Shoe Carnival, Inc.

Good morning and welcome to SHU Carnival Inc. Fiscal Year 2023 First Quarter Earnings 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 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'll now turn the conference over to Mr. Mark Warden, President and CEO of Shoe Carnival, for opening remarks. Mr. Warden, you may begin.

Good morning, everyone. Thank you for joining us today for Shoe Carnival's first quarter 2023 earnings conference call. Joining me on today's call are Carl Scibetta, Chief Merchandising Officer, and Eric Ast, our new Chief Financial Officer. Eric joined the company a few weeks ago, and we are excited to have him on the team and to engage with the investment community ahead. Let me start out today saying that Q1 was a challenging quarter. While we continued to make significant progress against our long-term strategies and achieved many important milestones, we saw softer-than-expected consumer trends develop in March and April, and unseasonable weather persists throughout the quarter end. The biggest headwinds that our customer faced in Q1 were persistent inflation across everyday expenses they need to spend on, interest rates continuing to climb, and unexpectedly, federal tax refunds ended the quarter with a nearly 10% reduction versus the prior year. Historically, our traffic and sales surge when our customer receives their annual tax refund. This year, the reduced tax refund amounts did not generate traffic levels a prior year. These headwinds resulted in store traffic declining approximately 10% versus prior year. What we saw was a segment of customers from lower-income households who had stretched disposable income. They delayed their shopping trips for footwear, apparel, and accessories. Furthermore, Spring weather did not improve in the second half of the quarter as unseasonably cold, wet conditions persisted across most of our markets. This resulted in a sandal season that did not meaningfully start during March or April. All combined, Q1 sales and earnings finished at the low end of our annual expectations. We see a pathway to deliver the low end of our original annual guidance if economic conditions improve this summer. However, we do not have clear visibility to when the economic landscape will turn positive. As such, we are reducing our annual sales and our profit guidance to reflect the short-term economic uncertainty. Eric will review the updated guidance shortly. Despite the challenging economic backdrop, I'm incredibly thankful for our nearly 6,000 team members' commitment to delivering the preferred footwear shopping experience. Their focus on advancing our long-term strategies led to many wins and has us in a strong financial and operational position to accelerate profitable growth as soon as we have visibility to the economic landscape improvement. I will now provide an overview of the company's key strategic progress and results of the quarter. First, the achievement I'm most energized about is how fast we grew our loyal customer base this quarter. Customer memberships surged to a record $32.7 million at quarter end, growth of 12% versus the prior year. This is the fastest expansion of members in any quarter over the last three years. Although a segment of customers are currently not in a strong buying position, they're still engaging actively with retailers they love and making decisions on where they will shop for footwear when economic conditions improve. Simply put, more and more customers every day are picking us. Our CRM platform has now reached a meaningful scale and has advanced capabilities to engage with the American footwear shoppers wherever and whenever they choose. We now engage ongoing with approximately one out of every eight American adults, up nearly 65% from just five years ago. Our commitment to providing this group the preferred family footwear shopping experience has customers rapidly choosing to become With its large-scale customer reach, 70% of our sales now come from our loyalty members at a very efficient cost to engage. We continue to see this a core advantage of our company and are confident we will keep growing our customer base this year and in the years ahead. Second, we continue to deliver gross profit margins of over 35% for the ninth consecutive quarter. Over the last few years, we've sustainably transformed our margins from among the lowest tier in our industry to the top tier. We've done so by leveraging our deep customer relationship management capabilities and analytics to engage profitably with our customers, to provide the freshest in-demand products they want at the right value, and to deliver the customer the preferred shopping experience. As a benchmark, the 35% gross profit achieved this quarter is growth of over 500 basis points from just four years ago. Our customer sales conversion climbed this quarter to the highest level in nearly two years. The customer that is ready to make a footwear shopping trip into the challenging economy is finding the brand and shopping experience they love at shoe carnival and shoe station stores. Our compelling assortments at the right value for our target customers generated not only strong margins and conversion growth, but resulted in yet another quarter of market share growth for our company. Given the current economic landscape, we have prioritized reducing our inventory levels, sustaining healthy margins, and building an even stronger financial position for future growth, while also providing our customers the freshest products for the remainder of 2023. Progress is encouraging on all fronts and Carl and Eric will elaborate more shortly. But here are the headlines. We ended 2022 with inventory up $105 million versus the prior year, with plans in place with our vendor partners to right-size this level rapidly during 2023. I'm so pleased with the progress made already, as we ended Q1 with approximately $45 million more inventory versus prior year, chipping away about $60 million during the quarter. Importantly, we are not reducing inventory levels by dumping product in the market nor drastically eroding margins. The hard work on this inventory reduction topic is complete. Receipts and inventory flows are updated. We continue to have our inventory fresh with no material age inventory concerns. I can share we remain confidently on track for inventory to be below prior year levels after back to school and on track to deliver our annual guidance to be approximately $40 million below prior year inventory by year end. Our merchant team has done an excellent job managing the balance of freshness, margin delivery, and inventory levels, as always, demonstrating they, along with our partners, are best in class. Carl will elaborate on inventory in a moment. Our athletic inventory position has also materially improved versus last year. As you will recall, vendor supply chain issues disrupted our on-hand inventory for Back to School 2022, and we disappointed some of our athletic shoppers last year. This year, we have the athletic brand assortment, depth, and freshness in hand that we did not have last year. While I'm not saying the customer economic issues driving soft traffic will be solved in Q2, I do see we are in a position to continue to grab athletic market share this year, convert at very high levels, and maintain our healthy gross profits in this declining market environment we face. Our store development plans continue to advance with success. The Shoe Carnival fleet modernization continues to roll out rapidly, and it's on track for approximately 60% of the chain to be completed fiscal end. We see this as a key contributor to our sales conversion growing and a differentiator to our customers who are rewarding us with continued market share growth. New Shoe Station store growth continues to deliver on our expectations. One of our big wins has been the market entry into Birmingham, Alabama, grand opening two stores over the past six months. These stores are pacing to be among the strongest in the Shoe Station fleet and in the top tier of stores across the entire corporation. We're seeing great success as we bring our new Shoe Station prototype store to customers in adjacent markets. These expansion wins give us confidence to advance methodically on our roadmap to reach 100 stores for Shoe Station and over 500 stores for the corporation in 2028. We are seeing our Shoe Station banner show positive signs over the past weeks. With Shoe Station's more affluent customer base, the addition to our CRM platform, and the launch of the online platform, Shoe Station is outperforming the overall company. Sales for quarter one declined single digits. compared to SHU Carnival, low double-digit. However, over the past few weeks, the SHU station banner is building momentum and growing mid to high signals. We continue to see SHU stations capable of growing in the quarters ahead, despite the economic headwinds discussed. The bottom line for the quarter is that customer traffic was disappointing due to unfavorable near-term macro conditions and unseasonable weather. Yet, our foundations grew stronger than ever. Customer growth accelerated to a record level. Gross margins sustained at very high levels. Customer conversions surged on fresh product, great value, and experiences. Inventory levels are rapidly progressing in line, and athletic positions are where we want for back-to-school season ahead. We're focused on executing our winning strategic plans on the path to become a multi-billion dollar retailer in 2028 and providing our shareholders with the top-tier returns in our sector. I am confident in the American consumer resilience and in our economy returning to health ahead. When it does, we are ready to rapidly accelerate growth. I would now like to ask Carl to provide further color on the quarter and year ahead.

