Shoe Station Group, Inc.

Good morning and welcome to SHU Carnival's fourth quarter 2025 earnings conference call. 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 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. Today's call will reference forward-looking non-GAAP measures, including expenses related to CEO transition costs. These forward-looking metrics have not been reconciled to GAAP as all forward-looking expenses associated with the CEO transition are not known at this time. I will now turn the conference over to Mr. Cliff Sifford, Interim President and CEO of SHU Carnival, for opening remarks. Mr. Sifford, you may begin.

Good morning, everyone, and thank you for joining us today. With me are Carrie Jackson, our Chief Financial Officer, and Tanya Gordon, our Chief Merchandising Officer. I want to address directly the leadership change since our last earnings call. Mark Worden departed from his role as president and CEO on February 24th. On behalf of the board and the entire organization, I want to acknowledge Mark's contribution to this company throughout his tenure and wish him well. The board appointed me interim president and CEO, and a search for a permanent successor is underway. Some of you know my history here well. I served as president and CEO from 2012 to 2021 and have remained on the board as vice chairman since then. I know this business, I know our people, and I know what it takes to execute in family footwear retail. My focus is straightforward, lead with clarity, execute with discipline, and ground every strategic decision we communicate today in what our operational data supports. Let me turn to the results and a path forward. Fiscal 25 demonstrated this organization's fundamental operational discipline. Full year EPS of $1.90 exceeded consensus Gross profit margin exceeded 35% for the fifth consecutive year. We ended the year debt-free for the 21st consecutive year, with over $130 million in cash and securities. These outcomes reflect the work of 5,000 employees executing through a challenging consumer environment. The fourth quarter came in above consensus at $0.33 per diluted share. Holiday was intensely competitive, and we chose not to chase unprofitable sales volume. That discipline preserved margins and protected the balance sheet as we moved into fiscal 2026. Shoe Station's full year results continue to validate the model. Shoe Station net sales grew 2.7% for the year, outperforming the family footwear industry for the third consecutive year, while Shoe Carnival sales declined. The Shoe Carnival banner still represents roughly 65% of total volume. The performance gap between our two banners is real, but we will be working diligently to improve Shoe Carnival's performance and lessen the gap between the two banners. I also want to note Shoe Station's e-commerce performance, which has been particularly strong. Online sales are demonstrating broad consumer resonance with Shoe Station brand and assortments well beyond the physical store footprint of the converted locations. That is an important signal as we think about the opportunity ahead. I want to be direct about where the rebanner program stands, and while we are adjusting the pace, Fiscal 2025 was the first large-scale deployment of this program. We completed 101 rebanners, a significant step beyond the initial 10-store test conducted in fiscal 2024. When we evaluated the performance of those 101 stores, particularly the second half results, we observed meaningful variability in store sales performance across the converted locations. Some stores are performing very well. Others have not yet achieved the results we expect from the model. As the number of stores increased, the e-commerce channel, as I noted, performed strongly across the board. That variability tells us we have more work to do before continuing conversions at the pace we had planned. Specifically, we're focused on better understanding which consumer demographics respond most favorably to the station format in store, which marketing approaches are most effective at driving sustained traffic to newly converted locations, and how we can further refine product disturbance and re-banner stores to improve store conversion and productivity. We are not stepping back from our re-banner strategy. We are being disciplined about its pace and targeting. We plan to re-banner approximately 21 stores before back to school 2026 while that evaluation is completed. The board's conviction in Shoe Station as a company's long-term growth vehicle is unchanged. The proposed corporate name change to Shoe Station Group Incorporated remains on the agenda for shareholder consideration at our annual meeting on June 10, 2026. At the same time, we recognize that Shoe Carnival Banner continues to serve an important customer base in a meaningful number of locations, and we will continue to manage both banners with discipline and intent. We expect to provide updates on the longer-term rebanner trajectory as this work progresses and as we gain greater clarity on where the model delivers the strongest and most consistent returns. Kerry will walk you through the detailed financial guidance. Let me set the context. Fiscal 2026 has three operational priorities, reducing