Shoe Carnival, Inc.
Q2 2019 Earnings Call Transcript

Published: 28 Aug 2019

[Operator:]

Good afternoon and welcome to Shoe Carnival’s Second Quarter Fiscal 2019 Earnings Conference Call. Today’s conference is being recorded and 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 be considered in conjunction with 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.

[Cliff Sifford:]

Thank you, and welcome to Shoe Carnival’s second quarter 2019 earnings conference call. Joining me on the call today is Kerry Jackson, Senior Executive Vice President, Chief Operating and Financial Officer. On today’s call, I will provide a brief overview of our second quarter operating highlights and sales results, as well as review our 2019 outlook. Kerry will discuss the financial results in more detail, then we will open up the call to take your questions. I am pleased to report comparable store sales for the quarter increased 1.4% on top of the 6.7% increase we had for the second quarter last year. This increase was driven by athletics early in the quarter and non-athletic as the quarter progressed to a warmer, dryer, seasonal weather pattern. This demonstrates the strength of our model which offers a broad assortment of footwear for any occasion or season for the entire family. I am also pleased to tell you that our back-to-school season is progressing nicely with August sales up 3.5% through yesterday. This increase is being driven through both the athletic and non-athletic product categories. I believe that Shoe Carnival is a shoe store of choice during critical shoe shopping periods. Our customers caused us to have a broad assortment of the best brands and the latest trends. In addition, I am pleased with very early results related to the initial implementation of our CRM program. I’ll speak to this in more detail in a few minutes. Traffic in average transaction for the quarter declined low-single-digits, while conversion increased low-single-digits. Average units per transaction were down slightly. We ended the quarter with inventory up 2.3% on a per store basis as we prepared for both of back-to-school selling period and early delivery of fall products. Merchandize margins were flat to last year. BD&O increased 60 basis points as a percentage of sales and SG&A decreased by 80 basis points. As a result, operating income increased by 20 basis points. EPS for the quarter was $0.80 per diluted share, an increase of 5.3%, compared to second quarter last year.

[Kerry Jackson:]

Thank you, Cliff. Our net sales for the second quarter ended August 3rd 2019 of $268.2 million were essentially consistent with the prior year’s second quarter. Our comparable store sales increase of 1.4% contributed $3.6 million to net sales and $1.2 million was attributable to the three new stores opened since the beginning of the second quarter of fiscal 2018. These increases were offset by a loss in sales of $3.7 million from the 15 stores closed over the same period and a loss in sales $1.2 million attributable to other non-comp stores relating primarily to hurricane impacted stores.

[Operator:]

Thank you. And we will take our first question from Mitch Kummetz with Pivotal Research Group. Please go ahead sir.

[Mitch Kummetz:]

Yes. Thanks for taking my questions. Cliff, could you elaborate a little bit on the athletic business? It sounds like, for the quarter, it was maybe better early than late and that just is a counterintuitive to me just given that your biggest athletic vendor was flowing a lot of new product late in the quarter. And also you made some comments about, there is a shift in athletic to more casual, which again seems to kind of go against what I would think to be the benefit of that vendor flowing in that newer products. So, just a little more color on athletic, I think will be helpful. Thanks.

[Cliff Sifford:]

No problem, Mitch. You are right that our largest athletic vendor did flow in new product as we went for through the quarter but, most of that product came in towards the tail-end of the quarter. So it didn’t have a major effect on the – as a whole in the second quarter. I talk about – I think you know what I am talking about when I mentioned casual athletic as being a major – the major contributor for the quarter. Everyone knows what’s going on with the skate category right now.

[Mitch Kummetz:]

And then, Kerry…

[Cliff Sifford:]

I will add that – go ahead – I will add this that, as we moved into back-to-school, we saw increases happen – I am missing this in this in my prepared remarks, throughout all product – most major product categories. I am very happy with that. So, getting a lot of sales from women’s canvas product, women’s – men’s canvas product, skate and out of the regular – what you would consider to be the true athletic product.

[Mitch Kummetz:]

Okay. That’s helpful. And then, Kerry, on the sales guides, you’ve taken on the sales guide for the year, no change in the comp outlook. It looks like you are closing fewer stores. So is the reason the sales guide comes down, because you are now - not expecting lot of volume from liquidating those stores. Is that really the difference on the sales guide?

[Kerry Jackson:]

No, the difference really came out of the first half, now that we’ve actually gone through it and we can adjust to actual the annual guidance we had at the beginning of the year against where we are mid-year with where we adjusted the earnings as the sales down on that. But we still feel confident in our earnings expectations, as we make adjustments throughout the year to compensate for a little lower sales than we originally expected.

