Shoe Carnival, Inc.
Q3 2016 Earnings Call Transcript

Published: 29 Nov 2016

[Operator:]

Good afternoon and welcome to Shoe Carnival’s Third Quarter Fiscal 2016 Earnings Conference Call. Today’s conference 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 speaks 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 remarks. Mr. Sifford, you may begin.

[Cliff Sifford:]

Thank you, and welcome to Shoe Carnival’s third quarter 2016 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 an update on our 2016 guidance. Kerry will review the financial results and then we’ll open up the call to take your questions. We continue to better position Shoe Carnival for growth over the long-term. Our team has done an excellent job on our multichannel efforts as consumer shopping habits evolve. Over the past few years, we have enhanced our multichannel strategy by improving our digital store experience. We have implemented a shift from store strategy improved our customers journey in the mobile space, created an endless aisle experience with our SHOES2U program, and most importantly we reenergized our loyalty program Shoe Perks. During the third quarter, we strengthened our multichannel sales strategy even further with a launch of our buy online, pick up in store and our buy online, ship to store initiative. We're very pleased with the early results of this program as our customers embraced this opportunity in greater numbers than we anticipated. Now that buy online pick up in store and buy online ship to store has successfully launched, we look forward to our next sales enhancement strategy through the development of vendor drop ship, which we will also launch in 2017. This initiative will allow us to expand our assortment with key brands without the risk of inventory ownership. We continue to make solid progress and taking our Shoe Perks loyalty program to the next level. We had another great quarter of new member enrollment with approximately 1.1 million new members. This brings our total membership to over 12 million. In the third quarter, our Shoe Perks members spent on average approximately 21% more per transaction than non-members and accounted for 67% of net sales. Our store associates have done a tremendous job connecting customers to their transaction. This along with several key visual acquisition campaigns drove new member enrollment. While we remain committed to the acquisition of new members, our team is in the process of analyzing customer segmentation data which will allow us to identify our high value customers and target specific communication to further increase shopping frequency and average order value going forward. We are very pleased with the success of Shoe Perks and we believe we have tremendous runaway ahead of us to acquire, engage and incentivize our most loyal customers to continue to consider Shoe Carnival as their destination of choice for family footwear. Our third quarter comparable store sales were essentially flat, down 0.4 percent, this compares to a 6% comparable store sales increased in the third quarter last year. As I discussed over our second quarter call, as we entered the key back-to-school sales season at the end of the second quarter, we experienced a strong trend where our customers shop, not only closer to the start of school, but continue to shop well after school began. This isn't the first time our customers have waited about buy their footwear closer to need, however, this year it was more pronounced than we've seen at in previous years. As we discussed on our second quarter earnings call, approximately 90% of our schools had going back-to-school, and our comparable store sales for the quarter were up 1.3% with two more weeks of back-to-school left. As a result of our customer shopping closer to need, our comparable store sales accelerated the first two weeks of September posting a 2.9% comp increase for that two week period. However, once the back-to-school shopping season ended sales began to slow down with the warmer summer-like weather, not supporting our customers' need to buy fall and winter footwear. As the weather continued to be unseasonably warm, our sales in boots for the family declined in the low teens for the two month period of September and October combined. Over the same time period, sandal sales were up in 20s and athletic sales were up in the low singles, both on a comparable basis. The increase in those two footwear categories was not enough to overcome the decrease in boots resulted in comparable store sales decrease for the quarter. Most of the key metrics have that drive our sales were positive as we benefited from a combination of higher conversion rates, average sales per transaction and units per transaction. These positive results were partially offset by low mid single digit decline in traffic. We ended the quarter with inventory down 3.9% on a per door basis, which was in line with our expectations. Our goal remains to reduce our per door inventories in the mid single digit range by the year-end. Merchandise margin was up 10 basis points. Buying, distribution and occupancy costs as a percentage of sales increased 30 basis points, due primarily to our inability to leverage distribution in occupancy costs. SG&A was down 20 basis points from the prior year, as we focused on expense management. Net income increased $286,000, earnings