Shoe Station Group, Inc.

Good morning, and welcome to SHU Carnival's first quarter 2026 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 contain certain forward-looking statements and certain non-GAAP financial measures. Forward-looking statements are subject to a number of risks and uncertainties that 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. Information about our use of adjusted or non-GAAP financial measures, including reconciliations to U.S. GAAP, can be found in our earnings materials that are available on our website. I will now turn the conference over to Mr. Cliff Sifford, Interim President and Chief Executive Officer of Shoe Carnival, for opening remarks. Mr. Sifford, you may begin.

Good morning, everyone, and thank you for joining us today. With me on the call are Kerry Jackson, our Chief Financial Officer, Tanya Gordon, our Chief Merchandising Officer, and Mark Chilton, our Chief Operating Officer. Tanya and Mark are both available to take your questions during the Q&A portion of the call. This is my second earnings call since returning as interim chief executive officer in late February. And I want to begin by thanking our board, our management team, and our associates across the company for their hard work during this period of transition. When I returned in late February, the board asked me to take a fresh look at the rebanner program and the broader strategic direction of the company. Working closely with Carrie, Tanya, and Mark, and the rest of our management team, we completed that review during the first quarter. Three conclusions emerged. First, the SHU Carnival and SHU Station banners each serve distinct consumer segments, and the company is best positioned to operate both banners as permanent independent components of our portfolio. We are not pursuing a single banner strategy. Second, while the rebanner program has been successful in markets where the consumer demographics align, our detailed analysis of customer data, individual store trade areas, Shopping Center Cote, Tennessee, and brand awareness by market identified only a limited number of additional shoe carnival locations that meet the criteria for conversion. For this reason, we expect few store rebanners over the next two years, a substantial departure from the prior expectations. Third, our store fleet includes underperforming locations that do not have a path to acceptable economics with or without banner conversion. We expect to close 12 to 14 such stores during fiscal 2026 and a further six to 10 stores during fiscal 2027. These decisions together with related fixed asset write-offs drove the strategic review charges of approximately $8 million that we recorded in the first quarter. I want to spend a moment on the SHU Carnival banner because we believe this banner has more potential than recent results have shown. The first quarter offered an early indication of what is possible. Through a rebalancing of marketing investment and a more deliberate promotional cadence in our stores, we narrowed Shoe Carnival's year-over-year net sales decline to 2.2%, a meaningful improvement compared to the trends we experienced throughout fiscal 2025. The plan from here is straightforward. We will restore the right product mix that delivers competitive opening price points our customer expects. We'll pair that assortment with a measured in-store promotional cadence and supporting marketing presence. We'll execute consistently across the chain. I want to be candid with you about the timing. We do not believe correcting the product mix will be visible in our reported results until back to school for athletic categories and into the fall season for non-athletic categories. We have also begun the effort to re-engage the value focused families and a more fast fashion forward customer, both of whom we underserved in fiscal 2025 when our merchandising drifted toward higher price points and assortments that did not reflect what those customers historically came to Shoe Carnival to find. Re-engaging those customers will take longer than a single quarter, but our back-to-school product offering and supporting promotions would demonstrate a clear return to the traditional shoe carnival proposition. The shoe station banner net sales declined 3.1% in the quarter, the first banner-level decline in some time. Part of that softness reflects a marketing rebalance toward shoe carnival that I just described. but it also reflects a more fundamental issue we identified through the strategic review and one I want to address directly. When we converted shoe carnival locations to the shoe station banner over the past two years, we applied a uniform shoe station assortment, one calibrated to the premium brand-led experience that our legacy shoe station customers in the Southeast know well. The assortment has performed well and markets where the trade area demographics align with the shoe station consumer profile. In other markets, however, the trade area retains characteristics of the original shoe carnival customer base, and the uniform assortment has not resonated as we expected. The path forward is not to reverse those conversions. Rather, our