be prouder of the Chicago team's performance throughout 2020, especially considering the ongoing impact of COVID-19 on the retail industry and broader economy. We saw record results for the year, and because of our strong balance sheet, we were able to keep all our employees working. Operationally, our accomplishments over the past nine years have been plentiful. First, we relaunched our e-commerce platform, which grew to approximately 20% of our sales. And most importantly, we were ready when our customers needed it most. We also reinvigorated our Shoe Perks loyalty program that grew to 26 million members from 1 million members we could not communicate with. I am happy to say Shoe Perks was responsible for approximately 67% of our overall sales in fiscal 2020. We have also implemented several new systems over the years. including an industry-leading CRM program that is driving sales both online and in our brick-and-mortar stores, a new transportation management system, an order management system, and later this year our buyers will be managing their distribution and orders through a new planning system. These systems have enabled our employees to work more efficiently, saving the company time and resources. We also established several new programs that supported our commitment to our customers, including our Shoes to You program, which opened up total company inventory to all stores, and we were first to offer Shift from Store, which essentially turned every store into an e-commerce fulfillment center. Our strong fourth quarter and fiscal year 2020 results are true reflections of the resiliency and dedication of our Shoe Carnival team and their unwavering support of our loyal customers. It was just a year ago when we announced the closing of all our retail stores, and as a team, we quickly shifted gears to meet the needs of our customers by exponentially growing our e-commerce business. By June, we have safely reopened our stores faster than any of our competitors. Looking back on what we were able to achieve in a time of such uncertainty makes me incredibly proud to have had the opportunity to lead this organization. Today, as part of the transition, Carl Scibetta, Senior Executive Vice President and our Chief Merchant, will walk you through the merchandise categories. But first, I'd like to turn the call over to Mark Wharton to provide an overview of the quarter and an update on our strategic initiatives. Mark? Good afternoon. Before we discuss our record Q4 results, I'd like to recognize Cliff for his outstanding contributions to the SHU Carnival organization. I've been very fortunate to work closely with Cliff over the last three years. His deep industry knowledge and leadership in the footwear channel over the past four decades set him apart as one of the retail leaders I respect most. His decisions during his tenure as CEO helped make Shoe Carnival the healthy, consumer-centric company it is today. First, investing in consumer technology enhancements put us in a position to succeed during an incredibly volatile market this past year. making significant investments in our e-commerce platform and customer relationship capabilities were key catalysts to achieving the record results we achieved the last three quarters following the pandemic's door closures, while at the same time, laying a foundation for continued growth well into the future. Anyone who has met Cliff immediately learns just how passionate and knowledgeable he is about merchandising and the vendor community. He's worked tirelessly over the past 24 years to establish Shoe Carnival as the top destination for family footwear customers and has built long-lasting relationships with our vendor partners. I'm excited to build upon those relationships as we move forward with our strategic partners. I'm honored for the opportunity ahead and to have been selected by our Board of Directors to succeed Cliff as CEO, and I look forward to continuing to partner with him in his role as Vice Chairman of the Board. In addition to the planned CEO transition we announced, I'd like to highlight three additional components of our succession plan. These changes further strengthen our leadership team and position us well for the future as we execute our long-term strategic plans. First, I'm thrilled to share that Carl Scibetta, our Chief Merchandising Officer in EVP, has been promoted to Senior Executive Vice President, Chief Merchandising Officer. For the past nine years, Carl has built a world-class merchandising team and has been a key leader among the SHU Carnival officer team. His 40-plus years of retail merchandising leadership in both specialty retail and department stores will continue to keep Shoe Carnival at the forefront of the industry. I'm excited to work closely with Carl and the vendor community in the years ahead. Second, Mark Chilton has been appointed Executive Vice President and Chief Retail Operations