Carl? Thank you, Mark. As highlighted, today's first quarter performance was below our expectations. Persistent inflation and the large reduction in tax refunds were major factors that affected Q1. cool weather we called out in March continued the remainder of the quarter. We anticipated that the weather will have normalized the back half of the quarter, but unfortunately that never materialized. As a result, sales in the seasonal categories did not hit expectations and contributed to the shortfall. With that said, we continue to focus on driving our strategic objectives, which include connecting with our consumers using our CRM program to maximize sales reducing our inventory throughout the year, and continuing to deliver our transformational product margin. Five categories, first quarter comp sales and women's non-athletic footwear were down low double digits, with dress and boots being down over 20%. Sales in women's sandals were negatively affected by the late arrival of spring, and comp sales were down high teens in the category. Sport and casuals were the bright spot. with sport down low single digit, casuals increased mid single digits. Men's non-athletic comps were also down low double digits with casuals down mid singles. Men's dress was down low double digits and boots down high teens. Children's comp sales were down high singles with non-athletic flat and athletic down low teens. Comp sales in adult athletic football were down low teens. Due to the late start of new seasonal selling and enhanced promotional activity in the marketplace, merchandise margins were down, however, remained up 750 basis points over pre-pandemic levers. This further demonstrates the transformation of our promotional strategy. Our outstanding team of merchants continues to collaborate closely with our vendor partners, ensuring the appropriate flow of products to our stores. Our best-in-class vendor relationships are enabling us to adjust to the consumer demand. The result will see inventories reducing as we move through the year. We entered first quarter with inventory up 36.9% versus the previous year. First quarter ending inventory was up 13% versus 2022. We expect as we end third quarter, inventory levels will be below 2022 levels and we anticipate we will finish the year at the previously stated level, approximately $40 billion below fiscal 2022 ending inventory. Currently, our inventory content is clean, and we still see no reason to aggressively promote distressed inventory to achieve our goals. As we move into the back-to-school timeframe, we will be in a much better inventory position versus 2022 with the most desirable key athletic brands. This will position us to maximize the sales opportunity during this critical selling season. Diligently managing our inventory flow will ensure our stores are stocked with the most desired product offerings that are time appropriate as we move through the second quarter in the balance of fiscal 2023. This reduction will further support our store modernization as well as our aggressive store growth plans. Our best-in-class CRM program continues to drive loyal customer growth. We have seen success engaging with our loyal consumers with targeted offers. This program continues to drive sales and plays a key role in maximizing margins while reducing inventory levels. Using this data enables us to communicate to our over 30 million, 32 million consumers and continues to maximize sales opportunities without reducing margins below expectations. With that, I will turn the call in to Eric for a review of our financials. Eric.

