Shoe Station Group, Inc.

Good morning and welcome to SHU Carnival's third quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Today's conference call is being recorded. and is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. Management's remarks today 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, including in the company's SEC filings and today's earning 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 will now turn the call over to Mr. Mark Worden, President and CEO of SHU Carnival, for opening remarks. Mr. Worden, you may begin.

Good morning, everyone, and thank you for joining us today. With me are Kerry Jackson, our Chief Financial Officer, and Tanya Gordon, our Chief Merchandising Officer. This is a pivotal moment for our company. Last week, we announced that our Board of Directors unanimously approved changing our corporate name to Shoe Station Group Incorporated, subject to approval of the name change by our shareholders at our annual meeting to be held in June 2026. That decision reflects our board's conviction about where this company is headed. We're building a stronger, more focused, and more profitable company. Today, I'll walk you through our third quarter performance, update you on where we are in executing the strategy, and provide context for fiscal 2026 and 2027. Let's start with the quarter. We delivered a strong third quarter. EPS at 53 cents, and net sales of $297.2 million, both exceeded consensus expectations. Gross profit margin expanded 160 basis points to 37.6%, driven by disciplined pricing and our continued shift toward the higher income shoe station customer. We achieved positive comparable sales during August back to school with margin expansion, That's significant given the promotional intensity across family footwear retail and the continued pressure on lower-income households. Athletics represented 51% of total sales in the quarter and delivered low single-digit growth overall. At Shoestation specifically, our focus on premium brands and higher transaction values drove double-digit athletic growth in both Q3 and year-to-date. Our non-athletic categories represented 43% of Q3 total sales with a mid-single-digit comp decline overall. Similar to prior quarters, SHU Station outperformed in every major category versus SHU Carnival. The story beneath these numbers is what matters most. Our two banners delivered very different results in the third quarter. SHU Station net sales grew 5.3%. SHU Station product margins expanded 260 basis points. Meanwhile, SHU Carnival net sales declined 5.2%, reflecting continued pressure on lower income households earning under $40,000 annually. That's a 10.5 percentage point performance gap between our two banners. This divergence isn't new. We've been discussing it for quarters. What's different now is the scale of the gap and our conviction that it will persist. Shoe Station's core customer, median household income $60,000 to $100,000, is choosing premium product, seeking elevated service, and responding to our brand positioning. The traditional shoe carnival customer is under economic pressure. and the competitive response in that segment is driving margins down across the industry. This quarter, we maintained pricing discipline instead of propping up traffic from a lower income customer, a segment we are strategically shifting away from. As a result, Carnival also expanded product margins. We're not chasing unprofitable sales. Third quarter EPS included a 22 cent impact from planned rebanner investments. Year to date, that's 58 cents per share. These are planned investments to convert underperforming locations into the SHU station format that's demonstrably winning. We expect to recover these investments within two to three years following each store's conversion. Let me give you the numbers on our progress. We completed 101 store rebanners during fiscal 2025. We now operate 428 stores, 144 SHU station locations, and 284 SHU carnival locations. This evolution started with test and learn, moved to scaling across the southeast, and is now a full chain rollout. We acquired SHU station in December 2021 with 21 stores. We started this fiscal year with station representing just 10% of our fleet. Today, Station is 34% of the total store fleet. By back to school 2026, it will be 51%. That 51% threshold is the inflection point. When SHU Station becomes the majority of this business, and we expect to return to comparable sales growth. Based on what we have learned through 101 store conversions this year, we now expect that well over 90% of our fleet will operate as shoe station before the end of fiscal 2028. The remaining locations will be evaluated for rebannering, outlet repositioning, or closure. Why consolidate to one brand? Running two distinct banners with different customer targets, different merchandising