Shoe Carnival, Inc.
Q3 2017 Earnings Call Transcript

Published: 17 Nov 2017

[Operator:]

Good afternoon and welcome to Shoe Carnival's Third Quarter Fiscal 2017 Earnings 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. I'll now turn the call over to Mr. Cliff Sifford, President and Chief Executive Officer of Shoe Carnival, for opening comments. Mr. Sifford, you may begin.

[Clifton Sifford:]

Thank you, and welcome to Shoe Carnival's third quarter fiscal 2017 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'll provide a brief overview of our third quarter performance and give you an update on our 2017 guidance. Kerry will review the financial results then we'll open the call to take your questions. Over the past several years, we have been building and executing multifaceted digital presence with the goal of engaging our customers across all channels. Our initiatives have been focused on building a fun, exciting and memorable experience for our customers regardless of how they choose to shop with us. We have enhanced our store experience through the addition of shop in shops, which how like key brands and/or classification. In this year, we have replatformed our e-commerce site to enhance performance and reliability. We launched the SMS program for those customers have preferred to hear about the latest Shoe Carnival experience via text and we began to refocus our marketing spend away from traditional marketing venues to a more robust always on digital program. In the quarter, it's all traffic impacted by three hurricanes affecting Texas, Florida and Puerto Rico. Our traffic for the third quarter was the only down low single digit. Our merchant team provided our customer with a great selection of the season’s most important styles that grow the mid-single digit increase in units per transaction and a low single digit increase in conversion. This led to a comparable store sales increase of 4.4% for the third quarter. Each geographic region from the North to the deep South with the exception of Puerto Rico all reported positive comparable store sales increases for the quarter. Our stores in Puerto Rico experienced a total comparable store sales loss in the teams due to devastation of Hurricane Maria. As of today, we have three of the non-Puerto Rico stores open with the possibility of getting one additional store open before the year-end. The remaining five stores will be a longer term project with some that maybe closed permanently. I remind you that we impaired seven Puerto Rico stores in the fourth quarter of fiscal 2016. We ended the quarter with inventory down 4.3% on a per store basis, which was in line with our expectations. Our plan remains in the year with per store inventories down mid single digits. Our merchandise margin decreased 80 basis points while BD&O was down 70 basis points as a percentage of sales. SG&A was leveraged 70 basis points primarily due to lower selling costs. The result was EPS of $0.66 per diluted share, which represents a 23% increase versus a third quarter last year. Kerry will get more detail on the financial results in his prepared remarks. I would now like to transition to our number one initiative for 2017. We announced on our last call that we were in the midst of implementing holistic CRM strategy. We are now in the final stages of implementing the strategy. This initiative is instrumental and focusing the entire organization to a more customer-centric model. Once this project is complete, we will leverage customer insights to better serve our customer and further differential the Shoe Carnival brand. With the ever evolving way our customers receive information and how they choose to shop, this project will aid them both keeping our core customer engaged in the Shoe Carnival brand and the acquisition of new loyal customers. In addition to the CRM strategy, over the next year, we will enhance our loyalty program, Shoe Perks, to award our high-value customers and to incentivize all our loyal customers to make Shoe Carnival their store of choice for all their footwear purchases. With the launch of our new website in September, we are in the process of creating key brand landing pages which we believe will enhance our site and make us more relevant in the marketplace and in 2018 will further strengthen our e-commerce store with the addition of vendor drop-ship. We ended the third quarter with 424 stores in 35 states in Puerto Rico. During the quarter, we opened seven stores and closed one store. Of the seven stores we opened in the third quarter, two are in larger traditional markets we currently serve, three are in mid market locations and two are in small markets. We will close approximately 16 underperforming stores during the fourth quarter of fiscal 2017. As stated in our last call for fiscal 2018, we have identified an additional 30 to 35 stores that we will close if we cannot improve the performance of those stores to our minimum contribution expectations. Even though this would reduce our overall sales volume, we would realize long-term improvements and operating income and EPS. New store openings for 2018 will be in the low single digit range. We remain committed to long term strategic store growth however with the changing landscape and brick-and-mortar stores, we believe more attractive real estate opportunities will be available to us, if we exercise patience. Now I'd like to moment to review our third quarter sales by department. Our women's non-athletic department ended the quarter down low single digits to last year on a comparable basis. As expected, women's boots got off to a slow start as we expand our boot receipts later in the quarter. We were pleased with our sandal categories as we saw positive results in sport and athletic sandals for back to school. The men's non-athletic department ended the quarter up mid single digits on a comparable basis. This increase was broad-based with comparable store sales increased out of dress, casual and boots. Children's shoes were up high single digits for the quarter. Our merchant team did an outstanding job of having the right styles from the right brands for our back-to-school time period. Adult athletic was up mid single digits on a comparable basis for the quarter. I cannot be more proud of our merchants' team in kids and adult athletics for identifying the key items of the back-to-school time periods and providing our stores the depth they needed to drive our sales. Now I'd like to give a little color on our expectations for the remainder of fiscal 2017. We are excited about our exceptional results in the third quarter. We believe the positive athletic and athleisure trend happening in the family footwear channel will continue and we have reallocated inventory dollars to those specific categories for the fall season to take advantage of this trend. As we stated on the last call, our plans are to be less promotional this fourth quarter than last year, and to that point we have decided not to open our stores on Thanksgiving Day. Although this strategy will have an impact on sales, we expect to experience higher merchandise margins on the seasonal product. However as I mentioned earlier, we’ll be closing approximately 16 stores during the quarter which will impact merchandise margins as we clear through the inventory owned in those stores. Based on our performance to date and these expectations for the fourth quarter, we expect fiscal 2017 net sales to be in the range of 1.20 billion to 1.25 billion with comparable store sales flat to up low single digits. We have raised our previous earnings guidance and now expect earnings per diluted share of $1.42 to $1.49 compared to our prior expectation of $1.35 to $1.45. Included in the full year earnings per diluted share estimates at the high end of our guidance, we expect the fourth quarter gross profit margin will be down slightly with BD&O and SG&A cost decreasing slightly as a percentage of sales. Please bear in mind the that the fourth quarter of this year will include 14 weeks compared with 13 weeks in the fourth quarter last year, while the extra week is worth about $12 million to $13 million in sales that has an immaterial effect on net income for the fourth quarter. The extra week is not included in the comparable store sales calculation for the quarter. I would now like to turn the call over to Kerry.