Thank you, Carl. Good morning, everyone. First, I joined SHU Carnival in late April, and I'm appreciative of the collective team and how they have supported me in the transition from Kerry Jackson, the previous CFO. Kerry, as you know, is 35 years and recently retired. I am looking forward to continuing the good work he started and working with the team at SHU Carnival. Having worked over 30 years with most of that time in retail, I look forward to sharing experiences and collaborating with the SHU Carnival team. The company has long-term plans to grow to over 500 stores and become a multi-billion dollar retailer in 2028, and I am excited to be a part of it. Now, moving to the financial results. In my remarks, I will compare our first quarter results with the first quarter of 20,022 noting comparison to 2019 if needed for context. Starting with revenues, our net sales in Q1 were $281.2 million. This is down 11.4% on a comp decline of 11.9% versus prior year. To offer some perspective, while representing a larger than expected decline, the sales were the third highest first quarter in company history. The comp decline was driven by a approximately 10% reduction in traffic. Our consumers are being negatively impacted by inflation and lower tax refunds. Lack of normal seasonal weather shifts driven by cooler weather patterns was also a contributing negative factor, resulting in spring seasonal product down by over 20% the prior year. Shoe station banner sales came in at a mid-single-digit decline versus shoe station banner sales at a low double-digit decline. Q1 gross profit margin was 35%, reflecting the ninth consecutive quarter at or exceeding 35%. The margin reflects continued advancement in our CRM capabilities, resulting in high customer conversion and increased loyalty members, as Mark discussed. The gross margin represents an increase of over 500 basis points compared to pre-CRM implementation and pre-pandemic in 2019. Compared to prior year, merchandise margins decreased 30 basis points, reflecting our promotional intensity. Buying, distribution, and occupancy costs declined, however, were deleveraging by 20 basis points as a result of the sales declines. the buying distribution and occupancy expense reductions were primarily the result of the absence of the high distribution cost experienced in the prior year with a return to more normal levels this year. Test G&A expense in Q1 was $77.6 million. While essentially flat in cost to the prior year, was deleveraging to 27.6% as a result of the sales decline. Overall SG&A expenses were under plan with increases in depreciation associated with our store modernization program and healthier costs offset by reduced selling costs when compared to the prior year. Q1 operating income was 20.9 million or 7.4% of sales. This is at the low end of our expectations. Net income for the first quarter of 2023 was $16.5 million, or $0.60 in diluted earnings per share. Although this was our third highest Q1 diluted EPS, with only 2022 and 2021 being higher, this was at the low end of our expectations. We closed out the quarter with inventory of $389 million, which was up approximately $45 million compared to the prior year, or 12.3% on a per store basis. The increased inventory reflects an improved athletic merchandise assortment for back to school shopping this year. And the increase of 45 million compares to 105 million higher than the prior year just three months ago. After back to school shopping, we do expect inventory to be lower than last year and be approximately 40 million lower by year end 2023 compared to year end 2022. we continue to have ample liquidity to fund our growth initiatives. At the end of Q1, we had total cash, cash equivalents, and marketable securities of $44 million and no outstanding debt. As of the end of 2022, the company has maintained no debt for the 18th consecutive year and continued funding its operations without debt through the first quarter. During the quarter, there were no share repurchases. We currently have the full amount of $50 million available for the share repurchase program. Given the Q1 results driven by traffic declines and consumer trends, we now are updating our sales guidance for fiscal 2023 to down 3 to down 6% compared to the prior range of down 2 to up 2. We are expecting gross profit margin to be between 36 and 37%. versus prior guidance of approximately 37%. For the year, including the extra week, we are lowering our diluted EPS guidance to 360 to 385 from previous expectations of 396 to 420. In closing, allow me to share some initial observations about the company. There are headwinds upon the industry. We highlighted them. Macroeconomic conditions. promotional intensity, and higher inventory. However, I am encouraged about the company. We have no debt. We are producing product and gross margins that are up meaningfully in a transformative way versus pre-pandemic periods. Plans are underway to reduce the inventory and are being implemented as evidenced by the current quarter reduction. The business has solid financial fundamentals. to build and grow upon that can outlast an economic downturn. There is an ample growth opportunity for the business. I am glad I am here and look forward to working with the team and all of you. This does conclude our financial review. Now I would like to open the call up for questions.