Officer, succeeding Tim Baker effective April 4th. This month marked Tim's 50th year in the retail industry and his 32nd year as an operations leader at Shoot Carnival. Tim's contributions to the company have been many and significant since joining Shoot Carnival in 1989. We've particularly valued his focus on people development and operational excellence, which has provided us with an industry-leading store organization and a deeply talented leadership team as we move forward. Thank you, Tim, for your dedicated service to Shoe Carnival. Mark Chilton has been with the Shoe Carnival team for 27 years in roles of increasing responsibility in store operations. Most recently, Mark served as Senior Vice President within operations, working directly with Tim. He's a respected executive and people leader across the organization, and his deep, broad-based experience will be invaluable as we look to grow Shoe Carnival in the coming years. Finally, Patrick Edwards has been promoted to Chief Accounting Officer. Patrick has been an excellent addition to our SHU Carnival finance team since he joined in 2019. Under Kerry's leadership, Patrick will further bolster an already strong finance organization and add the layer of financial expertise that will enable us to continue to deliver financial strength, discipline, and flexibility. Carl, Mark, and Patrick. Each bring excellent knowledge, focus on driving shareholder value, and experience to our leadership team. And I know both Carrie and I look forward to working closely with them as we move forward. Moving on to performance, I'm so thankful for the continued commitment of our SHU Carnival team members. Their focus on our customers' experience and delivering operational excellence. 2020 was an unpredictable year. but our team rose to the challenge and delivered value for our customers and our shareholders. The Shoe Carnival brand, unique consumer experience, and broad product assortment positioned us very well for growth in fiscal Q4. We delivered record sales and profits during Q4, with comp sales growth up 6.4%, merchandise margins expanded by 160 basis points, and operating income climbed to the highest Q4 ever, up approximately 114% versus 2019. At the heart of our long-term strategy is providing consumers the preferred shopping experience and product assortment within the family's footwear channel. We believe our strong 2020 sales and profit outperformance in the channel to reflect our 26 million plus loyal consumers choosing to engage with SHU Carnival for their family footwear needs wherever and whenever they chose to over the past year. Throughout the year, we continue to rapidly progress our consumer engagement strategy to develop the leading digital, analytics, and customer relationship capabilities in our industry. Despite the pandemic, I'm pleased we surpassed our brand building strategic plans during the past year. By the fourth quarter, we have robust consumer data from our new customer relationship platform, which enable highly accretive customer segmentation and targeting capabilities. These new capabilities enable both profitable new customer acquisition initiatives and loyalty building programs once acquired. Our deep consumer understanding is rooted in our customers' omnichannel buying behavior. their position in 2021 and beyond to unlock significant consumer insights and growth opportunities with our strategic vendor partners. As I transition into my new role as CEO, I'm excited to work closely with Carl and our top strategic partners to create brand value from our deep consumer analytics and capabilities. In addition to providing the preferred consumer experience in the channel, Another key part of our strategy is to increase merchandise margins by reducing promotional intensity. The consumer data that we've been able to collect and analyze has enabled a sharp reduction in promotional intensity and the elimination of many low ROI customer promotions and marketing activities. We've pivoted away from a historical heavy reliance on BOGO half-off promotions during the chain for non-peak periods in 2020. Instead, use our customer relationship platform and analytics to segment and personalize compelling product offers. Eliminating promotional intensity resulted in an increased product margin, up over 300 basis points for Q4. We've been so encouraged by our consumer response to this strategy that we have accelerated our plans. For example, we eliminated all BOGO half-off promotions for the current quarter with continued encouraging consumer results and sales exceeding expectations. Our brand strategy has resulted in expanding and deepening our connections with our 26 million-plus loyalty members at the end of the fourth quarter. We added over 2 million new members for nearly 10% growth in consumers we directly reached year-over-year. For our gold consumer membership, the basket class of this group was approximately $70 for the