per diluted share or $0.54 for the quarter versus $0.47 last year. Kerry will review more detail on the financial results in his prepared remarks. We ended the third quarter with 415 stores in 35 states in Puerto Rico. During the quarter, we opened up three stores which included two small market stores, bringing our total to seven small market stores at the end of the third quarter. We expect to open two additional small market stores this fiscal year and continue to expect consistent small market unit growth over the next several years. We closed one store and relocated two stores during the quarter. In the fourth quarter, we expect to open four additional stores and closed four stores. For the 2016 full fiscal year, we expect to have net store growth of 10 stores. I’d like to take a moment and review of our third quarter sales by department. The women’s non-athletic category ended the quarter down mid single digits compared to last year on a comparable basis. As I mentioned earlier, the unseasonably warm weather in the months of September and October fueled our sandal sales throughout the quarter. At the same time, these weather patterns had a negative impact to our boot sales in the quarter. Women’s boots finish the quarter down mid-teens on a comparable basis. Booties continue to perform extremely well throughout the quarter, but it was not enough to overcome the losses we experienced in the other expectations that are normally driven by seasonally cooler weather. Men’s non-athletic ended the quarter down low single digits on a comparable basis. Men's casual specially boat shoes and canvas footwear experienced comparable store declines. Interestingly, we did have a low single digit increased in men’s casual boots driven primarily from the hiking category. Children shoes a little bit quarter up low single digits on a comparable basis, driven primarily from children’s athletic. The adult athletic category was also up low single digit on a comparable basis. Campus basketball lifestyle products and the running categories performed well throughout the quarter. As I mentioned earlier, inventory was down 3.9% on a per store basis at the end of the quarter. We believe our inventory is well positioned in the right categories for the fourth quarters. During the third quarter, we announced the appointment of Clint Pierce as Vice President Divisional Merchandise Manager for Athletic footwear, reporting to Carl Scibetta, our Executive Vice President, Chief Merchandising Officer. We are excited to have Clint Pierce joining our team. He has over 25 years of experience in the footwear industry, most recently having spent over 15 years at Sports Authority, where he held key leadership positions of increasing responsibility including Senior Vice President General Merchandise Manager for Hardlines and several Buying and Divisional Vice President positions. Clint will oversee our athletic footwear category for the entire family and further strengthens our merchandizing team. I want to close by offerings some color on the remainder of the year. The first two weeks of November continued to be unseasonably warm, which continued our comparable stores decline in the boots category. While we became more commercial to drive this category, we faced strong headwinds as promotional cadence all around us including the department stores affected our Thanksgiving and Black Friday time period. As a result, November boot sales came in below our expectations with a comparable store sales decline in the teens. We won't accelerate our promotional activity on our fall and winter merchandise with the goal of driving sales and ending the season with inventories in line with our plan. Conversely, sales in our athletic categories performed better than our internal plans, finishing the month with a high single digit comparable store sales increase. We continue to believe the positive athletic sales trend we have experienced over the past several years will continue to grow as new casual categories and lifestyle product gain momentum. Additionally, as you will remember from last year, tax refunds were delayed until second week of February. And as of today, we anticipate tax refunds beginning in January. With the increased promotional cadence on fall and winter product, a strong and growing athletic trend and the opportunity for tax refunds seasons moving in January, we expect comparable stores sales for the quarter to be in the range of down 1% to up 1%, producing the full year sales between $1.002 billion to $1.006 billion. With this reduction in sales, we now expect full year EPS to come in between $1.46 and a $1.51. Kerry will get more detail on this in his prepared remarks. While disappointed in our recent sales trend, our team remains focused on the execution of our multichannel strategic initiatives to fuel future growth and sales and profitability. We continue to have confidence in our fund and exciting concept and our ability to offer our customers the best selection of trend-right merchandise in the family channel. Our proven ability to generate cash along with our debt free balance sheet gives us the financial flexibility to continue our commitment of returning value to our shareholders through share repurchases and consistent dividend payments. With that overview, I would now like to turn the call over to Kerry.