[Mitch Kummetz:]

And then, maybe lastly, Cliff on Payless, I think the thinking going into the quarter was sort of net neutral to the quarter or maybe a little bit of a drag early but then a benefit late. Probably, you maybe speak to kind of what you saw in those stores that overlap with Payless in the quarter?

[Cliff Sifford:]

We have not seen a lot of change in those stores from an overall. They comp very close to what the company comp. We got to remember there are lot of shoes that were liquidated early in the quarter through – at least for the first half of June and that took up a lot of these – a lot of the open to buy, customers open to buy, so to speak. And I think we will see the benefit of Payless going away as we move through the third quarter.

[Mitch Kummetz:]

Okay. All right. Thanks guys.

[Operator:]

And our next question comes from Sam Poser. Please go ahead sir.

[Sam Poser:]

Good afternoon. Can you just tell us what your – the comps – like what you are up against by months and last year in the second quarter? And then what you are up against by month? You mentioned 7.5% in August of 2018. Can you just tell us what September and October looks like?

[Cliff Sifford:]

Yes, Kerry is getting that for you now Sam. We had a – as you will remember, we had a strong second quarter last year.

[Kerry Jackson:]

Sam, last year, the second quarter started May up in the low-teens and then, June was high-singles and then, July was down low-singles.

[Sam Poser:]

And then, September, October or August, September, October?

[Kerry Jackson:]

August, we’ve talked about was up 6.5% last year and then we saw both September and October being up low singles.

[Sam Poser:]

And then, so, when you think about no Payless and your overall product mix, how do you view – do you view Q3 being a better – like a bigger number than Q4, as far as a comp increase? Is that – I mean, is that how we should think about it or do you think they are looking fairly aligned as far as the comp increase given the good start?

[Cliff Sifford:]

I think it looks fairly aligned given – even given the good start as we move through third quarter and fourth quarter.

[Sam Poser:]

And I assume based on the start that you have and no Payless that you would anticipate the back half of the comp in Q3 and Q4 to be better than the comp in Q2?

[Cliff Sifford:]

Yes.

[Sam Poser:]

Is it fair?

[Cliff Sifford:]

That is correct.

[Sam Poser:]

That’s a fair assumption.

[Cliff Sifford:]

I think that’s a fair statement.

[Sam Poser:]

And then, your sandal business was a little different than somebody else recently. Could you talk to us about what kind of things worked in sandals? What type of products work and maybe didn’t work in your sandal category?

[Cliff Sifford:]

Well, yes, it wasn’t surprising. We mentioned in the last call that we thought we were going to get comp store growth out of sandals. So, we weren’t surprised by that. But we did see continuing improvement in put net sandals as we move through the quarter and wedges as we move through the quarter, low wedges as we move through. So, I am happy that, when they are up low singles, so I can’t tell you we blew the doors off, but I am very happy with the fact that sandals comp positive in the second quarter.

[Sam Poser:]

But I mean, that was probably the story of, like mid-single-digits down at the beginning and then, better than mid-single-digits.

[Cliff Sifford:]

That’s exactly.

[Sam Poser:]

In the back half.

[Cliff Sifford:]

Sam, that’s exactly what happen is that, we started the quarter down and we had faced that as we move through the quarter we’d see increases and we did. And, by the way, I’d just want to reiterate that we saw those increases on our margins for the quarter in sandals improve over last year. I mean, one of the fact that we were clearing through.

[Sam Poser:]

I know that you don’t like to talk about brands, but I mean, one of the big brands and one of your biggest brands was Nike and you talked about, there has been a lot of talk in the athletic space about the improvement of the Nike products for your channel. Can you sort of give us some idea of how that’s shaping up? And how you see that overall through the balance of the year, maybe even in next year, now that you’ve seen product. And then, lastly, you haven’t mentioned the tariffs at all. Could you give us some view of sort of any impact of the tariffs that you’ve built into your guidance? Or how you are thinking about all that. Thank you.

