Shoe Carnival, Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Mar 2019

[Operator:]

Good afternoon and welcome to Shoe Carnival’s Fourth Quarter Fiscal 2018 Earnings Conference Call. Today’s call is being recorded. 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 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.

[Cliff Sifford:]

Thank you and welcome to Shoe Carnival’s fourth quarter and fiscal year end 2018 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 annual operating highlights and our fourth quarter sales results as well as an overview of our fiscal year 2019 guidance. Kerry will review the financial results in more detail. Then we will open up the call to take your questions. Shoe Carnival finished the year strong with a fourth quarter comparable store sales increase of 4.7%. For the fiscal year, comparable store sales increased 4.3% and we achieved record net sales of $1.30 billion, an increase of $10.5 million compared to fiscal 2017 which was ahead of our expectations. Our record sales were obtained through double-digit growth in digital sales and low single-digit increase in our brick and mortar stores. We also enjoyed increases in all major product categories in each geographic region throughout our chain. We reported record earnings of $2.45 per diluted share, a 64% increase over 2017’s adjusted earnings of $1.49 a share and we surpassed the high-end of our guidance of $2.43. Our merchant team continues to do a great job of identifying new trends, categories and key items of the season. They win by these items with sufficient depth, so that we can take advantage of key shopping periods like back-to-school and holiday. We are also pleased with our inventory position at fiscal year end, which was up 1.6% on a per store basis. Inventory in our seasonal boot categories ended the year down double-digits. In addition, we returned a record $50 million to our shareholders during the year through share repurchases and dividends. This represents a 47% increase versus last year. We ended the year with $67 million in cash and cash equivalents and no debt. Since 2015, we have returned over $155 million to our shareholders through stock buybacks and dividends. Our Board of Directors and management team remain committed to return excess capital to our shareholders. We are pleased our Board of Directors in December authorized a $50 million share repurchase program for 2019. Our customer-centric initiatives, trend right product selection of the best brands and the latest fashion, along with our exciting and unique in-store environment continues to make Shoe Carnival a store of choice for moderately priced footwear for the entire family.

[Kerry Jackson:]

Thank you, Cliff. We have included in our earnings release today a GAAP to non-GAAP reconciliation table illustrating and describing the adjustments that only affected prior year fourth quarter and prior year full year earnings. Fiscal 2018 Q4 and fiscal year earnings have not been adjusted and are presented on a GAAP basis. Where appropriate, I will compare this year’s earnings results first to the adjusted results from last year and then follow-up the prior year GAAP results. In addition, Q4 of last year and the full fiscal year of 2017 included an additional week of activity compared to Q4 and full fiscal year end 2018 where it adds value to comparing this year’s results with last year, I will identify the additional week of activity included in the prior year.

[Operator:]

Thank you. We will now take our first question from Sam Poser of Susquehanna. Please go ahead.

[Sam Poser:]

Good afternoon, gentlemen. How are you?

[Cliff Sifford:]

Hi good afternoon, Sam. We are doing fine. Thank you. Yes please, Sam, can you hear us?

[Sam Poser:]

I can hear you guys. Thank you. Real quick, I know you’re not guiding to the quarter because of the shift of Easter, but there is lot of talk about sort of the impact of the shifting tax refunds and everything. Did that how did that to this point net out for you? I mean, like, as expected, did it net, could you, give us some color there because of because there’s lot of moving parts and we’ve heard a lot about that.

[Cliff Sifford:]

There are quite a bit of moving parts, Sam. As you mentioned, the fact that Easter moved in to April, is a big shift. But I will tell you that what I am prepared is that we weren’t disappointed in the sales for February and they came in a little below our expectation. However, we are pleased with so far sales for March, they are running ahead of our plan.

[Sam Poser:]

Okay. And that’s even with Easter being this Sunday this coming Sunday last year, so.

[Cliff Sifford:]

No, we plan for that, Sam. So that’s built into the plan.

[Sam Poser:]

So, let me ask you this in general, have you caught up to your plan, when would you combine the two months thus far?

[Cliff Sifford:]

We don’t like I said in my prepared remarks we are not going to tell you where we are for the quarter. I gave you a bit more information. I should have, tell you we were that we were not pleased with our February results.