inventory, completing targeted rebanners, and controlling cost. On inventory, we entered fiscal 2026 with close to $440 million in merchandise inventory of 14% from the prior year end. This increases primarily opportunistic pre-tariff buys that supported our strong margin in fiscal 2025. In fiscal 2026, we will work that inventory down through disciplined selling and targeted promotional activity. That process will create near-term gross margin pressure, but it is necessary and it is the right thing to do. On rebanners, we plan to convert 21 stores before back to school 2026, focusing on locations where we have high confidence in the underlying consumer and store level economics. We're using our customer analytics to more precisely tailor assortments by location. aligning product with both the customer who has historically shopped the store and the customer we intend to attract with more premium brand mix. This targeted approach reinforces Shoe Station as our primary store growth banner, while supporting comparable store sales improvement across both Shoe Station and Shoe Carnival as we move through the second half of the year. On cost, Our SG&A expenses are expected to decrease approximately $12 to $14 million compared to fiscal 2025, reflecting reduced banner activity and continued operational cost discipline throughout the organization. On the product side, I want to highlight the significant brand launch heading into the first quarter. We launched the Jordan brand from Nike. and it is currently available in over 60% of our stores with a full fleet rollout expected by mid-April. Jordan resonates across both banners, but we believe it will be particularly effective in our legacy shoe carnival stores, which serve a more urban consumer whose lifestyle and brand preferences align closely with Jordan's identity. We believe Jordan has the potential to reach approximately 5% of our enterprise-level athletic sales. We do not expect all of that volume to be incremental, as some displacement of existing athletic assortment is anticipated. But the brand addition is a meaningful, positive, and important signal of the strength of our vendor relationships. The financial results is EPS guidance of $1.40 to $1.60. compared to $1.90 in fiscal 2025. That step down is real, is explainable, and is almost entirely a gross margin story driven by the timing of our price and cost changes related to tariffs. Kerry will explain that dynamic in more detail. Also want to note that our fiscal 2026 guidance excludes CEO transition costs, which will be disclosed separately and reported as incurred. Earlier this month, the Board approved an increase in our quarterly cash dividends to 17 cents per share. This marks the 12th consecutive year we have increased the dividend, representing a compounded annual growth rate of approximately 15.5% over that period. The dividend is payable April 20, 2026 to shareholders of record as of April 6, 2026. The company has now paid a dividend for 56 consecutive quarters. That record reflects a consistent commitment to returning capital to shareholders from a position of financial strength. In closing, I want to stress that the fundamentals of this business are sound. We have a debt-free balance sheet, substantial cash reserves, a proven store format with the SHU Carnival banner, and a proven growth vehicle with the SHU Station banner that is winning where it has been appropriately deployed. The near-term earnings pressure is real. It is understood, and we have a clear plan to manage through it. The decisions we are making in fiscal 2026 on inventory reduction, on the pace and focus of rebanners, and on cost discipline are deliberate, and they're grounded in what our data tells us about our long-term returns. These actions are designed to position this company for meaningful improvement in fiscal 2027 and beyond. Kerry?

Thank you, Cliff. Good morning, everyone. I will cover the fourth quarter and four-year financial results, balance sheet and cash flow, rebanner strategy financial impacts, and our fiscal 2026 guidance. The guidance reflects meaningful context to interpret accurately and will provide that context in some detail. Net sales in the fourth quarter were $254.1 million, a decline of 3.4% versus $262.9 million in the fourth quarter of fiscal 2024. Comparable store sales declined 3.5%. By banner, SHU station net sales were approximately flat with a low single-digit comparable store sales decline. SHU Carnival net sales declined 4.5% with a mid-single-digit comparable store sales decline. Rogan's, now fully integrated into the SHU station's operating structure, generated $15.5 million in net sales with product margin expansion exceeding 500 basis points as we completed the transition to the shoe station assortment in those stores. Gross profit margin was 34.9% in the fourth quarter, approximately flat compared to 34.9% in the fourth quarter of fiscal 2024. Merchandise margin expanded 30 basis points, reflecting continued pricing discipline. This improvement was offset by 30 basis points of deleverage in buying, distribution, and occupancy costs on lower overall sales volume. The holiday selling environment was highly competitive, and we made deliberate pricing adjustments to maintain competitiveness