strategies, and different operating models is inefficient. Every quarter this year, the sales performance gap between SHU Station and SHU Carnival has exceeded 10 percentage points. We're leaving value on the table by maintaining dual infrastructure when one banner is clearly winning. What makes SHU Station different comes down to three things. The customer. Station serves the American median income household, 60,000 to 100,000 dollars. Fable, everyday workers, value conscious, but not price driven. Carnival serves a value focused customer facing economic pressure. The product approach. Station offers premium brand access, higher transaction values, and strong full price selling. Carnival focuses on opening price points and a promotional model. The experiences. Station is modern and approachable, low-profile merchandising, easy to shop, service-oriented. Carnival is high-energy, treasure-hunt promotional intensity. Both models work for their customers, but consumer preferences are shifting toward best brands, premium products, and quality over lowest price. That's the shoe station customer. Consolidating to one brand creates significant structural advantages. By the end of fiscal 2027, we expect $20 million in annual cost savings and operating efficiencies. We expect comparable sales growth to resume as Shoe Station becomes the dominant founder. And we're executing this on a foundation of financial strength. We're debt-free with over $100 million in cash and securities. funding this entire program from operating cash flow, just as we've funded operations and growth for 20 consecutive years. We're building one team, one infrastructure, one P&O. Now, turning to inventory and the value we're unlocking. We bought heavy this year to de-risk tariff volatility. It worked. We delivered positive comps during back to school. We're fully loaded for fall, holiday, and spring. Now we plan to sell through this extra tariff-related inventory and move to the next phase. By the end of fiscal 2027, we'll free up $100 million in working capital. This isn't about cutting corners. It's a fundamentally different operating model. Shoe Station unlocks this capital through superior merchandising. Station presents product clearly, curated, organized, easy to browse and shop. Station generates higher transaction values, which means we need fewer units to deliver strong sales performance. The Carnival model is stack it high and let it fly, requiring deep inventory to maintain towering displays and promotional volume. ChewStation delivers a superior customer experience with less inventory per store. Better merchandising drives better terms, better margins, and capital efficiency. That's $100 million we plan to deploy toward growth. Let me walk you through what's ahead in the key milestones. Fiscal 2026 is our inflection year. We're converting 70 stores to reach the critical 51% SHU station threshold by back to school. That's the milestone when station becomes the majority of this business and the dominant driver of our results. First half of 2026, we'll see similar dynamics to 2025 as we work through rebounder conversions. Second half, we cross 51% and expect to return to comparable sales growth. This requires P&L investment in fiscal 2026. One-brand synergies begin, but the full benefit comes toward the end of fiscal 2027. The end of fiscal 2027 is when the full picture comes together. We expect $20 million in cost savings, $100 million freed from inventory reduction, comparable sales growth restored, and EPS expanding. Bottom line, we're investing through 2025, all of 2026, and into 2027. We see modest gains beginning in 2027 and meaningful acceleration in 2028. Kerry will give you more specifics on fiscal 2026 and 2027. Let me bring this together. The performance gap tells the story. Shoe Station outperformed Shoe Carnival by more than 10 percentage points this quarter. Station margins expanded 260 basis points. The industry is declining, but we're growing where the consumer is headed. Premium brands, better experience, customers who value quality. We're executing this from a position of strength. debt-free, over $100 million in cash and securities, 20 consecutive years of self-funding our growth. We have the financial flexibility to invest through this transformation and build for the long term. When our board approved changing the corporate name to Shoe Station Group, it wasn't about branding. It was about conviction. Conviction that this strategy is right for long-term value creation and building a stronger company. This isn't a rebrand, it's a repositioning of this entire company around what's winning. I'll now turn the call over to Kerry for the detailed financials, our fiscal 2025 outlook, and perspective on 26 and 2027. After Kerry's remarks, I'll have brief closing comments before we open for questions. Kerry?

