Shoe Carnival, Inc.
Q2 2015 Earnings Call Transcript

Published: 2 Sep 2015

[Operator:]

Good afternoon. And welcome to Shoe Carnival’s Fiscal Year 2015 Second Quarter Earnings Conference Call. Today’s call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. This conference 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. The forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company’s SEC filings and today’s 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 talked about during this 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, Chief Executive Officer, Chief Merchandising Officer of Shoe Carnival for opening comments. Mr. Sifford, please begin.

[Cliff Sifford:]

Thank you. And welcome to Shoe Carnival’s second quarter fiscal 2015 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 the company’s quarterly performance. Kerry will review the second quarter financial results and our guidance in more detail. Then we’ll open up the call to take your questions. We are pleased with our second quarter financial performance. Our strong 84.6% increase in quarterly earnings to $0.24 was driven by combination of higher merchandise margins and lower advertising expenses. Second quarter comparable store sales of 0.5% were at the high-end of our expectation and the guidance we have provided on our earnings call last quarter. Our second quarter comparable store sales were up mid-single digits through mid-July and as we expected major changes in tax free holidays shifted approximately $7 million in sales out of the second quarter into the third quarter. We are pleased that our August comparable store sales were up high-single digits in line with our expectation. As a reminder, last year in the markets we served, 13 states had tax free holidays that were observed at the end of July. This year, nine states shifted their tax free holiday to August. In the second quarter due to the tax free holiday and back-to-school shifts store traffic and units per transaction were down. However, average dollar transactions and conversion showed positive growth for the second quarter due to the strength of our inventory selection. We ended the quarter with inventory up approximately 2.9% on a per store basis, again which was in line with our expectations, primarily due to the shift in the back-to-school dates and tax free holidays. We continued to be pleased with our strategic initiatives to drive growth across multiple channels. We added over 758 members to Shoe Perks, our loyalty program and we continue to be pleased with this growth initiative. Our Shoe Perks members spent on average 28% more per transaction than non-members and accounted for over 53% of our second quarter sales. Our team has done a great job with our multi-channel initiatives to position Shoe Carnival as a convenient choice for customers in terms of where and when they shop, and -- by providing a robust selection of nationally recognized footwear brand. We continued to be pleased with the performance of our online sales and we are excited with our Shoes 2 U sales initiative launched in June. This creates an endless aisle for our customers to find the size, color and brand of footwear they are looking for when they need it. The feedback from our store associates has been very positive as it helps to increase store conversion by hoping our full inventory selection to every store. For example, if store does not have the particular size or style the customer is looking for, the store associate can order it on the spot and ship it directly to the customers’ home. We continued to make improvements in our multi-channel capabilities and our next step will include the options for customers to buy online and pickup in store, and the ability to buy directly from our Shoe Carnival app with direct ship. Turning now to real estate, in the second quarter, we opened five stores and relocated one store and closed six stores. This is in line with our plan to focus on strong trade areas for growth and to take our underperforming stores that have minimal opportunity to improve and either re-negotiate lease terms or relocate or close the store. We ended the quarter with 400 stores in 34 states and Puerto Rico. We recently hosted a major grand opening event in Philadelphia, our latest large market, with seven stores total in the Philadelphia market today. In addition, we announced in the second quarter our plan to launch a new complimentary small market store concept. We believe there is a tremendous untapped opportunity to expand into new and fill in existing markets with an approximately 5,000 square foot store, less than half the size of our current locations. This will provide customers and local communities a convenient shopping experience that builds upon Shoe Carnival’s strong track record of delivering moderately priced branded footwear for the entire family. Our real estate team is currently working with landlords and we look forward to opening our first two small market stores in the second half of 2015 with consistent expansion over the next several years. In total, for the remainder of the year, we plan to open an additional nine stores all in existing markets and close three. Moving on to merchandise, as I said earlier in this call, we started off the quarter strong and then in the last half of July we were impacted by the shift in back-to-school dates and tax free holidays to quarter three from quarter two. Despite the shift in the second quarter, we were very pleased with our sandal sales for both the women’s and kids departments. In addition to sandals, we experienced a nice double-digit increase in Canvas for men, women and kids. Focus on sales by department for a movement, women’s was essentially flat. Our best performing categories were junior dress wedges, ladies pumps, casual sandals and boots. Men’s was up low-single digits, driven primarily by men’s casuals and work shoes. Kids was down mid-single digits driven entirely by the shift of back-to-school and tax free holidays. Adult athletic was up low-single digits driven by Canvas, women’s fashion athletic and men’s basket pump. For the month of August our performance was strong with comparable store sales coming in with a high single-digit sales increase. This was led primarily by athletic, which was up double-digit in total for both kids and adults. Women’s boots were up high double digits, women’s sandals up in the teens. In the men’s category, boots were up lowest double digit. As I mentioned earlier, we are pleased with our comp store performance in August, which is in line with our expectations for the quarter. The result for August is including in our guidance for fiscal 2015 with store sales positive 3%. However, it is early in our third quarter and we are really excited about our selection of boots for the family as we head into the fall and winter season. We believe we have a great merchandise assortment and favorable inventory position to generate strong sales as the weather gets cooler and believe there is potential for us to outperform our guidance that we see similar weather patterns to last year. And as Kerry will review, we chose to be conservative and reiterate guidance as we think about the back half of the year given the tough comparison in the second half of last year. With that overview, I’d like to turn the call over to Kerry.