Thank you. If you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. One moment, please, for your first question. Your first question comes from the line of Mitch Cummets with Seaport Research. Please go ahead.

Yes, thanks for taking my questions, and I'd like to welcome Eric. Let me start with the guide. Can you update us on SG&A? and either operating margin or EBIT for the year. There was nothing in the release, and I didn't hear anything in your comments, but I think you previously had given guidance on those line items.

Sure, Mitch, and thank you for that kind welcome. SD&A, as you know, in our previous guidance, we pulled out approximately 25.6%. As we look through the balance of the year, We continue to look for cost management. And as we look through operating income, you can see that our EPS does reflect that continued management. So the guidance that we would give is that our percentages are going to be consistent with what we've provided in the original guidance. There will be some increased basis point changes, possibly in the range of 30 to 50 basis points. Regarding operating income, we've talked about the original guidance at 11.4%. Really, we're looking at a range of there is going to be some impact to the operating income in the range of 40 to 100 basis points as a result of the sales decline.

Got it. All right. Thanks for that. And then just looking at the revised sales guidance, obviously it came down for the year, but it looks like at least I can kind of back into growth that's sort of flat to maybe upload single digits over the balance of the year on a year-over-year basis, which is obviously better than what you achieved in the quarter. Can you just elaborate on why that is, that just, you know, that we're past tax refunds, you expect the weather to be more normal? I'm just kind of curious your assumptions around the consumer to kind of get to those numbers. And also, if there's any color you can kind of provide by quarter, I would guess that you're maybe most optimistic around 3Q, just given what you said around back-to-school and better athletic inventory. But maybe some more color there would be helpful.

Hey, Mitch. It's Mark. Thanks for joining today. Yeah, you got it right with those key elements. We see back-to-school being so... significantly improved versus last year. As I shared on the call, our athletic inventory positions, it's in hand, it's fresh, and it's far superior to the supply chain disrupted back to school we had last year. We think it's going to come in Q3, Mitch. We're still seeing the macro headwinds in Q2. But we believe our Q3 position is ready to go for back to school. and then moderate as the year continues on, as inflation continues to get more and more in control. I think the second thing you talked about that is encouraging, and I talked briefly about it, as the weather has turned, our shoe station business getting some good momentum, along with the new stores. At shoe station, the .com going live, CRM going live. Yeah, we're growing. nicely as we progress into this Q2. And we see that continuing to accelerate as the year goes on. So we're really highlighting that. We think shoe carnivals, segment of customers that are really hit by the inflation, it's that small segment under a third of our customers. That's the variability that we're just not sure yet when that customer is going to be healthier, which quarter that's going to turn. Soon as it does, we're in great shape to start accelerating growth.

Got it. And then, Carl, on sandals, I know they were challenged in the quarter. I believe that Q2 is by far your largest sandal quarter. What are you thinking there? Do you think there's pent-up demand for the category? And how do you feel about your sandal inventory and your ability to kind of work through that in Q2?