Thank you, Mark, and good morning, everyone. Let me start with the quarter performance then walk you through our outlook and the financial framework for fiscal 2026 and 2027. Net sales totaled 297.2 million, down 3.2%, versus 306.9 million last year. Comparable store sales declined 2.7%, including approximately a half a percentage point of headwind from the 56 stores re-bannered during the quarter. The banner divergence Mark described is the critical story. Shoe Station net sales grew 5.3% with mid-single-digit comparable sales growth. Shoe Carnival net sales declined 5.2% with mid-single-digit comparable sales decline. Rogan's generated 21 million in net sales, consistent with our integration plan. Three category highlights worth noting. First, men's and women's athletics, 35% of our business, delivered break-even comps overall, but SHU Station's athletic business grew high teens. Second, kids footwear, 22% of Q3 sales, delivered low double-digit athletic growth at Station. Overall for the company, kids was down low singles for the quarter due to weakness in kids' non-athletic footwear. Third, the boot season started modestly, but we were well positioned with inventory depth as we move into the heart of the season. Rounding out the categories, men's and women's non-athletic categories both declined mid-single digits compared to Q3 last year. Athletics across our men's, women's, and kids' categories was 51% of our business in the quarter, up from 49% in Q3 last year and was key to our overall comp positive results in back-to-school August. Shoe Station's athletic sales have strong comparable store growth every quarter this year as our premium brands continue to resonate with higher-income consumers that the Shoe Station banner attracts. Non-athletics was 43% of our total sales in Q3, down 1% from last year, again reflecting the strong athletic cycle we were in. Gross profit margin expanded 160 basis points to 37.6%, exceeding the high end of our guidance. Merchandise margins increased 190 basis points, driven by discipline pricing, favorable mix shift towards SHU stations' higher income consumers, and our strategic inventory investments. This more than offset 30 basis points of deleverage in our buying, distribution, and occupancy costs. SG&A was 93.2 million, or 31.3% of sales, compared to 85.9 million, or 28% of sales last year. The 3.3 percentage point increase breaks down as follows. 2.5 points reflects banner reinvestments, including store closing costs, new store construction depreciation, and customer acquisition costs. The remaining 0.8 points is the deleveraging on lower sales. The rebanner P&L investment in Q3 was approximately $8 million. Year to date, we've invested 20 million in operating income, or 58 cents per share, towards this transformation. Net income for Q3 was 14.6 million, or 53 cents per diluted share, compared to 19.2 million or $0.70 per share last year. This year-over-year decrease of $0.17 primarily reflects our rebanner investments, which we estimate impacted Q3 by $0.22 per share. In the quarter, our EPS otherwise grew by $0.05. The two- to three-year payback of these rebanner investments we've consistently discussed remains on track. Shoe Station's net sales were up 3.8% year-to-date compared to Shoe Carnival's net sales down 8.5%. Said differently, year-to-date through Q3, Shoe Station's net sales growth has outperformed Shoe Carnival by 12.3 percentage points. These results support the one-banner strategy timeline Mark just outlined. and our view of the long-term profit potential from doing so. Our balance sheet continues to strengthen. We ended the quarter with over $107 million in cash equivalents and marketable securities, up 18.2% versus last year, and we remain debt-free with $100 million of available credit. Based on strong Q3 results and continued rebanner momentum, We updated our full year outlook. We are reaffirming our net sales guidance and continue to expect net sales of 1.12 billion to 1.15 billion. We are raising the EPS guidance range to $1.80 to $2.10, increasing the low end by 10 cents. We continue to expect gross profit margins of 36.5% to 37.5% and now expect SG&A in the range of $350 million to $355 million, down $5 million from previous guidance. For Q4 specifically, we are forecasting net sales of $240 million to $270 million, ranging from down 7% to up 2% compared to Q4 last year, with a midpoint down 3%, consistent with Q3 trends. Our Q4 net sales range is wider than typical given macroeconomic volatility, consumer behavior in non-event periods, and fourth quarter weather uncertainty. We expect Q4 EPS in a range consistent with consensus prior to our earnings release in a range of 25 to 30 cents. Q4 EPS in that range targets full-year EPS at the lower end of our annual outlook. The higher end of our outlook assumes stronger holiday selling and improvement in lower income consumer spending. Regarding our one banner strategy, we've re-bannered 101 stores in fiscal 2025, including 56 in Q3 and one additional store after quarter end. We anticipate no further re-banners this year. The Rogan's acquisition is now