through December without sacrificing the quarter. SG&A was 77.8 million, or 30.6% of net sales, compared to 77.6 million and 29.6% in the prior year period. The year-over-year increase as a percentage of sales reflects deleverage of the lower revenue and approximately 2.7 million of rebanner-related investment, partially offset by lower variable selling costs. Net income was 9.1 million, or 33 cents per diluted share. exceeding consensus expectations. For context, this compares to $14.7 million or $0.53 per diluted share in the prior year quarter. The prior year fourth quarter contained certain tax credits and other benefits associated with the Rogan's acquisition that totaled $0.19 per share and did not recur in fiscal 2025. Our Q4 2025 earnings contained approximately $0.08 per share of rebanner investment and otherwise increased $0.07 per share before the impacts of these prior year Rogan's benefits and current year rebanner investment. For the full fiscal year, net sales were $1.135 billion, a decline of 5.6%. The four-year comparable store sales decline was also 5.6%, with SHU Carnival's mid-single-digit decline partially offset by SHU Station's low single-digit growth. SHU Station's net sales were $236.7 million, representing 21% of total net sales. SHU Station grew organically 2.7% versus fiscal 2024, outperforming the family footwear industry and exceeding Shoe Carl's performance by 10.4 percentage points for the full year. Full year gross profit margin was 36.6%, an increase of 100 basis points versus fiscal 2024's 35.6%, and the fifth consecutive year gross margin has exceeded 35%. Merchandise margin for the full year expanded approximately 180 basis points compared to fiscal 2024. I want to spend a moment on that merchandise margin expansion because it is an essential context for understanding our fiscal 2026 guidance. In Q2 of fiscal 2025, the company made a deliberate decision to raise retail prices in anticipation of tariff-driven cost increases. At the time of that price increase, tariff-affected product had not yet entered our cost stream. Our average unit costs were still based on pre-tariff inventory. The result was a period during which we were selling at higher prices before our costs increased, generating a temporary but meaningful benefit to merchandise margin. This dynamic contributed significantly to the 180 basis point merchandise margin expansion and the full year 100 basis point gross margin improvement. This decision was appropriate given the information available and the tariff environment at the time. It materially supported fiscal 2025 results. However, it creates a challenging comparison of fiscal 2026. when tariff costs arrived in our cost of sales while our ability to raise prices further is constrained by competitive dynamics. This timing mismatch is the primary driver of gross margin compression in our fiscal 2026 guidance. Full year SG&A was 348.4 million or 30.7% of net sales versus 337.6 million and 28.0% in fiscal 2024. The 2.7 percentage point increase as a share of sales reflects approximately 2.0 points of rebanner investment and the balance from deleveraging on lower revenue. Four-year operating income was 66.8 million or 5.9% of net sales. Net income was 52.3 million or $1.90 per diluted share compared to $1.87 consensus estimate, a modest but meaningful beat. The full year rebanner P&L investment reduced operating income by approximately $24.1 million or $0.66 per diluted share. Our balance sheet remains a genuine competitive advantage. We ended fiscal 2025 with $130.7 million cash equivalents and marketable securities, an increase of approximately 6% from the end of fiscal 2024. We had no debt outstanding the 21st consecutive year we had ended the fiscal year debt-free, $100 million of available revolving credit, and $50 million remaining under our share repurchase authorization. Operating cash flow for fiscal 2025 was $71.3 million. Capital expenditures were $44.7 million, primarily rebanner-related. Merchandise inventories ended fiscal 2025 at $439.6 million, up 14% compared to $385.6 million at the end of fiscal 2024. As Cliff noted, This elevation was intentional. We made opportunistic pre-tariff buys of seasonal merchandise and in-demand products in advance of expected cost increases. Those purchases directly supported merchandise margin expansion in fiscal 2025 and are expected to partially offset higher tariff-affected costs as that inventory is sold in fiscal 2026. Working the inventory position down in fiscal 2026 is an operational priority. That process will involve targeted promotional activity on merchandise that is not of the ongoing assortment and other excess merchandise, which will create a near-term pressure on merchandise margins. That pressure is accounted for in our guidance. As Cliff described, we will complete approximately 21 story banners in the first half of fiscal 2026. compared to the 71 stores previously communicated. The financial implications are incorporated in our guidance. Total rebanner P&L investment for fiscal 2026 is expected to be in the range of 10 to 15 million, compared to the 25 to 30 million previously communicated. The reduction reflects the lower number of rebanner conversions planned, partially offset by