Shoe Station Group, 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.