Shoe Station Group, Inc.

Good morning and welcome to SHU Station Group's second quarter fiscal 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 forward-looking statements that involve a number of risks and uncertainties that could cause the company's actual results to be materially different from those projected in such statements. Thank you for watching. Thank you for joining us. I will now turn the conference over to Mr. Clif Sifford, interim president and chief executive officer of Shoe Station Group, 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 Marc Chilton, our chief operating officer. Tanya and Marc are both available to take your questions during the Q&A portion of the call. This is our first earnings call as Shoe Station Group, which became official in June. The new name reflects our strategic vision, Shoe Station as our primary vehicle for long-term growth, operating alongside Shoe Carnival in an ongoing two-banner model. with each banner serving its localized customer base with the right assortment at the right price. Our second quarter results fell short of our expectations. This morning I'll cover what drove the quarter, what our product and customer data tell us, and the actions underway for the fall season, several of which are already showing up in our Q3 results. Kerry will then take you through the financials and our updated outlook. Three factors drove the quarter and they interacted with one another. First, and this is the issue we identified and discussed with you on our first quarter call, the assortments in our shoe carnival and rebannered shoe station stores were not fully aligned with the customers actually shopping those stores. This alignment by location includes brand, assortment, and sizing, all of which were not up to the standards we have set for our stores. When the assortment and sizing based on the customer that shops the store is wrong, promotion cannot fix it. Both of these opportunities showed in our Quarter 2 results. Second, we accelerated the liquidation of our aged and access inventory. This was also deliberate. It pressured merchandise margin into quarter, but it converted slow-moving inventory into cash and open receipt dollars for our fall assortments that I will describe in a moment. Our inventory ended the quarter down 5% from last year. and we remain on plan to reduce inventory approximately $50 million by year end. Third, the footwear marketplace became increasingly promotional as the quarter progressed. Faced with that environment, we made a deliberate choice. We priced in-season product competitively to protect our market position rather than defend margin rate and lose the customer. That said, we were pleased with our customer conversion rate. When customers came in our stores during the quarter, they balled. Store conversion improved in both banners, rising to levels we have not experienced in years. What declined was traffic. Lower prices alone did not bring customers through the door. Our challenge is clearly traffic and consumer awareness, not price. and that shapes where we need to invest. We will be communicating our value proposition and our assortment to both the legacy shoe carnival customer and the shoe station customer. The message will be differentiated, but it will communicate our improved assortment and value proposition. We need to rebuild trust with our customers that our stores offer the best selection of shoes and accessories at a great value for the entire family. And that takes effective and targeted communication, not deeper discounting. Let me spend a moment on the product because the category detail tells you exactly where the assortment work matters and where we believe it is already paying off. Adult Athletic, our largest business at roughly 37% of sales, declined mid-single digits. But the story underneath is mixed. Men's Athletic was down only about 1%, with the running category comping positive in both men's and women's. Where we underperformed was Fashion Athletic, including the basketball category. Running shoes are a staple for our customers. They trust us to have the best brands and a broad assortment. And when we have the right brands and the right doors, we win. That is the localization thesis in one category. Women's non-athletic, roughly 23% of sales, declined high single digits with both sandals and women's sport casuals down double digits. Children's shoes declined high single digits. This is a business that we should own in the shoe carnival stores. Our family proposition in these stores start with the children's business. Our children's shoe buyers are as good as it gets in the industry, and they are rebuilding this business back to the levels we have traditionally experienced. This is a huge opportunity for us, and we believe we will once again be the destination shop for kids' shoes. Men's non-athletic declined high single digits in dress and casual, while men's work boots, a replenishment business with a loyal customer, comped up about 2%. The pattern across all categories is consistent. Replenishment categories perform better. The categories that depend most on having the right localized assortment and sizing