merchandising team, under Tanya's leadership and in close coordination with our key vendor partners, is calibrating the assortment at each converted store to align with the actual demand profile of its trade area. In some markets, that means a more accessible mix within the shoe station banner. In others, it means leaning further into the premium brand-led positioning. The shoe station banner remains our premium concept, but the assortment discipline behind it is being tailored to each market. This is the most important operational priority for our merchandising team between now and August. Our goal is to have the right assortments by store based on the customer shopping that particular store and time for back to school. Looking further forward, we expect to begin selective new store growth in fiscal 2027. Our plan currently contemplates three to five new stores in fiscal 2027 expanding to 8 to 10 in fiscal 2028. These new stores will be primarily under the Shoe Station banner in suburban trade areas within our existing 35-state footprint, where the consumer demographic clearly supports the concept. We are executing this plan from a position of financial strength. We ended the first quarter with $129 million in cash cash equivalents, and marketable securities, an increase of more than $36 million compared to the prior year quarter. And we operate with no debt. During the quarter, we also returned approximately $7 million to shareholders through the repurchase of 390,492 shares of common stock. This financial flexibility is a deliberate result of disciplined capital management over many years, and it allows us to fund the actions I have just described. The moderated rebanner activity, the store closures, the inventory normalization, and the future new store program entirely from operating cash flows and existing reserves. On a GAAP basis, we reported a first quarter diluted loss per share of 21 cents, reflecting the cost associated with the chief executive officer transition and the strategic review of our rebanner program. Excluding those charges, the underlying business generated 23 cents of non-GAAP adjusted diluted earnings per share, consistent with the consensus analyst expectations for the quarter. Net sales of 270.7 million and a comparable store sales decline of 2.1% both came in modestly ahead of consensus, and gross profit margin of 33.3% was in line. Selling, general, and administrative expense on a non-gap adjusted basis was modestly above consensus. That said, meeting consensus this quarter should not obscure the underlying issues we identified through the strategic review. The microenvironment was a contributing factor, Our customers, particularly at the Shoe Carnival banner, are absorbing higher costs for fuel, food, and other essentials, with recent geopolitical developments adding pressure. We saw that reflected an unusually consistent softness across all four of our major footwear categories. Adult athletic, men's non-athletic, women's non-athletic, and children were each down low single digits in the quarter. That kind of cross-category symmetry tells us this is a consumer pressure story, not a category-specific one. More fundamentally, the underlying issue in the first quarter was our product positioning at both banners. At the rebannered shoe station stores, our assortment was tilted toward a customer profile we have not yet attracted in meaningful volume to those locations, and one that, in many cases, does not naturally shop at the centers where those stores are located. At our legacy Shoe Carnival stores, our merchandising had drifted toward a more moderate income customer while underserving the value-focused family and fast fashion customers in large metropolitan areas, both of whom have been important customers for the Shoe Carnival banner. We believe those positioning issues are reversible and both have been addressed by the corrective actions I described earlier. We expect the work to begin to show in our results at back-to-school and athletic categories and through fall and non-athletic categories. Looking ahead, the consumer environment remains challenging. We expect continued pressure of moderate-income households through the balance of fiscal 2026, particularly given the recent geopolitical developments affecting fuel and food costs, we are planning the business accordingly. At the same time, the bulk of our annual earnings opportunity sits in back-to-school and fall, and our corrective actions at both banners are deliberately targeted to land in advance of those critical selling periods. For that reason, we are reaffirming the fiscal 2026 guidance we communicated in March. The most important quarters for our business are still ahead of us, and it is too early in the year to step away from the guidance we set. Kerry will walk you through the detail in his remarks. I am confident in our team and the strategic conclusions that we have reached and in the financial foundations from which we are executing. Kerry will now provide the detailed financial review of the first quarter. We will then open the line for questioning, after which I'll offer brief closing remarks. Kerry?