year, generating over $15 more per order than non-numbers. We remain focused on growing our relationship with this segment of consumers and see robust growth opportunities with both our athletic and non-athletic strategic brand partners. Holiday-focused customer acquisition efforts also drove strong results. Consumers who are non-loyalty members grew sales in the teens for Q4, increasing the total year-to-mid single-digit sales growth. Our targeted digital marketing capabilities were key in acquiring these new customers and converting into record sales levels. Our strategy to rapidly accelerate our digital capabilities, and specifically our e-commerce strategic plans, far exceeded our 2020 expectations. For the full fiscal year, e-commerce sales grew over $110 million, or 175%. In fact, Shoot Carnival e-commerce sales grew triple-digit in every quarter during 2020. Product margin associated with e-commerce sales was up over 300 basis points compared to prior year in the quarter and over 150 basis points for the full year. E-commerce sales represented approximately 19% of company sales for 2020, compared to approximately 6% in the prior year. On the back end, we implemented a new warehouse management system and order management system to enable our long-term strategic growth plans and augment the e-commerce shift from store order fulfillment capabilities already in place. Moving on to our long-term brand development and consumer engagement strategy. With such robust consumer insights, analytics, and digital capabilities in hand, we're excited to announce a strategic plan to modernize our most profitable stores across the fleet. Our goal is to have approximately two-thirds of our store fleet modernized in the three to five years ahead. This will be achieved through a robust annual remodel plan relocations where we have strong customer opportunities in the market but underperforming real estate, and reigniting new store growth. We're currently finalizing our beta test mode on store experience and design enhancements and are very pleased with our consumer learning. We plan to move ahead rapidly with rollouts this year, assuming COVID-19 does not disrupt any development plans. As we have shared during the past year, we chose to take a conservative capital approach during the pandemic and will continue to do so in relation to new store growth for 2021. Our strategy is to continue to accelerate our store fleet for-wall profit contribution. In 2021, we plan not to renew approximately 10 leases on stores that do not drive long-term profit potential nor connect with our most valuable consumers. We anticipate opening one new store this year. While we are not providing 2022 store opening guidance at this time, our intent is to reignite store growth in the years ahead and to continue to rapidly accelerate e-commerce growth. Teams are mining the rich CRM insights in hand, and as highly profitable real estate opportunities open up in late 2022 and 2023, we plan to pursue store openings within existing operating states as a top strategic priority. Our disciplined capital management strategy resulted in closing the year in our strongest balance sheet position ever. At quarter end, the company had no debt and approximately $106 million in cash and cash equivalents. The strength of our balance sheet, coupled with our outstanding team and their dedication to executing our consumer-centric strategy, has allowed us to achieve our strongest Q4 operating results in what has been one of the most difficult periods for retail in modern history. Additionally, this healthy position enabled us to return increased shareholder value as our board directors approved a 56% increase in our dividend last week. Terry will discuss this and other financial updates in greater detail momentarily. In closing, I'd like to reiterate my gratitude to Cliff for his leadership and his partnership over the last three years. Further, I want to offer my heartfelt thanks to the entire SHU Carnival team for all their hard work over the last 12 months. 2020 brought about events that are hopefully once in a lifetime, and our team's ability to serve our loyal customers and come together as an organization was remarkable. Our strategic investments to build our brand, our unique consumer experience, our talented team, strong vendor partnerships, and our superior execution have been the cornerstone of our success and continue to be our focus ahead. I'll now turn it over to Carl Scivetta, Senior Executive Vice President, Chief Merchandising Officer, for an update on our product performance and inventory position. Thank you, Mark. I'm excited to join today's call and look forward to getting to know each of you more in my new role. Before I get into our performance during the quarter, I'd like to echo Mark's gratitude to Cliff. It has been a pleasure having an opportunity to work with Cliff over the past eight-plus years. His leadership has