[Kerry Jackson:]

Sam, one thing we will say additionally is that, we took into account February and our expectation for March and the rest of the quarter, where we evaluated our previously stated guidance and we chose to remain where we with our previous guidance after evaluating where we stood for the quarter.

[Sam Poser:]

Alright, thank you very much. And then since the close of the quarter, I know, it’s going to come out in the K, but since the close of the quarter, have you used any of that $50 million at this point or have you been –

[Kerry Jackson:]

No, as I stated in my remarks that we still have $50 million available. We’ve been in a closed period since the end of the fiscal year, since we had released earnings at that point in time, so we had not purchased any stock at that point.

[Sam Poser:]

Okay. And then Cliff, can you talk about how you’re viewing sort of both in the short and long-term, the impact of Payless going away?

[Cliff Sifford:]

Well, Sam, anytime a competitor goes away, as we have to look at from a human standpoint either for the employees, but from a business standpoint, I think it’s positive for us and others inside the family channel. The low end of our – the bright part about Shoe Carnival is that we carry a broad range of product and a broad range of price points. So, I think we – I think there is a benefit to be had for Shoe Carnival with Payless going away.

[Sam Poser:]

And then two other things. Kerry, can you give – or either one of you, can you give us the comps by month for the fourth quarter. And Cliff, can you talk about the athletic business, it was – in the quarter, it sounded like it was – it sort of eked out. But can you – two of your larger brands had sort of been okay at best last year. Can you – could you give us any color or any changes you may or may not be seeing there as well? Thanks.

[Kerry Jackson:]

Sam, we saw November being up high-singles and we saw December and January both at low-singles.

[Cliff Sifford:]

And Sam, we – as you know, we don’t talk about brands, that’s a policy we’ve had longstanding. I will tell you that our athletic business was positive for the quarter. I’m pleased – very pleased with where we came out in the fourth quarter with athletic.

[Sam Poser:]

And then as far as like mix of athletic, it’s so important to you, just in the general sense looking ahead to this year, how do you feel about that?

[Cliff Sifford:]

We are still positive about athletic. In fact, we plan our athletic business up low to – low single-digits. We consider low single-digits anything under 3.5%.

[Sam Poser:]

Okay, well thanks very much. Let somebody else go. Have a continued success.

[Cliff Sifford:]

Right. Thanks.

[Operator:]

We will now take our next question from Greg Pendy of Sidoti. Please go ahead.

[Greg Pendy:]

Hey guys, thanks for taking my question. Just wanted to dig into that goal, I think you mentioned 10 new stores in 2020, you mentioned as you gather data on the CRM, but could you also share with us a little bit on what you’re maybe seeing on the real estate lease environment out there and is that something you think will potentially get more favorable as some of the competitors go away and just kind of how you’re weighing opportunities from a cost perspective? Thanks.

[Cliff Sifford:]

Greg, we’re certainly hoping that the lease opportunities open up from a – gets a little better from a costing standpoint, but the fact is, we’re really early in the process, so looking for sites for 2020. We’ve been at this now for about 3 or 4 months and I can’t really give any more guidance on that. I will tell you this that we’re looking in our current footprint. We’re really not looking to expand outside of the current footprint. There are markets that – for competitive reasons I won’t name the markets, but there are markets that we are in that we believe we have opportunity to grow store base and that’s where we’re concentrating our efforts.

[Greg Pendy:]

Yes, that’s helpful. And then can you just kind of give us a little bit color on how – what you’re seeing in the Puerto Rico stores right now?

[Cliff Sifford:]

Puerto Rico as a territory is performing positively. However, today there are I believe 5 stores opened whereas a year ago there were only 2 or 3 stores opened from that we covered. There are 6 stores opened today in Puerto Rico, year ago there were 3 or 4, can’t remember exactly. But – so the sales that we’re experiencing in Puerto Rico are spread out over more stores than a year ago. So, our comps are not positive there. And we find that happen sometimes after devastating hurricane like Puerto Rico had where the stores come back very strong for a year and then as the stores that weren’t able to open up immediately come online, then the sales spread out, if that makes sense.

[Greg Pendy:]

Yes. That’s helpful. Thanks a lot.

[Operator:]

We will now take our next question from Chris Svezia of Wedbush. Please go ahead.

[Chris Svezia:]

Good afternoon, gentlemen, and congratulations on a really – on a great close to the year.

[Cliff Sifford:]

Thanks.