[Kerry Jackson:]

Thanks Cliff. Second quarter net sales increased $5.7 million to $227.8 million, compared to second quarter last year. The net sales increase was driven by higher sales to $9.2 million from the 36 new stores opened since the beginning of the second quarter fiscal 2014 and $1 million increase in comp store sales. Partially offsetting the net sales increase was $4.5 million loss in sales from the 18 stores closed since the beginning of the second quarter of fiscal 2014. Our gross profit margin for the quarter increased 110 basis point to 29.1% from 28.0% in the second quarter last year. This was driven by 110 basis point increase in the merchandise margin while buying, distribution and occupancy expenses remained flat as a percentage of sales. As we mentioned on our call last quarter for the past two years in Q2, our merchandise margin declined a combined 90 basis point due to tepid response by customers to our spring merchandise and higher levels of clearance product. However, our customers’ positive response to seasonal product this year helped us more than recapture the two-year decline. Selling, general and administrative expenses increased $442,000 in the second quarter of fiscal 2015 to $58.4 million. The small dollar increase in SG&A expenses was primarily due to a $2.6 million reduction in advertising expense for the second quarter. As a percentage of net sales, SG&A decreased 50 basis points. Pre-opening cost included in both cost of sales and SG&A decreased $1.5 million in the second quarter of fiscal 2015 to $355,000. Store closing impairment charges included in both cost of sales and SG&A in Q2 this year were $593,000 compared to $326,000 in Q2 last year. The effective income tax rate for the second quarter of fiscal 2015 was 38.8%, as compared to 38.9% for the same period in fiscal 2014. For fiscal 2015, we continue to expect our tax rate to be between 38.5% and 39%. Net earnings for the second quarter were $4.8 million, or $0.24 per diluted share. For the second quarter of last year, we reported net earnings of $2.6 million, or $0.13 per diluted share. Now turning to our cash position and information affecting cash flow. No purchases have been made this fiscal year under our share repurchase program. We currently have $25 million available under our existing repurchase authorization. Depreciation expense was $5.0 million in Q2. We continue to expect depreciation expense to be approximately $23 million for the full fiscal year. We expect capital expenditures for fiscal 2015 including actual expenditures, year-to-date to be between $26 million and $27 million. Approximately, $10 million of the total capital expenditures are expected to be used for new stores and $8 million would be used for store relocations for remodels and we continue to expect lease incentives in the range of $5 million to $6 million for the year. My final comments today will focus on adding little color on our sales and earnings expectations for the third quarter this year. We expect our Q3 comp store sales to be up mid single digit. In Q3, we expect to deleverage our SG&A, primarily due to a $3.5 billion increase in advertising costs, primarily based on the shift in back-to-school and tax re-dates. Additionally, we expect our Q3 gross profit margin to increase slightly and expect a decline in our merchandise margin will be offset by leveraging of our buying, distribution and occupancy expenses. This decline in merchandise margins is due to a combination of the shift in back-to-school and tax redates, as well as the expenses related to our multi-channel sales initiatives. Based on our view of the second half of the year, we believe we are on track to achieve our fiscal 2015 financial guidance and as a result, we are reiterating our guidance for fiscal year net sales to be in the range of $977 million to $991 million, with a comparable store sales increase in the range of 1.5% to 3%. Earnings per diluted share are expected to be in the range of a $1.42 to a $1.48. This represents an increase of 12% to 17% over our fiscal 2014 earnings per diluted share of a $1.27. This concludes our quarterly review. Cliff and I are now available to take your questions.