[Kerry Jackson:]

Thank you, Cliff. Third quarter net sales increased $12.9 million to $287.5 million compared to the third quarter of last year. Of this increase in net sales, $11.9 million was attributable to the 4.4% increase in comparable store sales. We generated $6.6 million in sales from the 26 new stores opened since the beginning of the third quarter of fiscal 2016, partially offset by a loss in sales of $5.5 million from the 15 stores closed over the same period of time. Our gross profit margin for the quarter was 29.8% compared to 29.9% in the third quarter of last year. This decrease was driven by an 80 basis points decrease in our merchandise margin partially offset by a 70 basis points decrease in buying distribution occupancy expenses as a percentage of sales. The majority of the merchandized margin decrease was due to being more promotional during the quarter and the shift in the merchandize sold during the quarter. As Cliff mentioned earlier, we sold fewer women's boots during the quarter which is typically the highest margin category in the third quarter and so more athletic footwear which is typically the lowest margin category for the quarter. The decrease in combined distribution occupancy expenses as a percentage of sales is primarily due to lower occupancy cost and the leveraging effect higher same-store sales. The decrease in occupancy cost was primarily from the stores we have closed or will close since the third quarter of last year. SG&A expenses increased $1.2 million in the third quarter of fiscal 2017 to $67.8 million. As a percentage of sales, these expenses decreased to 23.6% compared to 24.3% in the third quarter of fiscal 2016. The overall increase in SG&A expense during the quarter was primarily due to increases in incentive compensation, consulting fees related to our CRM initiative, and our retirement savings plan, partially offset by more advertising expense for the third quarter. Included both cost of sales and SG&A in the third quarter of fiscal 2017 were store closing cost of $300,000 compared to $360,000 in the third quarter last year. More stores closed in both Q3 this year and Q3 last year. Preopening costs included in both cost of sales and SG&A decreased 170,000 in the third quarter of fiscal 2017 to 328,000. We opened seven new stores in the third quarter of fiscal 2017 compared to three new stores in the third quarter last year. The effective income tax rate was 40.0% compared to 37.2% in the same period of fiscal 2016. For the full year of fiscal 2017, we expect our tax rate to be approximately 38.8%. Third quarter net earnings decreased 11% to 10.7 million or diluted earnings per share increased 22% to $0.66. In Q3 last year, we had net earnings of 9.7 million and diluted earnings per share were $0.54. Weighted average shares outstanding for the quarter decreased 1.6 million shares or 9% from Q3 of last year. Total shares outstanding at the end of Q3 this year were 16,951,770 shares. Now turning to our cash position information affecting cash flow. In the third quarter this year, we repurchased 24,000 shares of common stock at a total cost of 545,000. Due to the desire of non-recurring further borrowings on our line of credit after we paid off the balance outstanding at the beginning in the quarter, we limit our share repurchase during the third quarter. The fourth quarter is typically our largest cash generating quarter. While multiple factors play into the decision of when we repurchase shares in the open market. To add a little perspective on cash flow in the fourth quarter, we could spend the remaining 13 million available under our $50 million share repurchase authorization in the fourth quarter and still in the year with approximately $50 million in cash and no borrowings. Depreciation expense was 6.0 million in the third quarter of fiscal 2017. Depreciation expense is projected to be approximately 24 million for the full fiscal year. Capital expenditures for fiscal 2017, including the actual expenditures during the first nine months of the year are expected to be 20 million to 21 million, with approximately 13 million to be used for new stores, relocations and remodels. Lease incentives are anticipated to be 4 million for the year. My last comment today will be to discuss the calendar shift in fiscal 2018. Due to the fact that fiscal 2017 is a 53-week year, the fiscal 2018 quarterly calendar is one week later than it did in 2017. While the shifts affect these quarters during the year is most apparent in Q2 and Q3, Let me explain. This year, our second quarter ended on July 29th and the very next week, the first week of Q3, are back-to-school sales accelerated significantly? Due to the calendar shift in 2018, our second quarter will end on August 4th thereby pulling in those sales for back-to-school into the second quarter and out of Q3 next year. If the 2017 calendar was restated to 52 weeks and to reflect the 2018 ending dates, we were increased fiscal 2017 sales in Q1 by 5.1 million increased Q2 sales by 22.9 million, decrease Q3 sales by 24.8 million and increased Q4 sales by an estimated 15 million to 16 million. The net sales affected the calendar shifts and been having one less week would be to reduce 2017 sales by an estimated $12 million to $13 million. This concludes our financial review. Now, I'd like to open up the call for questions.