[Kerry Jackson:]

Thank you.

[Chris Svezia:]

You’re welcome. So, I’ve got a bunch of questions, sorry. So first –

[Cliff Sifford:]

I hope we have all the answers.

[Chris Svezia:]

The first is just cadence comp Q1 last year, just walk through Kerry, February, March, April, what they were?

[Kerry Jackson:]

March and April is really hard to describe because Easter moves around too much, but – so we had a soft February or similar to this year, where it was cold and we – and there it felt like the tax checks were a little delayed. We were down just into mid-single-digits in February and then the combined March, April was up just in the mid-single-digits, which gave us a slight comp increase of 1.3% for the quarter. It was backloaded significantly. When it warmed up, we saw our sales take off and people started responding, we saw some really good sandal sales when that actually occurred.

[Chris Svezia:]

Okay, got it. When you think about low single-digit comp, is that basically the assumption every quarter. Is that fair to say?

[Kerry Jackson:]

It is. They’re built into our guidance, yes.

[Chris Svezia:]

Okay. Got it. And I know it’s going to be a little bit hard to calculate this, but I would assume normally March is a bigger month than February. Is that fair to say, sales wise?

[Kerry Jackson:]

Yes, because March is a 5-week month, so typically it is larger.

[Chris Svezia:]

Okay, got it, okay, good. I’m curious, Kerry, just on cadence or any color, so just for the year in terms of your expectations, I mean, it’s basically driven largely by the buyback or maybe any color you can give as it pertains to the margin, gross margin, SG&A, how we should think about those percent of sales as it pertains to the – wherever you want to be, the midpoint, the high-end of your guidance, just any color about that?

[Kerry Jackson:]

You’re talking about little color around our guidance for fiscal ‘19.

[Chris Svezia:]

For the year as it pertains to gross margin and SG&A, yes.

[Kerry Jackson:]

Okay, so built into or the high-end of our expectations, we’re looking at a flat gross profit margin and built into that is both the idea that merchandise margins relatively flat and the buying, distribution and occupancy is relatively flat. Remember in 2018, where in Q2 of this year, we recorded $1 million benefit from 2 stores in Puerto Rico that didn’t open and that reduced our occupancy cost in Q2 of this year and therefore for the full-year of ‘18 that we’re not seeing a repeat of it in ‘19 that was not included in the adjusted numbers I discussed today. So, that’s a little bit of headwinds for leveraging BD&O in ‘19. We expect to see some leverage on our SG&A line particularly related to a decrease in our incentive and equity comp with – because of the great performance we had in ‘19, we had above normal expense in those areas. We expect those return back to more normalized expense and that will create some leverage.

[Chris Svezia:]

Okay. And final two things, do you anticipate earnings growth every quarter, I know there was a lot of certainly benefit in the first half of the year, which is a calendar shift, just how should we think about that, I know, Q2 is pretty high hurdle, but any color you could give there?

[Cliff Sifford:]

We expect – we do expect a low single-digit increase each quarter of the year. We’ve got tremendous plans for our back-to-school time period. And so even though last year, Chris, you remember, we – every conference call, we kept reminding everyone that we had to go against a 7% increase in August and then we comped it with a 6.5% increase. So, I believe that our concept is great when it comes to back-to-school comp period. So yes, we have planned our sales up each individual quarter.

[Chris Svezia:]

I was actually talking more specifically about earnings, Cliff, not so much sales, but just from an earnings perspective on how we think about each of them.

[Cliff Sifford:]

Well, then, I’ll turn that over to my financial expert, Kerry.

[Kerry Jackson:]

Well, we really need to see how the rest of this quarter ends up, but aside from this quarter, we’re looking for increases in our EPS in each of the additional quarters. Depending on the rebound and the continuation of the positive sales we’re seeing in March, it could be closer to a flattish quarter in Q1.

[Chris Svezia:]

Okay. So, Q1 is the only one that could be sort of flattish, outside of that, you’ve got growth every quarter.

[Kerry Jackson:]

Correct, that’s right. That’s what we’re guiding to, that’s the high-end of our guidance.

[Chris Svezia:]

Alright, got it. Alright, I’ll get back in the queue. Thank you very much guys, and all the best.

[Cliff Sifford:]

Thank you, Chris.

[Operator:]

We will now take our next question from Steven Martin of Slater.