Thank you, Cliff. And good morning, everyone. Our first quarter results came in within the range of consensus analyst expectations, with sales modestly above consensus, gross margin in line, and adjusted diluted earnings per share of 23 cents matching consensus. I will walk you through the detailed financial results, our balance sheet position, and our reaffirmed fiscal 2026 guidance. On a gap basis, we reported a first quarter net loss of 5.6 million, or 21 cents per diluted share, reflecting 13.6 million of pre-tax charges associated with the CEO transition and strategic review of our re-enter program that Cliff described. These charges break down as 5.3 million of costs related to CEO transition, primarily cash severance, the accelerated vesting of equity awards, outplacement fees, related payroll taxes, and related legal costs. And 8.3 million of strategic review charges comprising of the impairment of seven store locations, some of which were previously identified as rebanner candidates, write-offs of rebanner-related and corporate fixed assets, and related lease costs. The after-tax impact of these charges was $11.9 million, or 43 cents per diluted share. Excluding these charges, non-GAAP adjusted net income for the first quarter was $6.2 million, or 23 cents per diluted share. This compares to a net income of $9.3 million, or $0.34 per dilute share in the first quarter of fiscal 2025. Net sales for the first quarter were $270.7 million, modestly ahead of consensus compared to $277.7 million in the first quarter of fiscal 2025. Total company comparable store sales declined 2.1%, also modestly ahead of consensus. Breaking down performance by banner, Shoe Carnival banner net sales were $177.3 million, representing 65% of net sales, a decline of 2.2% compared to the first quarter of fiscal 2025. Comparable store sales at Shoe Carnival declined approximately 1.7%. This represents a meaningful improvement from the mid to high single-digit comparable sales decline we reported at SHU Carnival Banner throughout fiscal 2025. SHU Station Banner net sales were 93.4 million, representing 35% of total net sales, and declined 3.1% compared to the first quarter of fiscal 2025. Comparable store sales at SHU Station declined approximately 2.9%. While we saw an improvement in the rebanner stores, a moderation in the increase in SHU Station's e-commerce sales resulted in the comparable store sales decline. First quarter gross profit margin was 33.3%, a decrease of approximately 120 basis points compared to the first quarter fiscal 2025. Within that, Merchandise margin decreased approximately 140 basis points, primarily reflecting increased promotional activity and higher e-commerce related shipping costs. The decrease was partially offset by approximately 20 basis points, primarily due to lower buying distribution and occupancy costs. The first quarter gross profit margin compression of 120 basis points is consistent with the full year of fiscal 2026 gross margin expectation we communicated in March, which contemplates approximately 260 to 270 basis points of gross profit margin compression for the year, with the majority of that compression weighted to the first half. Selling general and administrative expense on a GAAP basis was 96.1 million in the first quarter, an increase of 12.3 million compared to the first quarter of fiscal 2025. Excluding the $13.6 million of non-recurring charges associated with the CEO transition and the strategic review, adjusted SG&A was $82.5 million, a decrease of approximately $1.3 million compared to the prior year quarter. Of that decrease, approximately $0.2 million reflected lower rebanner-related costs, and $1.1 million reflected the other lower selling expenses. First quarter income tax expense on a GAAP basis was 0.6 million, despite a pre-tax loss for the quarter. This reflects the non-deductibility of certain CEO severance payments, which increased reported income tax expense by approximately 1.6 million. On a non-GAAP adjusted basis, our affected income tax rate in the first quarter was approximately 27% compared to 28% in the first quarter of fiscal 2025. We continue to operate from a position of significant financial strength. At the end of the first quarter, cash, cash equivalents and marketable securities totaled 129.3 million, an increase of approximately 39% or 36.4 million compared to the end of the first quarter fiscal 2025. We remained debt-free. Cash flow from operating activities in the first quarter increased $32.7 million compared to the first quarter of fiscal 2025. Capital expenditures during the first quarter totaled approximately $10.4 million, a decrease of approximately $3 million compared to the first quarter of fiscal 2025, primarily reflecting the moderated pace of rebanner activity. Merchandise inventories at the end of the first quarter were $417.2 million, a decrease of approximately $11 million compared to the end of the first quarter of fiscal 2025. Consistent with the framework we communicated in March, we continue to expect inventory to decline by $50 to $65 million by the end of fiscal 2026 compared to the end of fiscal 2025, driven by disciplined buying and planned promotional activity during the first half of the year. During the first quarter, we returned approximately $12 million to shareholders through a combination of dividends and share repurchases. We paid a dividend of 17 cents per share, an increase of 13.3% compared to the first quarter of fiscal 2025. This marked the 12th consecutive year in which we increased the quarterly dividend rate and the 56th consecutive quarter in which the company has paid a dividend. We also repurchased 390,492 shares of common stock during the first quarter for approximately $7 million at an average price of $17.93 per share. As of the end of the first quarter, approximately $43 million remained available under our existing share repurchase authorization. turning to our fiscal 2026 guidance. The first quarter unfolded broadly in line with the consensus expectation on the key financial metrics. We are reaffirming the fiscal 2026 guidance we communicated in March, which continues to contemplate net sales of 1.125 billion to 1.147 billion, representing a range of down 1% to up 1% versus fiscal 2025, adjusted diluted earnings per share of $1.40 to $1.60, gross profit margin of approximately 34%, representing approximately 260 basis points of compression versus fiscal 2025, reductions in adjusted SG&A of 12 to 14 million versus fiscal 2025, and an effective adjusted income tax rate of approximately 26%. Our adjusted diluted earnings per share guidance excludes the impact of the CEO transition costs previously identified and strategic review charges recorded during the first quarter. With that, I will open up the call for questions.