[Cliff Sifford:]

I am going to live with my commitment not to talk about brands on the call. So, I am going to skip that question. I will tell you that, as I said on the last call, and I still believe that is that the product has gotten better as we move through the second half of the year and we expect that to continue to tweak all the products we’ve seen as we move through the rest of the year we are happy with. And that’s the extent which I am going to talk about brands. From a tariff standpoint, we don’t – whatever tariffs we felt were going to hit us into our guidance. However, we don’t believe that we are going to – about 10% of the product that we are importing on our own will be affected by the non-one tariffs. So, very small portion, as you know, we only do about 20% of our women’s business and about 30% - less than that about 10% of our kids business are direct imports. Kids is driven so strong by athletic. So, very small percentage of our receipts for September are going to be affected. The rest for the 12/15 tariffs we have a range to have most of that product. The vast majority of that product delivered prior to 12/15. So we don’t see any – very, very little impact to our margins for this year on tariff, Sam.

[Sam Poser:]

And what about the brands? I mean, and how they are handling it and how you may be seeing pricing for next year? I heard one of the large accounts in kids that they – that we’ve already started to hear that there is some price increases going on in kids?

[Cliff Sifford:]

I can tell you that, as of today, we have not seen any price increases in kids or in adults.

[Sam Poser:]

Thank you very much and continue to success.

[Cliff Sifford:]

All right. Thank you.

[Operator:]

And our next question comes from Chris Svezia with Wedbush. Please go ahead.

[Chris Svezia:]

Good afternoon gentlemen. So, I want to go to the revenue outlook. Kerry, could you just walk through that one more time, what has changed in your view to kind of walk back a little bit the revenue outlook as you there just – I don’t know, just add a little more color about why that change? What do you saw relative to your plan that changed that revenue outlook?

[Cliff Sifford:]

Well, it was primarily just truing up our expectations to first and second quarter actual results. If you remember, in Q1, we talked about we had a difficult February and our comps were down high-single-digits. We were expecting a little bit of a rebound and why we didn’t true-up our sales effect at that point in time, when we announced our Q1. It appears that, whatever happen in February, never rebounded honestly. If you remember, we came back with a decent Easter, on a combined March, April together with up high – low-single-digits which was comparable last year. So, that effect, we did have truing that up, we also had a little bit difficulty during the Mother’s Day area in May and those two factors were the primary factors as truing up what our original expectations in the first half were to what we now expect. We really have not adjusted our second quarter outlook from what we originally expected for the year. This was just truing up to actual.

[Chris Svezia:]

Okay. Got it. That’s helpful. And then, just I want to go to your guidance that you’ve given kind of about preliminary walk through here for the third quarter. Based on rough math, that would imply, call it, at the upper-end of the range somewhere in the $0.12 to $0.12 for the fourth quarter. Maybe just walk through some of your thought processes through the acceleration or the material improvement in earnings for that period. Just to remind us with some of the puts or takes, maybe closing fewer stores less liquidation sales, just on a thought process to kind of get to that number?

[Cliff Sifford:]

Well, if you really look at it is going to be an increase in sales and you are really talking about the fourth quarter, I think you are saying, right?

[Chris Svezia:]

Right.

[Cliff Sifford:]

A slight decline in the gross profit margin and we’ll leverage our expenses fairly significantly because we won’t have as large expense for incentive and equity compensation, similar to what we saw in Q2, we are going to see a savings in our overall SG&A. I would expect that to see less SG&A expense for the quarter - in the fourth quarter this year versus fourth quarter last year. That would be due to the increase on a year-over-year basis.

[Chris Svezia:]

Got it. Okay. And I want to go back to sort of – to comp drivers for a moment. I know you don’t want to talk about brands, but let me ask it this way, could you get to a 3.5% comp in August without your largest brand comping positive?

[Cliff Sifford:]

That is..

[Kerry Jackson:]

That’s good calculus.

[Cliff Sifford:]

Chris, that is a terrific question, which I am not going to answer.

[Chris Svezia:]

We can’t talk that, come on. And, the answer is?

[Cliff Sifford:]

I am sorry. I must have not heard your questions. What was – when I said, I wasn’t going to answer the question. What did you ask?

[Chris Svezia:]

Oh, you are not going to answer my question, then, even if I ask it that way?

[Cliff Sifford:]

No, if I answer that, it really goes against my policy to talking about brands and we are up, the story of the day is that we are up 3.5% for the month of August and to me, that all is driven by the fact that, our merchants have done an incredible job of delivering great products to our stores. Our stores have done a terrific job of selling that product and I just don’t want to get involved in talking about individual brands. And so, I’d like to leave it at that.

[Chris Svezia:]

Okay. I tried. I want to ask you about this thing, I guess a couple of months ago versus today. Any change in your thought process about the fashion boot business as it plays out into the back half of the year?