[Kerry Jackson:]

Thank you, Cliff. Third quarter net sales increased $4.8 million to $274.5 million, compared to the third quarter last year. The net sales increase was driven by a $7.4 million increase in sales from the 23 new stores opened since the beginning of the third quarter of fiscal 2015. This increase was partially offset by a $700,000 decrease in comparable store sales and a $1.9 million decrease in sales from the eight stores closed since the beginning of the third quarter of fiscal 2015. Our gross profit margin for the quarter was 29.9% compared to 30.1% in the third quarter last year. This decrease was driven by a 30 basis point increase in buying, distribution and occupancy expenses as a percentage of sales partially offset by 10 basis points increased in our merchandise margin. We realized margin increases on sales of both our non-athletic and athletic merchandise for the quarter, which was mostly offset by increase in expenses related to our multichannel sales initiatives. The increased in buying, distribution and occupancy expenses as a percentage of sales is due to deleveraging effect of lower same-store sales and an increase in expenses primarily due to new store growth. SG&A expenses increased 414,000 in the third quarter of fiscal 2016 to 66.6 million. As a percentage of sales, these expenses decreased to 24.3% compared to 24.5% in the third quarter last year. For the quarter, the increase in expenses for new stores was partially offset by expense reductions for the stores that have closed, resulting in an $897,000 increase in non-comp store-selling expenses. Other significant changes in SG&A for the quarter included increases in wages, depreciation and stock-based compensation expense and reductions in incentive compensation, employee healthcare and advertising expense during the third quarter of fiscal 2016, compared to third quarter of prior year. Preopening costs included in both cost of sales and SG&A decreased to 149,000 in the third quarter of this year to 351,000. Store closing and impairment charges included in both cost of sales and SG&A decreased 45,000 in the third quarter this year to 360,000. The effective income tax rate for the third quarter was 37.2% compared to 38.0% for the same period in fiscal 2015. For the full year of fiscal 2016, we expect our tax rate to be approximately 37.8%. Net earnings for the third quarter of fiscal 2016 were 9.7 million or $0.54 per diluted share based on approximately 17.6 million shares outstanding. For the third quarter of fiscal 2015, we reported net earnings of 9.4 million or $0.47 per diluted share based on approximately 19.5 million shares outstanding. Now turning to our cash position and information affecting cash flow, in the third quarter of this year, we repurchased approximately 376,000 shares of common stock at a total cost of 10.2 million. The amount that remains available under our $50 million share repurchase authorization at the end of third quarter was 10.3 million. Depreciation expense was 5.9 million in the third quarter, depreciation expenses project to be approximately 23.8 million for the full fiscal year. Capital expenditures fiscal 2016 are expect to be between 21 million and 22 million with probably approximately 16 million to be used for new stores relocations and remodels. Lease incentives to be received from the landlord during fiscal 2016 including actual amounts received during the first nine months are expected to be approximately $4 million. In my final comment today, we will focus on adding a little color on our earnings expectations for the fourth quarter of this year. At the end of our guidance, we expect our merchandise margin to be slightly down along with a slight deleveraging of our buying distribution and occupancy expense. SG&A expenses as a percentage of sales are expect to be even with Q4 last year. Diluted weighted average shares for Q4 are expected to be approximately 17.4 million, an 8.7% decrease from the diluted weighted average shares outstanding at the end of Q4 last year. Included in this guidance is the estimate of repurchasing of approximately 300,000 additional shares in Q4 of this year. We expect cash and cash equivalents at the end of Q4 to be equal to or slightly higher than the 68.8 million on hand at the end of Q4 last year. 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 Jeff Stein of Northcoast Research.

[Jeff Stein:]

I’ve got two questions looking ahead at the margin trend and wondering of what percent of your footwear, what percent of your shoes are being sold under the SHOES2Uprogram compare to the prior year? And also can you give us some indications of is the Shoe Perks program a margin pressure, margin accretive or margin neutral to the Company? Thanks.