[Operator:]

[Operator Instructions] And we will take our first question from Sam Poser from Susquehanna, please go ahead.

[Sam Poser:]

The way the -- and just question about the hurricane impact. What happened with the hurricane in those states was because of the traffic? The traffic went down I would assume in August and September and then the traffic could make up the traffic, but those people that came back in those states arguably bought more which helped the comp in your conversion. Is that the right way to think about sort of how that -- how the hurricane impacted?

[Clifton Sifford:]

The hurricane impacted Florida and Texas right at the back-to-school time period, so it did have an impact actually in Florida right after the back-to-school time period. So it did have an impact on traffic. The largest percentage impact on traffic however was out of Puerto Rico. We were close for quite some time and we were close that -- how long in the one store and then we were able to get the other. So for at least a week, and then the other stores that we have not opened yet remain closed obviously.

[Sam Poser:]

I guess the question is in Florida and Texas. Did the sales post hurricane pick up a lot, like did your conversion go way up in those markets even if traffic didn't simply pick up or you couldn’t offset the traffic?

[Clifton Sifford:]

Wherever there was flooding Sam is the best way to think about it -- in a hurricane wherever there's flooding, you got a pretty good tailwind after the hurricane. So the sales did pick up significantly in the Houston market. Not so much in the Florida market because again it was after back-to-school and there was not a lot of flooding.

[Sam Poser:]

And then when we, when you think -- you talked about the low single digit store openings next year and how you wanted to get back to sort of opening stores again. What is sort of like what you would see to be a store opening, run rate this year you open or you will have opened 19 stores? Is that like a good number as a target number to have, despite the fact that next year's going to be lower?

[Clifton Sifford:]

I think that's a terrific number once we -- the real estate settles down, I believe between 20 and 25 stores is an excellent number.

[Sam Poser:]

And do you foresee that happening, I mean, is that something you expect to happen post next year? And do you foresee closing more than the 30 to 35 stores next year? Do you foresee another batch beyond that or is this just get you sort of where as of now we're see this as the between what you view to 26 or close this year in the 30 next, 30-ish next years?