built a strong company with an outstanding culture that is positioned for growth. Over the past three years working closely with Mark, we've been able to grow synergies within our merchandising, marketing, and e-commerce teams. This enabled us to successfully navigate through the pandemic, maximizing sales and margin. This, along with our outstanding vendor relationships, has positioned Chew Carnival to continue to grow through both brick and mortar and e-commerce channels. Now turning to comparable store sales by department for the quarter, adult athletics continue to outperform. The category was up mid-teens overall, driven by strong growth in both women's and men's product categories, which were both up mid-teens for the quarter. We continue to deliver triple-digit athletic e-commerce comparable sales increases. Our leadership position in the marketplace enables us to continue to deliver the broad trend-ride assortments our customers are looking for. Sales in women's non-athletic categories were driven by comfort sports shoes as customers continued to work and quarantine at home. Sales in men's non-athletic categories were driven by boot sales. The increase was from both the work boot category as well as the casual hiking boot category, which were bought as people got tired of being confined in their homes and ventured out for exercise. Consistent with last quarter, dress shoes were down double digits, reflecting a more casual, active lifestyle, as many offices remained closed. Kids' comparable score sales were up mid-teens for the fourth quarter. Once schools in many markets returned to some form of in-class learning, we experienced strong sales in children's casuals and in the athletic categories. Kids non-athletic was up mid-teens, and kids athletic was up low-teens. We ended the quarter with inventory down 8% on a per store basis. The industry is currently experiencing major supply chain issues from the factories to the ports and from the ports to our DC. At Shoe Carnival, we have built an outstanding merchant team. Their experience with our company and their position in the marketplace with our vendors is second to none. We believe in the strength of this team and the fact that we did not furlough our buying staff has given us an advantage with the supply chain. We continue to work closely with our vendor partners to deliver fresh new product and replenish key categories and classifications. We are monitoring our supply chain very closely and reacting when needed. Our increased marketing and analytics capability have given us insights into the results of our promotional activity. We have eliminated most of the store-wide global promotions for fall 2020. This enabled us to drive sales and margin growth through targeted promotions while still providing our customers the value they have come to expect from Shoe Carnival. Our plan is to continue this strategy into 2021. I am confident that we have a powerful leadership team in place that will guide Shoe Carnival to great success ahead. Through our best-in-class merchandising, marketing, and store teams and our excellent vendor partnerships, we are confident in our ability to build on our success. With that, let me now turn the call over to Kerry Jackson to provide more insight into our financial performance for the fourth quarter and full year. Thank you, Carl. Before I take us through financials for the quarter, I would also like to express my gratitude to Cliff for his steady leadership. we would not be as fiscally sound as we are today without his guidance and commitment to driving results and improving margins. Under Cliff's leadership, we had an incredibly impressive year given such extenuating circumstances. We achieved record net sales of $253.9 million for the fiscal fourth quarter into January 30th, 2021. an increase of $14 million compared to the fourth quarter of last year. Of this increase in net sales, $16 million was attributable to an increase in comparable store sales, and $1 million was attributable to the four new stores open since the beginning of the fourth quarter of fiscal 2019. This was partially offset by a loss in sales of $3 million from the 14 stores closed and other non-comp sales over the same period. Comparable store sales increased 6.4% for the quarter on top of a 3.2% comparable store sales increase in the fourth quarter of fiscal 2019. Our e-commerce business sustained its triple-digit growth and represented more than 19% of fiscal fourth quarter sales. As Mark mentioned, Our brick-and-mortar store sales were negatively impacted by customer concern related to COVID-19 and holiday sale crowds. Our gross profit margin for the quarter was 30.8% compared to 29.1% in the fourth quarter of last year. Our merchandise margin increased 160 basis points while buying, distribution, and occupancy expense was nearly flat as a percentage of sales. The increase in the merchandise margin was primarily due