[Cliff Sifford:]

I don’t have the answer for you on the SHOES2U program, what percentage of our shoes. I can tell you that that program added in 2015 about a 100 basis points to our conversion rate and this year our conversion rate continues to climb. And we attribute that to a lot of that to our SHOES2U program, but we talk about conversion by the way, we’re talking strictly brick-and-mortar stores that I want to be clear on that. So our conversation rates in our stores continue to climb. The second question, again the second question had to do with.

[Jeff Stein:]

Shoe Perks, margin line Shoe Perks.

[Cliff Sifford:]

We look at it is accretive to earnings because we're able to increase our sales with those customers and -- how do I -- best way to say this, we’re not giving them discounts at the register. They only earn those discounts based on hitting certain purchase goals. And then we sent them the coupon to use, which we have a very low return rate on.

[Jeff Stein:]

Do you know what kind of the -- what kind of liability you have on your balance sheet with regard to future Shoe Perks redemptions compare to prior year? I presume that in liabilities.

[Cliff Sifford:]

It is -- it’s not a significant amount, but I don’t think we’re ever going to give an actual amount on that for future reference.

[Jeff Stein:]

And Kerry, any thoughts in terms of new markets for next year? And then one more for Cliff, can you talk about some of the merchandise drivers that you see for spring of 2017, given that it sounds like canvas is beginning to weaken somewhat?

[Kerry Jackson:]

Right now our intent is not to open any large new markets next year. We’re going to continue to backfill. We will be entering into new smaller market within our current geographic footprint, which has been a typical standard for us. We’ll be looking at maybe entering a larger market in '18, but we’re still evaluating that.

[Cliff Sifford:]

Just from a merchandise perspective, I’ll talk in terms of what I mentioned in the conference, in my prepared remarks. And that we still believe that the runway in athletics is getting stronger. We are personally being invited to a few of the pre land -- yes that was a shot at Carl. But I am very excited about what I see from the lifestyle and retro standpoint, casual lifestyle and retro. So, I’m real excited about the opportunity in athletics, and as you know that right at 50% of our total business. So, we can get -- we can keep that momentum going, I feel pretty good about where it will be. Our kids business continues to be strong and growing, and we’re pretty excited about that. As far as the non-athletic categories, we’re very pleased with the sandal selection that we have put together. And we got to remember, the canvas is actually selling in the non-athletic categories as more of the escape canvas that has slowdown on us, so casual canvas has actually been pretty good.

[Operator:]

And we will take your question from Randy Konik of Jefferies.

[Unidentified Analyst:]

It’s [indiscernible] for Randy Konik. We had couple of questions. Just want to drill down the performance of boots. Did you see any regional variances in areas where the weather was maybe a bit more normalized, anything to suggest more than just weather but maybe also a bit of a change in trend? And then with November boot sales down in the teens, can you give us some color on how much was transaction versus ASP now that you’re being forced to take some additional promotions on the category? Thanks.

[Cliff Sifford:]

Okay. So a lot of questions in there, we didn’t really see a change – difference in by region, the deep south obviously got hurt more in boot category because that was really warm there, but other than that as far as the comp store trend that not that much of a difference between north and south. The ASPs and for November in the boot category, give me two seconds and I'll give my best answer that for you --

[Kerry Jackson:]

We saw a decline in the average price in our women’s, but our men’s and our kid’s were relatively flat where we still saw most of the loss came in pair sold and we saw a decline in pair sold on each of the three women’s, men’s and kid’s boots.

[Unidentified Analyst:]

And just the guidance assumes that ASPs are under pressure in the category during the quarter or is it assuming flattish ASPs going forward?

[Cliff Sifford:]

Their guidance anticipates a little lower ASP in the quarter.

[Operator:]

And we will take your question from Greg Pendy of Sidoti.

[Greg Pendy:]

I guess you've gave guidance on where you expect merchandise inventory to end the year, which would be down and just kind of wondering, where do you stand as far as inventory on women’s boots, if it is sort of a buy now, wear now-type customer? And then you also have a nice setup I guess on January with the tax rebate, do you feel that, you would end up may be having to chase, if there is a snap in demand above what you’re expecting? Or do you feel that you’re well prepared to meet that demand? Thanks.