[Cliff Sifford:]

We actually feel pretty good about boot business as it plays out in the second half and I believe we will see a strong booty component early and I don’t – really don’t want to talk too much about the way the types of products I think we’ll sell in the fourth quarter from a – just from a competitive environment standpoint. But we feel pretty good about boots.

[Chris Svezia:]

Okay. Do you feel better than you did, call it, three months ago?

[Cliff Sifford:]

Three months ago I didn’t see the entire selection. Since that time, the buyers have walked both Carl and I are through that program. We’ve taken a – we know what the advertising cadence is. We know – so, yes, I feel better today about our boot opportunity than I did three months ago, mainly because I am more educated on it than I was three months ago.

[Chris Svezia:]

Well, that’s good to know that you better educated on it. Last thing I had here is just on the buyback – so, Kerry, just give me your thought process on how you’ve initially said, you bought back what you thought you would have, I think in the first quarter for that period. Are there some logic about the planning in the buyback and you had done more than you had thought or planned to earlier. What your thoughts why you didn’t buy back stock here, was it just inventory commitments for back-to-school, et cetera and just any color you can add about how we should think about the balance of the year. I know you threw out 14.7 million shares, but just any thoughts around it would be helpful.

[Kerry Jackson:]

So, we wanted to help you to understand where we are at. So we are maintaining our thought, where we are going to end the year with diluted average shares outstanding. So, that hasn’t changed. We didn’t buy any shares in Q2 last year either. We really have two factors. When do we feel that there is value in our stock that we’d want to buy it back and secondly, we had monitored - when we always did only through excess cash. Q2, because we are building up our inventories, at the end of Q2, we always had the highest – typically always had the highest inventory levels of the year. So we are building up our inventories throughout the quarter which is, it takes a lot of capital commitment typically that’s the lowest free cash available during the quarter. So, those are the factors that we play into when we decide to do with a buyback or not.

[Chris Svezia:]

Okay. So in the balance of the year, the outlook, you are just assuming no additional share repurchases though should the opportunity present itself, you would obviously be more aggressive than buying stock? Is that fair?

[Kerry Jackson:]

No, we actually, we get very cash flow rich at back-to-school, because August is such a large quarter. We liquidate those inventories and we don’t have as – a larger inventory build throughout the rest of the year. So we have factored in purchases in our guidance through in the second half.

[Chris Svezia:]

Okay.

[Kerry Jackson:]

So I see it less of an issue of free cash flow being an issue that would restrict what quarter we buy back. But it’d be dependent on the price and if it represented value.

[Chris Svezia:]

Okay. Okay, that’s all I have. Thank you very much gentlemen.

[Cliff Sifford:]

Thank you.

[Operator:]

We will take our next question from Greg Pendy with Sidoti. Please go ahead sir.

[Greg Pendy:]

Hi guys. Thanks for taking my question. I just wanted to dig into the trimmed store closure count and if you can kind of give us any color on maybe what was behind that? Was that lease opportunity – most attractive lease opportunities? You said earlier, you completed your CRM project and kind of any insights there? Was it just kind of reduced competition? Just any color on what kind of brought that down a bit?

[Kerry Jackson:]

Well, we always work with our landlords and we look at the current – the most recent trends with the store and if the store is improving and we can get some relief on the cost structure, we can extend stores into future periods and that’s what – that’s basically what we did. We were able to find, have a store or two meet metrics that would meet our criteria for keeping it and maybe extending a year or two while it continues to see if we can continue that positive sales trend we had saw prior to the extension.

[Greg Pendy:]

Okay, that’s helpful. And then, just on that subject, just one final one, do you still planning to pivot to net store growth in the following year?

[Cliff Sifford:]

Yes, we are. It’s going to be a very moderate net store growth based on our outlook. Now that outlook could change as – with the economy. Right now the big talk in all the financial press is the recession. We see recessionary environment where we saw the consumer pull back, we would adjust our thought process as going forward on that. And in fact, my slowdown, the amount of stores we might open and it may require us to increase the number of stores we close. So, it’s hard to predict at this point in time. But we are in line with what we said in previous quarters that we see small net store growth.

[Greg Pendy:]

Got it. That’s helpful. Thanks a lot.

[Cliff Sifford:]

Thank you.

[Operator:]

And we will take a follow-up question from Sam Poser with Susquehanna. Please go ahead.

[Sam Poser:]

Hi guys. I just want to follow-up on Chris’ question. Let me rephrase it. Can you hit a 3.5 comp in the quarter without athletic being top as a whole, because our biggest your chunk of business? I mean, it’s over 50% of your business. So can you do that? 54% of your business be down and you still be comping at 3.5. Is that reasonable given the trend?