fully integrated in SHU Station. and beginning in Q4, we'll report Logan's results as a part of the SHU Station banner. Year-to-date rebanner CapEx is approximately $31 million, with minimal additional CapEx expected for the remainder of the year. Full-year P&L investment remains on track at approximately $25 million. For Q4, we expect rebanner investments of $0.10 to $0.12 per share. bringing the four-year impact to 68 to 70 cents per share. Looking ahead are fiscal 2026 and 2027 framework. While we're not providing detailed fiscal 2026 guidance today, that will come in March, we can provide transparency on what to expect. As Mark has clearly identified, It's critical for a financial success to reach the milestone of 51% of our store's standard issue station, our inflection point. To achieve that goal, fiscal 2026 will be a year of continued investment. We believe the next year's investments will lead to a return to sales and earnings growth in fiscal 2027 and further accelerating in fiscal 2028 as we complete the rebannering program. Let me detail our future expectations for sales, SG&A, and inventory reductions. Sales trends will mirror what we've seen in fiscal 2025. The first half will be challenging as Shoe Cornwall's mid to high single digit declines more than offset stations growth. The inflection comes in the second half when station crosses 51% of the fleet. We expect flat to very low single-digit growth in the back half. Overall, for fiscal 2026, we expect net sales and comparable sales will be down, but improved compared to the 6% year-to-date declines we have seen so far this year. With respect to SG&A for fiscal 2026, we expect rebanner investments to range from 25 to 30 million for the entire year. Given the timing of the rebanners in fiscal 2026, we do expect costs in fiscal 2026 to be more front-loaded. In addition, we continue to recognize costs associated with stores rebannered in fiscal 2025 as we continue to educate customers in those markets and as CapEx investments made in fiscal 2025 are depreciated. As a result, We currently see significant SG&A investment in Q1 and Q2 of fiscal 2026 compared to 2025. And we expect those headwinds to moderate post back to school as fiscal 2025 costs become comparable and the 20 million of expected synergies and efficiencies from implementation of the one banner strategy begin to be realized. Overall, We do not expect SG&A to decline in fiscal 2026 compared to fiscal 2025 and may increase. Given the impacts on sales and SG&A, we expect fiscal 2026 EPS to be lower than fiscal 2025 with more significant decreases in Q1 and Q2 compared to the prior year. Now for more insight on expected inventory reductions driven by the one banner strategy. We expect higher inventory for the remainder of fiscal 2025 and for inventory at the end of fiscal 2025 to be flat to up from the Q3 balance, inclusive of additional buys in Q4 to support launching new athletic assortments and styles next year. The level of inventory we are carrying this year has been intentional, given the tariff backdrop and the optimistic buy of seasonal merchandise and in-demand product. These opportunistic purchases were key to our 160 basis point gross profit margin increase in Q3 and 270 basis increase in Q2. We expect our inventory position will also drive a margin increase in Q4 of over 100 basis points. We expect tariff-related increases in our inventory to moderate in fiscal 2026 assuming there is more tariff certainty. As Mark stated, we are planning for more dramatic shifts in inventory as SHU Station becomes our dominant banner, which is expected to free up $100 million of cash through inventory reduction over the next two years. This inventory reduction comes from SHU Station's fundamentally different operating model, which requires 20% to 25% less inventory per store compared to Carnival's model. When we get to 51% of our stores operating the SHU station model, we expect a $50 to $60 million reduction by the end of fiscal 2026. As we transition the inventory model, we expect some near-term gross margin pressure from selling through legacy Carnival inventory, partially offset by the lower cost, optimistic purchases we made in fiscal 2025. This inventory reduction will more than fully fund our rebanner capital needs over the course of the year, maintaining our debt-free position at year end. We expect rebanner capital expenditures between $25 and $35 million to be concentrated in Q1 and Q2, while inventory reductions may be more gradual and more focused on the back half of the year. The payoff comes in fiscal 2027 and accelerates into fiscal 2028, By the end of fiscal 2027, we expect to see the full $20 million in annual cost savings from reduced dual brand complexity, the full $100 million in working capital freed from inventory reduction, a return to annual comparable sales growth, and EPS growth resumes in fiscal 2027 and expands significantly in fiscal 2028. We'll provide more specific fiscal 2026 and 2027 guidance in our March earnings call. With that, I'll turn the call back to Mark for closing remarks before we open a call for questions.