the continuation of customer acquisition and marketing costs for stores converted in fiscal 2025 that are still ramping up. Rebanner capital expenditures for fiscal 2026 are expected to be in the range of $5 to $7 million compared to the $25 to $35 million previously guided, consistent with the revised rebanner plan. Regarding inventory reduction, notwithstanding the reduced number of store conversions in fiscal 2026, The company remains committed to reducing merchandise inventory by 50 to 65 million during the fiscal year. We will achieve that reduction primarily through the sale of optimistic pre-tariff and in-demand products purchased in fiscal 2025 and increased promotional activity as we work through excess inventory, with the majority of that promotional selling concentrated in the first half of fiscal 2026. As inventory normalizes, promotional intensity is expected to moderate in the second half of the year, which supports the improvement in gross margin trends we expect from the first half to the second half. The inventory reduction is expected to significantly increase our operating cash flow in fiscal 2026 compared to fiscal 2025. Coupled with the now expected lower capital expenditures, This provides increased flexibility to fund growth investments from cash reserves. I want to frame the fiscal 2026 guidance carefully because the year-over-year comparisons requires more context than typical guidance discussion. Our fiscal 2026 guidance excludes CEO transition costs, which will be reported separately as incurred. Met sales are expected to be down 1% to up 1% versus fiscal 2025. Comparable store sales are expected to decline in the first half as the fleet composition remains similar to the latter part of fiscal 2025. As 21 stores complete conversion before back to school and SHU stations e-commerce and store momentum continues, we expect comparable store trends to improve in the second half. The full-year comparable store sales results is expected to show improvement versus the 5.6% decline in fiscal 2025. Gross profit margin is expected to be approximately 34%. A decline of approximately 260 basis points compared to fiscal 2025. Let me walk through the three components of debt compression directly. First, tariff-driven cost increases. As pre-tariff inventory is sold and replaced with higher-cost tariff-affected goods, average unit costs increase. This is the cost side of the equation. Second, the non-recurrence of the fiscal 2025 price increase benefit. As I described in the full-year results section, we raised prices in early Q2 fiscal 2025 before the costs increased. That benefit Higher prices, lower costs does not repeat in fiscal 2026. In fact, our retail pricing may be moderated, not increased, given the competitive environment our customers are shopping in. Third, promotional inventory reduction activity. Working through the excess merchandise requires promotional selling, which compresses merchandise margin in the near term. I want to offer an important frame for these factors in aggregate. Our fiscal 2026 gross profit guidance reflects the decline of approximately 260 basis points from fiscal 2025. The compression we're reporting versus fiscal 2025 is primarily the unwinding of a timing benefit that was always temporary, plus modest net headwinds from tariffs and promotional activity. In fiscal 2027, we expect to return to a more historically typical gross margin of better than 35%. On expenses, SG&A costs are expected to decrease approximately 12 to 14 million versus fiscal 2025. The decline is primarily due to lower rebanner costs from the reduced conversion plan and ongoing operational discipline across the organization. Pulling it together, net sales down 1% to up 1%, gross margin of approximately 34%, and expenses down 12 to 14 million produces expected operating income in the range of approximately 47 to 55 million. After interest income and taxes at an expected rate of approximately 26%, we expect EPS in the range of $1.40 to $1.60 excluding CEO transition costs, compared to $1.90 in fiscal 2025. From a quarterly cadence perspective, the first half will carry more than gross margin pressure as we sell through elevated inventory and execute rebanner conversion. The second half benefits from improved comparable store sales trends as newly converted shoe stations locations ramp, the stabilization of inventory levels, and moderation of promotional activity. We will provide more specific quarterly perspective when we report Q1 fiscal 2026 results in late May. The fiscal 2026 guidance reflects an honest and fully supported assessment of the gross margin environment, the work required to normalize inventory, and the more measured pace of the rebranded program. The expense reductions are real and operational. The balance sheet is strong and expected to grow stronger with normalizing inventory. Shoe Station continues to grow in both its stores and e-commerce channels. The EPS step down from $1.90 to the $1.40 to $1.60 range is significant, but it has clear and explicable cause. The multi-year gross margin context I provided demonstrates that fiscal 2026 represents a return toward historical norms, not a structural deterioration of this business. I will now open the call for questions.