structures underperformed. We believe this is fixable, and we are very focused on making that happen. Back to school is the first evidence that our localized assortment focus is working. Ahead of the season, we were able to change many distributions to a more localized athletic assortment, the category that drives back to school. and in August 2026, the beginning of our third quarter, comparable store sales declined 2.7%, a substantial improvement from the second quarter's 7.1% decline, with improvement in both banners and continued double digit e-commerce growth. As we move forward, our merchandise will reflect not only the right product based on the customer shopping in each store, but also the size profiles that best serves that customer. We believe the bigger opportunity is still ahead of us. The majority of our fall receipts, localized across categories, not just athletic, arrive after back to school. And I will say this plainly, I believe our food assortment is outstanding. The strongest we have offered in several years, and boots are the most important fall category in family footwear. The brands, the styles, and the depth are targeted to each store's customer in a way they have not been before. We are supporting the season with intensified advertising and incremental investment directed at building customer traffic and communicating our assortment and value to both customer groups described. The second quarter demonstrated that price alone will not deliver traffic. We believe communication is the missing element. During the quarter, we completed the rebannering of 20 stores, bringing the year to 21. and we do not expect to re-banner additional stores for the remainder of fiscal 2026. This pause allows us to concentrate on retail fundamentals, assortment, presentation and the customer relationship, particularly at our converted stores where that relationship is still being established. We expect the promotional environment to persist through the balance of the year, and our updated guidance reflects that reality. We are not assuming the environment improves. What we are assuming is that the actions I have described, localized assortments, arriving for fall, a boot offering we believe in, and intensified advertising, continue to close the sales gap the way back-to-school has begun to. We enter the second half debt-free with strong cash position and inventory position for the season. With that, I'll turn the call over to Kerry to review the financials and our updated outlook in detail. Kerry?

Thank you, Clif. And good morning, everyone. Our second quarter results came in below the expectations underlying our first quarter guidance, driven principally by lower sales and Gross Profit Margin in an increasingly promotional footwear marketplace. This morning, I'll review the quarter, our year-to-date results, fiscal August, and our updated fiscal 2026 guidance, which we have lowered. I will start with the balance sheet because it is the foundation from which we are managing through this period. We ended the quarter with $131.6 million in cash, cash equivalents, and marketable securities. An increase of $39.7 million compared to the end of the second quarter of last year. We have no debt outstanding, with $99 million currently available under our $100 million credit facility, which we expect to renew or replace in the second half of fiscal 2026. During the quarter, we paid the 57th consecutive quarterly dividend. Inventory ended the quarter at $426.6 million. down 22.4 million, or 5.0% from last year, with inventory per store down 3.6%. This reduction was achieved deliberately through the accelerated liquidation of aged and excess inventory Cliff described, and we remain on plan for an approximately $50 million reduction in inventory by fiscal year end. We are converting slower moving inventory into cash while funding open to buy for localized fall assortments. Due to the lower than originally expected sales performance for the year, we are targeting the year-end inventory reduction at the low end of the range we gave in Q1, 2026. One additional item. Following the Supreme Court's February rule striking down certain tariffs imposed under IEPA, we submitted initial tariff refund claims in July and expect to file additional claims in the second half of fiscal 2026. We expect these claims to total approximately $1.2 million and we will record refunds when collected. Net sales in the second quarter were $284.3 million compared to $306.4 million last year, a decline of 7.2%. Comparable store sales declined 7.1% compared to a 7.5% decline in the second quarter of last year. By banner, SHU Carnival net sales were $178.5 million representing 63% of total net sales and declined 6.5% with comparable store sales down 6.3%. SHU Station net sales were $105.7 million or 37% of the total and declined 8.4% with comparable store sales down 8.5%. E-commerce was a bright spot. Comparable e-commerce sales grew 18.8% with growth in both banners, while store comparable sales declined 9.5%. We believe the sales shortfall in the quarter was concentrated in store traffic, not in demand for our banners. Gross profit margin in the second quarter was 