[Steven Martin:]

Hi guys, and congratulations. It’s a shame you weren’t able to buy back stock during this depressed period. Cliff, I know it frustrated you. Kerry, your guidance – go ahead.

[Kerry Jackson:]

No, you go ahead.

[Steven Martin:]

Kerry, your guidance is based on what share count?

[Kerry Jackson:]

For next year, we’re looking at diluted shares outstanding for the full-year just over 15 million shares.

[Steven Martin:]

So, you’re assuming basically no incremental buyback in that?

[Kerry Jackson:]

We factor in a certain amount. We don’t typically factor in initially because we can’t – we don’t know what the stock price is going to be throughout the year, but we do plan certain amount of buyback of the total $50 million.

[Steven Martin:]

Got it. You commented on Payless earlier, but you’ve also had Sears closed or not closed but get out of the footwear and apparel business. You’ve had more JCPenney closings, you’ve had Shopko closed, you’ve had maybe the second half of Bon-Ton and now rumored models. Can you talk about any impacts you’ve seen or you expect to see positive or negative?

[Cliff Sifford:]

Not sure how – I’m not sure how to measure it unless we talk to you about stores on a location by location basis, but I can tell you that 4.3% increase in the – for the quarter and our sales were up mid-single-digits for the quarter and mid-single-digits for the year and some of that had to be the fact that there were less – there was less competition. So, I don’t want to get down to the specific area or geographic region, where our competition is closing, but we’ve always talked about the fact that the U.S. is over retailed and today it’s less, so –

[Steven Martin:]

Okay. You said you were very anticipatory of back-to-school. Can you tell us what about the second half of the year in back-to-school has you enthused?

[Cliff Sifford:]

Well, back-to-school as you know is our strongest time period, and we plan for it, we plan for it all year, back-to-school and holiday are very, very important to us. We spent the entire year. I’m very excited about the product we’ve seen. I don’t want to give too much insight because just like we listen to our competitors’ calls, our competitors listen to ours. So, I’d just tell you that we are excited about what we’ve seen and the plans that we put in place.

[Steven Martin:]

Okay. And some of your other besides Puerto Rico, you had some newer markets that were underperforming that had gotten a little better. Could you talk about some of your other markets?

[Cliff Sifford:]

I’m not sure.

[Steven Martin:]

So, without the Detroit, Houston?

[Cliff Sifford:]

Again, Steve, I don’t really want to get down in a conference call talking about individual markets. It really sends a signal to people we compete with every day.

[Steven Martin:]

Alright not a problem. Thanks a lot.

[Cliff Sifford:]

Alright, thanks, Steve.

[Operator:]

We will now take our next question from Chris Svezia of Wedbush.

[Chris Svezia:]

Hey, I just have one follow-up here. Just on the CRM initiatives just real-quick, I know you said Cliff, that you’ve got a couple more months to go before you really roll it out, but clearly, you’re seeing things in the data and mining’s of the data that you are already utilizing in terms of your marketing, probably your inventory purchases and things of that nature. Just maybe talk about when, is this right before back-to-school, you really start to lever some of that benefit from the CRM initiative in totality, or just sort of how do I think about that?

[Cliff Sifford:]

We believe that Chris, I was going to answer that two ways. Our this is really, took off in August of last year when we relaunched our Shoe Perks program that our customers are very excited about what they saw and excited about what we were doing and how we were messaging them. And that took off and continued throughout the fall season. So that that gave us great confidence that we were headed down the right path. So, with CRM, we’re getting improvements almost on a monthly basis. The entire program won’t launch until, till won’t be done until the second half of the year. Sometime after back-to-school but prior to fourth quarter. That’s our goal at this point, but we are seeing benefit from what we’re learning and how the customers are reacting to the messaging that we’re using in all the marketing initiatives that we’ve, utilized, under this program. So, we expect to continue to see benefit from CRM even though the entire program won’t launch until the fourth quarter.

[Chris Svezia:]

Okay, sounds good. I appreciate it and continued success.

[Cliff Sifford:]

Alright. Thank you.

[Operator:]

There are no further questions at this time. I would now like to hand the call back to Mr. Cliff Sifford for any additional or closing remarks.

[Cliff Sifford:]

I just want to say thank you for participating on our call today. We look forward to speaking to you again in May. Thank you again.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, you may now disconnect.