Sure, Mitch. Thanks. We do believe I already see some movement on sandal business as we have consistent warm weather that has hit a part of most of the Midwest. So we're encouraged by some very recent sandal business and shoe carnival business, shoe station business. It actually started a bit earlier, pretty much, I believe, based on the geographics of that business and a higher income consumer that tends to shop earlier. In regards to the inventory, we have made the necessary adjustments as we move forward with our position on sandals based on reported results. And we anticipate ending the season in a better inventory, more reduced inventory position than we did last year. So we're confident we've got that business under control.

All right, thanks. I'll just get back in the queue.

once again ladies and gentlemen if you have a question it is star one and there are no further questions at this time i will turn the call back to oh sorry we do have a follow-up from mitch comments please go ahead okay i thought there'd be other people um

So I guess my other question, or one of my other questions, was just on the BOGOs. You talked about the gross margin obviously was down year over year, but still way up from four years ago, particularly on the merge margin side. I am curious, you guys still do BOGOs, but you do them very differently than before. Is there any way you can comment on the margin of the BOGOs? Is there any way you can kind of isolate that and talk about how that's different from what it was four years ago?

Sure. I'll take that. Any BOGO promotion that we run, and we only do it a couple times a year, a seasonal product that we have purchased at a very advantageous price. So they're planned in on selected items, and the margin on them during BOGO actually is in line with the total company margin. And in fact, in some cases, it's margin accretion. So they're limited time very targeted product and merchandise that was bought for that intent.

And so how does that compare from like four years ago when it was more of an all-store BOGO? I assume that those margins were dilutive to the total, but I mean, have you seen like within kind of the BOGO piece, I mean, is like the margin, you know, a thousand bits better than it was four years ago, or is there any way you can, again, sort of isolate how much that's improved and how much of that's kind of a story for the overall margin expansion of the business?

Sure, Mitch. That is definitely the story. The BOGOs that we used to run included the entire inventory. They weren't targeted, and the margin was, you pretty much set out about 1,000 basis points dilutive to the margin we run today on the very selected BOGO products. So that is a major factor in the transition. we've been producing.

Got it. And maybe one last for me. Just on back to school and athletic, can you, Carl, can you speak to how much better the athletic inventory is versus last year? I don't know if you can kind of speak to it in percentage terms. And then just remind us of the athletic comparison that you're going up against for back to school. I assume it's a pretty easy comp.

Yes, it is. The athletic inventory, we go back historically. We looked at last year. Our athletic inventory was really hampered by supply chain. We received quite a few delays with product change, actually, late August into September and really missed the back-to-school time frame. In addition to that, we... We had many products that we purchased that, frankly, we never got. So from an athletic standpoint, I see a major improvement also in products, but in the quality of the brands and the quality of the products we have. We anticipate our athletic inventory as we go into the back-to-school timeframe being up in the teens. But it's really that and the quality of the inventory that we have and the timing of the delivery of that inventory. Actually ending July in the mid-teens, and as we move through the early part of August, around 20%.

And if I can go on that.

Yeah, Mitch, I'll give you one point. So if you looked at comps last year, To remind you, Q2 was down 13.8%, and it was really driven by between 15% and 20% declines in comp in June and July during that period where our supply chain was really disrupted. So we see that as an opportunity with this great position Carl talked about to claw back, gain market share, and have a much more solid Q2 than we did last year.

Okay. And then... And then I guess maybe one last one for me. Just on the loyalty, Mark, I know that Shoe Station is now plugged into Shoe Perks and has access to all of those loyalty members. What have you seen there? Have you seen some of those customers buying product from Shoe Station, especially maybe some brands and some price points that they didn't have access to in the Shoe Carnival stores? We do.

We see we've got almost 2 million people already have joined Shoe Perks. on the shoe station side, I would see a great opportunity to grow that rapidly. We're just starting now to engage with them. And we are, we're seeing them buy purchases in different price tiers now that they can cross shop. We're seeing them engage with different categories that they haven't had before. And importantly, we're seeing the direction to where the shoe carnival shoe perks members are also being introduced to new products from the new brand, too, that aren't offered. This is a big opportunity for cross-introducing over the quarters ahead and really fueling growth.

All right. Thanks, guys. Good luck. Thank you, Mitch.

There are no further questions at this time. I will turn the call back to Mr. Mark Worden.

Thank you all for joining us for today's call, and thank you for bearing with our technology struggles there for a moment. We look forward to talking to you all again as we get into the back-to-school season and have Q2 to report.

This concludes today's conference call. Thank you for joining us. You may now disconnect your line.