[Operator:]

[Operator Instructions] And we will go first to Eddie Plank with Jefferies. Please go ahead.

[Eddie Plank:]

Hey. Good afternoon, guys. Thanks for taking the questions. I guess, Cliff, maybe if you could talk a little bit about the trends? You touched on athletics starting off the quarter strong and being excited about the foods. I know the compares toughen from here. How do we think about it playing out over the next few months? Do you have the inventory to drive against those comps? And then secondarily, how might we think about AUR trends over the next couple of quarters? Thanks.

[Cliff Sifford:]

Eddie, we expect -- let me take the last question first. We expect AURs to continue to climb through the second half of the year. We also are very pleased. I think I have mentioned this in the prepared remarks. We are very pleased with the performance of our athletic business during the month of August and we still believe all of our schools are not going back. So, we still believe we have back-to-school sales. We have to go for athletic. As far as boots concerned, we’ve been very pleased with boots, actually in all year. But then the back-to-school season or during the month of August, we actually drove double-digit comp increase in our women’s and kids boot categories and I’m pretty excited about that where it’s going. Now, of course, it’s really early in the season. It’s important to state that I believe it takes one bad day in the month of November to wipe away the increase you are having in the month of August. But the fact is that we had double-digit increase in the month of August last year in boots. And this year, we are comping up double-digit on top of that.

[Eddie Plank:]

Great. That’s helpful. Kerry, I just wondered if you could give us a little bit more clarification. I mean the color around third quarter is very helpful. Maybe how to think about merchandise margins? You have seen the fourth quarter because you have a similar opportunity. I don’t think it’s as big as the 90 basis points to our decline you have in the second quarter but it's pretty meaningful. I guess maybe how to look at it in the context of a tougher compare? Thanks.

[Kerry Jackson:]

Well because, we did have a down merchandise margin in Q4. We are expecting to see a rebound in that margin in Q4. So in Q4, we expect a benefit of a positive merchandise margin or gross profit. On top of that, we don't expect to incur the additional costs we did for the port slowdown issues and therefore, we expect the leverage of our [BD&O] [ph]. We should see deliveries at nicely on the increasing comps, because of the lower expense structure.

[Eddie Plank:]

Okay. That’s helpful. Thanks, guys. Good luck going forward.

[Cliff Sifford:]

Thank you.

[Operator:]

And we’ll go next to Chris Svezia with Susquehanna. Please go ahead.

[Chris Svezia:]

Good afternoon, everyone. I guess, first, I’m just curios, August, how important is August relative to the third quarter, and can you just remind us when the business really began to accelerate last year just sort of the comp cadence, maybe by month in the third quarter last year?

[Cliff Sifford:]

Yes. August is the most important month of the year. Kerry will get to the percentages in just a second. But for the third quarter last year, we were up almost 1% in the month of August, up 4.3% in September and 2.6% in October.

[Kerry Jackson:]

We’d expect August to represent little under half of ourselves for the quarter and it’s at the little higher than typical because of the shift in back-to-school.

[Chris Svezia:]

Okay. And the reason why the product margin goes down is because of just the mix shift of promotions, plus the higher cadence of athletic product in the third quarter that being August specifically versus last year, is that why?

[Cliff Sifford:]

The largest weak of the year moved out of the last week of July and into the first week of August.

[Chris Svezia:]

Okay. Okay. And then just I guess, Kerry for you, number one, I’m surprised you were able to leverage [BD&O] [ph] on a flat comp. If you do a mid-single in Q3, why couldn’t that be 50 basis points or more, something along those lines? And so we talked about why it’s so easy to have a flattish percent of sales and why that couldn’t be up, get significant leverage in the third quarter on a mid-single digit comp?