[Cliff Sifford:]

Greg, when you say chase, so you're talking about the athletic category which is what the tax free days really drive athletic, and we’re in great position to tackle that business. As far as the boot category, the women’s boots are up, we’re in the high single digits on a comp basis.

[Greg Pendy:]

Okay so, currently, you feel that right now, I guess to meet. If there sort of a buy now, wear now and a snap in demand, you have the inventory in place right now?

[Cliff Sifford:]

No question about that from a boot standpoint in fact if we give winter weather and it does require that to sell some of the categories that we have. Then we're in great shape to maximize sales for that.

[Operator:]

[Operator Instructions] And we will take our next question from Sam Poser of Susquehanna.

[Sam Poser:]

I have four questions only. So Shoe Perks you talked about, how happy you are to add people to the roster. How do you get those people to be the more productive because the comp, I know you comp well on some categories but the comps haven't really jumped with those additional people that you’re adding, you’re adding some good percentage? That’s number one.

[Cliff Sifford:]

Let me take that one one-by-one, Sam. In my prepared remarks I talked about in fact that we added a little over 1 million Shoe Parks members, but and even though we’re still in the acquire mode. We’re still looking to acquire new members, but we’re still -- when you compare us to our competitors, we’re still way behind. We’re now data mining that our Shoe Perks members, so that we can more effectively talk to them and with the goal being to get them to shop more frequent and to add to their purchases. So, it's important for us to know exactly who they are and what interest them, so that we can more effectively talk to them and we’re in the process doing that as we speak.

[Sam Poser:]

Thanks and number two, on the gross margin in the fourth quarter, overall gross margin Kerry, where are you, I mean you talked about -- can you give us sort of high end and low end of your guidance on the total gross number?

[Kerry Jackson:]

I stated in my prepared remarks of the high end typically what we do, it's going to be slightly deleveraging our BD&O, and we expect a slight decline in our merchandise margin. So, we’re going to see a slightly lower gross profit margin percent for the fourth quarter. We really haven't defined specifically an actual number. But on the lower, we see a little bit lower number on the low side, for sales from the low side that we would expect to see even more of a decline in our merchandise margin and we deleverage BD&O even further.

[Kerry Jackson:]

Sam, it's important to understand on the boot category, we said we're going to get -- we would be more promotional during the month of December and January to draw that inventory down. We buy our boots to be promotional, so we can be promotional and not have a terrible effect on our margins. So as long as we get some favorable weather, we'll be in good shape promotionally and from a margin standpoint.

[Sam Poser:]

I mean I do respect to that, does the favorable weather has to come the next four or three and half weeks or it doesn't matter?

[Cliff Sifford:]

Just would be my preference.

[Sam Poser:]

Okay, well that's good to know. All right, can we talk a little bit about the athletically inspired walking category and how you're doing over there? And do you see any changes in your pre-lines and what not?

[Cliff Sifford:]

We don't talk about individual vendors on the call, Sam.

[Sam Poser:]

I wasn't asking about individual vendors.

[Cliff Sifford:]

The way you phrased the question although very -- I got to give you credit it was creative, if it was about an individual vendor, so we don’t talk about that on the call.

[Sam Poser:]

I withdraw that question and then the last question is Kerry, 53rd week next year the fun begins. Can you give us any indication, I mean we did a little bit of -- can you give us any indication of what that's worth just by itself that extra week and how to think about it next year.

[Kerry Jackson:]

Well this is very preliminary numbers that it might be $15 million in sales roughly for the extra week and it might be accretive to anywhere from $0.025 to $0.05. I mean we're not really in a position to and I'm sorry EPS of $0.025 to $0.05, we're really not in a position yet to give that. We need to get through January because we built our model. Our comp increase is based on the prior year comps, so we need to get through January and understand what is that baseline to project off of but really rough numbers would be, that'd be real rough numbers.

[Operator:]

And with no further questions in the queue, I would like to turn the call back over to Mr. Sifford for any additional or closing remarks.

[Cliff Sifford:]

I just want to say thank you for joining us on the call today and we look forward to talking to you again in our fourth quarter call in March. Thanks again.

[Operator:]

And ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.