[Clifton Sifford:]

We are not really prepared to talk about '19, if -- right now Sam, we believe that the our customer has benefitted from a lot of different things, one of them with the economy and we hold hope that some of these underperforming stores realized hope is not our strategy, but we do hold hope that some of these 30 to 35 stores will benefit from what we've seen in the third quarter and what we believe we're going to see in the fourth quarter and beyond. So we are not really prepared yet to talk about '19. So I think we concentrate strictly on the 30 to 35 stores that we are looking after next year.

[Sam Poser:]

And then Kerry, as you close the stores next year like what -- and with the stores you closed this year where does that gives you -- I you are going to save some money because those are underperforming I assume some of the Puerto Rico may close as well. So I mean, how does that affect your leverage point of on the comp when as that happens?

[Clifton Sifford:]

Well, overtime we may see that our comp against our buying just reaching I can speak where we took place let's say 2% to 3% may come down because what we're seeing is closing low sales productivity stores and they have a higher occupancy cost as a percent of sales, and as those stores close out that may change that. In the near term next year when you close the store, you incur additional SG&A type cost. So I don’t see that changing dramatically, but just generally overall we will see a better operating margin as we give for the past 18, if all else stays the same, closing new stores would help you operating margin now.

[Sam Poser:]

Okay. And then when you look at, your inventory is down nicely but I guess the question is overtime. What's your target annual turn? I mean you are still -- on a forward week to supply basis, your numbers are still pretty high. What's your goal like if we want to talk about an inventory churn? Is there a target that you have?

[Kerry Jackson:]

Right now, weren’t looking for just -- well exactly the 2.4 time turn is where we the long-term plan just to get there. That's not going to happen, as you know, ex-retail Sam and that doesn’t happen overnight. But we are making really good progress.

[Sam Poser:]

And then I mean that's 2.4 that I would assume that sort of a mid-term plan. I mean would you foresee yourself overtime getting to a three I mean that would be huge and that given that you are closing on the performing stores and so on and doing grab ships and so on I mean that theoretically you could sort of mind your way there overtime?

[Kerry Jackson:]

That's a tough number in the shoe business because of the number of sizes that we have to be in stock, but the payers wouldn’t completely roll it out because of the fact that we shift from us ship our e-commerce business sales from our stores.

[Operator:]

[Operator Instructions] And we will take our next question from Christopher Svezia from Wedbush. Please go ahead.

[Christopher Svezia:]

So first I'm curious Q3. What was the cadence? Or can you add any color about cadence? I know August was up roughly 7. Just maybe talk about how September and October played out?

[Kerry Jackson:]

Yes, we were up 7%, not correctly but now roughly 7%.

[Christopher Svezia:]

Okay.

[Kerry Jackson:]

I didn't want you to think six, nine, Chris. It was 7% probably that number. We were up 2.9%, we were just above flat for October.

[Christopher Svezia:]

I don’t know if you can do -- so probably that 7% want to hear you telling you actually got top that 7% next year. So I’ll remember that for you. What’s the -- and in the fourth quarter, I’m just curious. What’s the cadence you see at the fourth quarter versus last year?

[Clifton Sifford:]

Kerry is pulling that out right now.

[Christopher Svezia:]

Okay. And while Kerry is pulling that out, I got a -- when you talk about your CRM initiatives just can you give any color so when that starts to go into play? Is that do expect to get some of that done or in place for holiday or is that really sprint '18?

[Clifton Sifford:]

We're expecting that in -- we’ll start the implementation of that program in early 2018. And if ramps up -- so you need to look at that, it’s going to be go for ’18, but is long-term ramp. So over the next two to three years especially as we answer loyalty program, we’ll see a benefit for at least for next three years.

[Christopher Svezia:]

Okay. Kerry.

[Kerry Jackson:]

I’m going to keep you ask about. In November, we were down low single. December was relatively flat and January came back in low single and that gave us a 1.2% comp decrease for the quarter. The November, we just really came around the Thanksgiving time period.

[Christopher Svezia:]

And then, when you talk about boots and you say boots were down. How much of that is just to a slower start to the season versus you planned it down and you brought it in late, you understand what I am trying to say?

[Clifton Sifford:]

Yes, I understand exactly. We plan to stay on and we brought it in later then we did last year. We -- our inventory and boots, per door inventory and boots down double-digit through the quarter only began to recover from a double-digit decline, as we’ve move through October. But that was planned, our goal all along as I stated and I think in a couple of calls now to move product out of -- move dollars out of the non-athletic categories into the athletic categories. So, we could maximize or we could elevate the athletic business to where we thought our customer demand was going to be. And athletic, we did exactly the right thing.