[Cliff Sifford:]

Well, we should see some nice leverage in the third quarter. We’re going to see some dilution in our merchandise margin like we said in the third quarter because of the shift to back-to-school and our omnichannel initiatives like we said all year long. We’ve put some pressure on the topline. So, we will see some nice leverage against that because of the higher sales that are shifting in the quarter. And the Q2 leverage really came at a lower cost structure where we were able to be a little more efficient in our buying, distribution and occupancy cost against the prior year.

[Chris Svezia:]

Okay. And just last question on that. I’m just curious, I mean your guidance, I mean it was good say, hey, your guidance in back half of the year for the balance year, so I assume flat and there is sort of no earnings growth. I know what you’re saying, there is some shifting going on between the SG&A expense component but I still wouldn’t sort of buy but improvement in comp and you’re comfortable about product and what could unfold, potentially for upside in the third quarter and fourth quarter. So maybe just sort of help us understand where you’re really being conservative, where really the opportunity is if you cut it off?

[Kerry Jackson:]

We said in our press release and Cliff said in his remarks, I should say is that the opportunity, we have big comp sale go again starting in October, tailing in September through the end of the year. So we’re being a little cautious on that thought process. If we have the positive weather, which is really seasonable weather than we saw last year than we -- Cliff said we should see some opportunity really coming from the topline and potentially from the margin of having better sales or typically really better margins.

[Chris Svezia:]

Okay, okay. All right. I’ll get back in the queue. Thank you and congratulations.

[Cliff Sifford:]

Thanks.

[Operator:]

And we’ll go next to Jill Nelson with Johnson Rice. Please go ahead.

[Jill Nelson:]

Afternoon. Would you just talk about, I know you mentioned that some of your markets are not back-in-school, could you maybe quantify that for us, maybe what percentage is not back in school yet?

[Cliff Sifford:]

Jill, I don’t have that number directly in front of me. I do have people hear that and figure that out for me, however. And its roughly 10%, about 10% to 12% of our stores and not that will go actually in another good board in another week or two -- week or so.

[Jill Nelson:]

Okay, okay. And it sounds like you are pleased with the launches of Shoe 2 U initiative. Could you maybe just talk a little bit more about that in kind of what upside you see with that initiative?

[Cliff Sifford:]

Let me tell you the reason we’re excited about it. First of all, its helps raise the conversion rate in our store, so the customer comes in, you can’t find the size, you can’t find the style, we can actually find the style for them right at the POS system where we complete the sale. So it raises the conversion rate. I don’t want to quantify that for you. I just can tell you that from the omnichannel experience, the multi-channel experience that we are creating at Shoe Carnival is going to be, we feel can be accretive to our comp store sales as we continue to role it out.

[Jill Nelson:]

And just last quick one on Texas, if you could talk about any varies of outperformance there, just given, what’s going on in the energy market and what has…

[Cliff Sifford:]

Yeah. As Texas that actually, almost total of three states, you got the border stores and with the strength of the dollar, we are seeing some issues there, many do have the energy cities where with what’s going on with oil prices that the stores there are not performing as well as the other stores that aren’t as dependent upon. I will tell you this that Texas as a whole isn’t not near as bad as I think, you guys think it is. It’s a -- it’s not as positive as our total company, but it’s doing okay.

[Jill Nelson:]

Okay. Thanks so much.

[Cliff Sifford:]

Okay.

[Operator:]

[Operator Instructions] We’ll go next to Sam Poser with Sterne, Agee. Please go ahead.

[Sam Poser:]

Good afternoon. You answered some of my questions already. Can you give us some idea within the guidance that -- within the range of the guidance that you’ve given, one, what mid single-digit range means, is it 3 to 6, what it tell us, what that is? And then, two, sort of on a base case, what’s the range you are looking forward for Q4 in this number given the difficult comparison?

[Cliff Sifford:]

Hey. We consider mid-single, Sam, I believe we have talked about this in the past, but 3.5 to 7. And second part of your question, I am sorry, we are off that, go ahead.

[Sam Poser:]

What was it for, what kind of range, given your difficult compare in the fourth quarter, in your current guidance, what kind of range are looking for, are you looking to be positive in the fourth quarter or…

[Cliff Sifford:]

We are absolutely looking to be positive in the fourth quarter in mid single-digit range.

[Sam Poser:]

Even with the difficult comparison?