31.9%, a decrease of 690 basis points from last year. Merchandise margins decreased 630 basis points, while buying distribution occupancy costs deleveraged 60 basis points on the lower sales base, even though those costs declined in dollars. The merchandise margin decline reflects three drivers. First, The second quarter of last year included a temporary benefit from rising retail prices ahead of tariff-driven cost increases, while selling through inventory purchased at pre-tariff costs, a benefit that did not repeat. Second, we priced competitively in an increasingly promotional marketplace, which lowered average transaction size. And third, we accelerated the liquidation of aged Nexus inventory accepting margin dilution in exchange for inventory quality. A simpler way to size these pieces is to look back two years to the second quarter of fiscal 2024 before last year's tariff-related pricing benefit. On that comparison, gross profit margin declined approximately 420 basis points and the merchandise margin declined approximately 240 basis points. Put plainly, Of this year's 630 basis point merchandise margin decline, roughly 390 basis points came from lapping last year's temporary pricing benefit, and roughly 240 basis points reflect today's promotional environment and our inventory liquidation. SG&A in the second quarter was $83.0 million, a decrease of $10.6 million from last year, driven by lower selling costs. primarily advertising and other rebanner related expenses and lower incentive and equity compensation. As a percentage of net sales, SG&A was 29.2% compared to 30.6% last year. In the normal course of business, we recorded $396,000 of store impairment charges on four stores during the quarter. bring in year-to-date impairment charges at $6.7 million on 11 stores, including the impairments recognized in the first quarter as part of our previously discussed strategic review. Income tax expense was $2.3 million, and the effective tax rate was 26.7%, compared to 25.9% in the prior year quarter. Net income for the quarter was $6.3 million, or 23 cents per diluted share compared to 19.2 million or 70 cents per diluted share last year. There were no non-GAAP financial measures adjustments in the second quarter. Through the first six months, net sales were 555.0 million down 5.0% with comparable store sales down 4.7%. GAAP net income year to date were $631,000, or two cents per diluted share, inclusive of the $13.6 million of non-recurring charges recorded in the first quarter related to the CEO transition and our strategic review. Excluding those non-recurring charges, non-GAAP adjusted net income was $12.5 million, or 45 cents per diluted share, and non-GAAP adjusted SG&A declined 11.9 million year to date. Turning to the third quarter to date, comparable store sales for fiscal August, which ended on August 29, declined 2.7% and net sales declined 3.3%. This was a substantial improvement in both banners from the rate of decline in Q2, 2026 and e-commerce continued double digit growth. As Cliff described, we localized our athletic assortments ahead of back to school and we attribute the improvement to that work along with competitive prices and intensified advertising. The majority of our fall receipts, localized across categories, arrived in the stores after back to school. I would note the promotional environment has not abated. Our margins in August continued to run below last year's at a rate comparable to the second quarter. and our updated guidance contemplates that continuing. We are lowering our fiscal 2026 guidance to reflect second quarter results and current family footwear trends. For the second half of fiscal 2026, we expect comparable store sales in the range of down 1% to up 1% inclusive of fiscal August. For the full year, we now expect net sales of 1.1 billion to $1.111 billion, representing a decline of approximately 2% to 3% versus fiscal 2025. Gap EPS of $0.32 to $0.47 and adjusted EPS of $0.75 to $0.90. Gross profit margin of approximately 32.5% to 32.7%. representing approximately 390 to 410 basis points of compression versus fiscal 2025, GAAP SG&A approximately flat versus fiscal 2025, and a reduction in adjusted SG&A of approximately 14 million, inclusive of the intensified advertising investment, and a GAAP tax rate of approximately 37% and an adjusted tax rate of approximately 27%. The GAAP guidance reflects the 13.6 million of first quarter charges, or 43 cents per diluted share. The elevated GAAP tax rate reflects the non-deductible portion of the CEO's severance against the lower pre-tax income base. Let me be clear about the philosophy behind the guidance. We are not assuming the promotional environment improves in the second half. and we are not assuming margin recovery. Our gross margin outlook contemplates continued pressure at rates similar to what we experienced in the second quarter and August. What we are assuming is continued improvement in comparable sales consistent with the trend change we saw in August, supported by localized fall assortments, our boot offering, intensified advertising and progressively easier prior year comparisons. With that, I will turn the call back to Clif.