[Cliff Sifford:]

That is reasonable to assume that. We, at athletic, we are comping down. We would have a tough time hitting the 3.5% comp.

[Sam Poser:]

And since this unknown vendor is the largest part of athletic, it would be unlikely that that business is down to get you to the 3.5% comp, if we follow the logic. And my follow in…

[Cliff Sifford:]

You need a comp in athletic – we need to have positive comps in athletic to pose the 3.5% comp.

[Sam Poser:]

Okay. Thank you. And then, Kerry, just to the store question, if this chatter about a recession is true, wouldn’t that also lower the – theoretically lower the rents and lower the leases and give you sort of a big opportunity to step in an open stores for when that does settles and to renegotiate leases to better rates that could keep more stores open. Now that you are doing all this, now with the CRM and all this other stuff rolling out, that should make your business more efficient sort of in the larger picture?

[Kerry Jackson:]

But, Sam, that’s a very logical way of looking at it. What we’ve seen in the past is that didn’t actually happen that way. Prior to the last recession, we had that same thought process that we would be getting lot of opportunity for store growth, because there would be more boxes available. The rents would be much more cost-effective. What, in practice we saw is that, the landlords had so many retailers coming back to them asking for rent relief that it really hardened in that the negotiation and that unless you had a lease event where you could actually say, I am going to kick out this lease or I am not going to renew it. They wouldn’t even talk to you. So, they were having to prioritize who they talk to. So, we are going in – we won’t go into any type of toughen retail environment or economic environment with that thought process again. If it turns out to be different this time, we could reevaluate. But based on past history, those opportunities aren’t available.

[Sam Poser:]

And what percent of your store base is on lease - that would be on lease expiration or kick outs next year?

[Kerry Jackson:]

Up until recent, we’ve been a fairly ratable grower on a year-over-year basis. So, 10% is greater or leases would come up each year.

[Cliff Sifford:]

And Sam, I think you can tell about the fact that each year, the past two years, we have lowered the expectation of the number of stores that we were going to exit and that is due to several reasons. One is the increasing sales and the stores begin to perform to, we were able to get better deals through the landlords and thus the stores became more profitable for us. So, we continue – we work on that almost every day. So, it’s – and that’s the reason why the expectation of store closures have continually gone down.

[Sam Poser:]

Well, I understand. I mean, I guess, the question is though that, we’ve got no more Payless, which is a whole ton of stores, then – and you have your CRM and your communication which apparently is improving and making more gold customers and so on. And your net opening next year is, I mean, it’s not going to be very much. So, why – sort of the offset of Payless and the internal improvements, why would – I mean, I don’t even – I mean, why would you go from small net openings to net closings in a situation like that when you take into account those other factors. Or is this just you are being prudent in the way you are asking the question, just in case you get to net closings next year.

[Kerry Jackson:]

Well, there is a significant amount of time for us to evaluate that for what you're saying about the CRM coming online, getting the usage of it, understanding how much for the benefit that’s going to be, how immediate that’s going to be. We typically don’t set the out year goals at this stage beyond what we have visibility on and right now, that’s what we had visibility on. There may be greater opportunity and we could capitalize on it, but at this point in time, we don’t see that.

[Cliff Sifford:]

One thing we should say also is that, we are not going to be going into any new markets, which – so, for the next several years and we have opportunities to backfill the markets we have to make them more productive where we already have brand awareness or where we can continue to build additional brand awareness. So that would be the prudent way for us to grow and that by itself will limit opportunities.

[Sam Poser:]

Do you have any leases signed for next year yet or is that all work in progress for these new locations?

[Cliff Sifford:]

We have several – if they are not signed they are near. So I couldn’t say for sure.

[Sam Poser:]

And I assume that that’s more stores whatever are near as more stores than you are planning to open this year based on what you – based on your current numbers.

[Cliff Sifford:]

That is correct. Yes, our belief – we only believe we’ll open one store this year.

[Sam Poser:]

Thank you guys again. Appreciate it.

[Cliff Sifford:]

Thank you, Sam.

[Kerry Jackson:]

Thank you, Sam.

[Operator:]

And it appears that is all the time that we have for question and answers for today. Mr. Sifford, I would like to turn the conference back to you for any additional or closing remarks. Thank you. And thank you for joining us today and we hope you have a very enjoyable Labor Day weekend. We look forward to talking to you about our third quarter results in November.

[Operator:]

[And:]