to lower promotional activity during the quarter but was partially offset by higher shipping costs associated with the increase in e-commerce sales. SG&A expenses increased $2.5 million in the fourth quarter of fiscal 2020 to $67.6 million. As a percentage of net sales, These expenses were leveraged at 26.6% compared to 27.1% in the fourth quarter of fiscal 2019. The increase in SG&A expenses was primarily attributable to costs supporting increased e-commerce sales. The effective income tax rate for both the fourth quarter of fiscal 2020 and 2019 was 28.8%. For the full year of 2020, The effective income tax rate was 25.8% compared to 21.6% in the full year of 2019. The tax rate in 2019 contains a one-time benefit of approximately $1.9 million or 13 cents per diluted share associated with vesting multiple equity-based compensation awards. Net income for the fourth quarter was $7.4 million compared to net income of $3.5 million last year. Earnings per diluted share for the fourth quarter increased by $0.28 to $0.52 per diluted share. Now turning to information affecting cash flow. Depreciation and amortization expense was $4.1 million in the fiscal fourth quarter compared to $4.3 million in the fourth quarter of fiscal 2019. Depreciation expense for the full year was $16.1 million compared to $17.0 million for the full year 2019. Capital expenditures for fiscal 2020 were $12.4 million with approximately $5.9 million used for new stores, relocation, and remodels. In fiscal 2021, we expect to spend $23 to $25 million on capital expenditures with a principal focus on the remodeling efforts Mark spoke about. As Mark mentioned, we continue to work closely with our vendor partners to strategically manage our inventory given current supply chain constraints. As a result, we ended the quarter with inventory of $233.3 million, which is down $26.2 million compared to the prior year, or 8.0% on a per-store basis. As of January 30, 2021, we had no outstanding debt in cash equivalents of $106.5 million. Our borrowing capacity was $98 million at the end of the quarter. Free cash flow was $61 million in the quarter, driven primarily by the reduction in inventory. Due to volatility this year, no shares were repurchased in fiscal 2020. As of January 30, 2021, $50 million was available for future repurchase under our board-authorized share repurchase program. The company plans to resume the repurchase of shares under the repurchase program in fiscal 2021 under the assumption that general economic conditions will stabilize and the pandemic will have significantly less impact on the company's performance and operations. The company paid $5.1 million cash dividends during the fiscal year 2020. The company announced last week that our board of directors has approved a 56% increase in the quarterly cash dividend. The quarterly cash dividend of $0.14 per share will be paid on April 19, 2021 to shareholders of record as of the close of business on April 5, 2021. Given the continued uncertainty around COVID-19 and its impact on consumer spending behaviors and recent supply chain disruptions, we are not introducing annual guidance at this time. That being said, we are providing our initial view of first fiscal quarter for 2021. The delay in tax refunds, along with severe weather throughout most of the country, led to a difficult sales month in February. However, in early March, when our customers began receiving their tax refunds and stimulus payments, our sales trends rapidly shifted, increasing to record-setting levels. Based on quarter-to-date results, we are currently anticipating a record first quarter in both sales and earnings. If we continue to see positive sales trends the remainder of the quarter, sales for Q1 are expected to be a minimum of $273 million with diluted EPS of at least $1.40. This is a 54% increase over the $0.91 earned in Q1 of 2019. While the rebound in March sales has been strong and concentrated, the month-to-month variability in customer spending we have experienced during the quarter has made predicting the duration of this recent sales intensity difficult. My final comments today are about the transitions happening at Shoe Carnival. Cliff opened the call by saying the company is embarking on a new and exciting chapter. I share Cliff's enthusiasm for the future. While Shoe Carnival would not be what it is today without the contributions by Cliff and Tim, they have both planned for this transition by putting in place talented individuals that they can seamlessly pass the baton to. Our management team is strong and prepared for the future. This concludes our financial review. Now I'd like to open the call for questions.

Ladies and gentlemen, to queue for a question, you will need to press star 1 on your telephone keypad. Again, that's star 1. Please stand by while we compile the Q&A roster. Our first question comes from Mitch Comments with Pivotal Research. Your line is open.