[Christopher Svezia:]

Okay. And then when you said flat in October. How much of that -- is that just due to the fact that you have boots in later? And if you didn’t have boots coming in later, it would have been a different comp, I’m just curious about the flat in October?

[Clifton Sifford:]

No -- oh, you're talking about from a comp standpoint.

[Christopher Svezia:]

From a comp perspective, yes.

[Clifton Sifford:]

I think that actually did have a little to do with the boot sale, it was warmer. October with us is all about the weather. We have a cool October. We sell boots. By the time we get to October, the demand for athletic products has settled down and becomes a seasonal product issue with us, and we were just waiting for the cool weather. And which did not…

[Christopher Svezia:]

And since it arrived in November, is it fair to say comps have improved at all because the boots business is starting to move and flow. Is that a fair characterization?

[Clifton Sifford:]

It's a fair characterization.

[Christopher Svezia:]

Okay, I don't bite. It's okay you can answer. So last thing I just want to ask you. When you -- the stores you're going to close next year, are they actually losing money right now? And I know Kerry you answered some questions previously about it. Are they actually losing money right now? Or they breakeven just where -- where do they stand at this point, if we can add color to that?

[Kerry Jackson:]

Once you identified the store that you're going to close, you have to start accelerating some cost. So when the store prior to us -- before we had made a commitment to close the store, they are more of a breakeven but slightly positive, and now what we're seeing because the accelerated expenses in some of these, now they're losing money. Not a dramatic amount of money, but they've gone negative as a group.

[Christopher Svezia:]

Okay. Alright. Got it. Okay, final thing just real quick. When you talked about the merchandized margin that should be up because they're being less promotional and boosting how you post your inventory, but the offset to all that is the clearance of liquidation sales, you've got to run in the 16 stores in the fourth quarter. So our merchandise margins as you see it today, a wash for the fourth quarter.

[Clifton Sifford:]

Slightly, slightly down.

[Christopher Svezia:]

Okay.

[Clifton Sifford:]

Yes, we fix [indiscernible] BD&O a little bit, but still expect their overall gross margin for the quarter to be slightly down.

[Operator:]

And we take our next question from Greg Pendy from Sidoti. Please go ahead.

[Greg Pendy:]

I guess just as we look. How should we be thinking about the out year? I mean if we're closing 16 stores this year and the impact that's going to have I guess on the gross margin, just given the liquidation process, the clearance process that you use for store closures. Is it fair to say the impact will be roughly double next year, as we start to think about that given the fact that you're targeting 30 to 35 stores?

[Kerry Jackson:]

Well, it's going to be hard for us to project. We have not closed this many stores at one time. As Cliff talked about it, we need to get through this fourth quarter and we've made projections on what we think it's going to take to liquidate and how much it's going to hurt our margin. But we need to get through that before we can really make a prediction on doing twice as many stores in the out year.

[Greg Pendy:]

Okay, but is the process you think going to be the same that you use where you don't really move product you keep it within the stores? And I think you spoke last call roughly the last three weeks of a closing as a sort of liquidation process of the store?

[Kerry Jackson:]

We've taken almost four months to close the store so that we can peek out every dollar or gross margin that we can. We close the store in the third quarter and we're very pleased with the margin performance of that store through the closure. So we took the learnings from that store and have applied it to the 16th that we're closing in the fourth quarter, and we believe we're going to duplicate exactly what we did in the third quarter.

[Operator:]

And we will take a follow-up from Sam Poser.

[Sam Poser:]

Real quick, you closed five stores in the first quarter, four stores in the second quarter, one store in the third quarter and you are closing the additional 16 stores for the total of 26 stores close. Next year, you are saying 30 to 35, which is not double anything, it's slightly more and most of that probably comes at the end of the year, but it's not doubling store closing cost just from the big picture. Is that correct?

[Clifton Sifford:]

That is correct.

[Operator:]

And we have no further questions at this time, so I'll turn it back to Cliff Sifford for any closing remarks or additional remarks.

[Clifton Sifford:]

We do appreciate you joining us on the call today. We hope everybody has the incredible Thanksgiving with their family and we look forward to talking to you about our fourth quarter results next year.

[Operator:]

And this concludes today's conference. Thank you for your participation. And you may now disconnect.