[Cliff Sifford:]

That is correct. We are very, I am telling you, we are bullish on our boot assortment, we are bullish on what’s happening with boots today. In fact that boots as a category is changing from a fashion standpoint, you the shops on the stock, lower shops are working well today, we think mid shops are going to be good. We are very excited about where we stand in boots, even though we had, I think, we led the family channel last year and our boot increases and we believe we have the options to do that again this year.

[Sam Poser:]

Okay. And what -- the later Labor Day, the obvious moving parts, how big relative to last year is this week and next week?

[Cliff Sifford:]

I don’t want to get down to…

[Sam Poser:]

I mean, just…

[Cliff Sifford:]

… what we compare…

[Sam Poser:]

But I mean just on a relative?

[Cliff Sifford:]

I will tell you this, you are correct, and the fact that the later the Labor Day is the better it is for back-to-school sales. You are, I know that that’s been a question on your mind as you talk to other public companies, but you are correct in your thought process.

[Sam Poser:]

And so, September on a compared to last year becomes a much more important month because of this later Labor Day.

[Cliff Sifford:]

The first two weeks of September…

[Sam Poser:]

First two weeks…

[Cliff Sifford:]

… will become a much more important first two weeks.

[Sam Poser:]

So the guidance that you’re -- so this next two weeks move the needle much more than they did a year ago at the same time when you gave guidance?

[Cliff Sifford:]

Certainly. That is the case, yes.

[Sam Poser:]

And so, you said, you’re going to delever the SG&A in the quarter because of the shift to marketing spend is more back-to-school from Q2 to Q3. But what kind of comp would it take to not delever the marketing in the third quarter or not delever the SG&A -- not delever the SG&A in the third quarter, excuse me?

[Cliff Sifford:]

I haven’t calculated that specifically, I will leave it up to you -- we’ve give you -- but our intent was, is to give the numbers unless you evaluated and I’m sure you can calculate that also.

[Sam Poser:]

So it appears $3.5 million that’s moving that we have to add in.

[Cliff Sifford:]

What I said was, there was a decrease of $2.7 million in Q2 and we expect that $3.5 million increase in Q3 overall. The majority of these $3.5 million was related to the shift from advertising from Q2 and Q3 to follow those sales.

[Sam Poser:]

Got you. Got you.

[Kerry Jackson:]

I’m sorry. It’s $2.6 million in Q2, not $2.7 million.

[Sam Poser:]

And that $3.5 million is absolute dollar increase?

[Kerry Jackson:]

Yes.

[Sam Poser:]

So if you did $59 million in SG&A, we should add $3.5 million to that not for you should be at the quarter -- for this quarter?

[Kerry Jackson:]

Well. There are other ins and outs. That’s why we gave you the color about the overall SG&A deleveraging and we tried to identify the components that help us identify the deleveraging.

[Sam Poser:]

So to what degree does it de-lever by just a hair or by…

[Kerry Jackson:]

Sam…

[Sam Poser:]

…. really you’re not going to de-lever by very much?

[Kerry Jackson:]

Sam, this is probably not the right place to try to work a model. We give you the general ideas of how to build the model, let you go within there.

[Cliff Sifford:]

You know, I’m very skilled in all of that. Anyways…

[Sam Poser:]

Can you just give us a little more color on some of the athletic trends and some of the other trends that you mentioned kicked off in the quarter and -- could you just give us little more color there, the type of things that you are working maybe fashion versus performance and so on?

[Cliff Sifford:]

Our business is really no different than anyone else’s fashion. Athletic has been very strong. We see a running business, our basketball business led mainly by canvas. And canvas product, in general, all selling. It was a very strong athletic month. In addition to being a very strong athletic month, we again have said we were pleased with the performance of our boot category and the fact that we saw double-digit increases there. So that gives us some -- that gives us some reason to be positive about the fourth quarter.

[Sam Poser:]

And it is booties and boots, it is mostly booties right now that are …?

[Cliff Sifford:]

Yes. Booties are definitely the strongest part of the boot category today. But we are seeing performance at our other boot categories.

[Sam Poser:]

Thanks very much and good luck.

[Cliff Sifford:]

Thank you.

[Operator:]

[Operator Instructions] We will go next to Chris Svezia with Susquehanna. Please go ahead.

[Chris Svezia:]

Yes,. I just have a follow-up. I’m just curious of what we’re talking about boots and booties. I’m curious the percentage of the business that comprises sort of back half in the third quarter or what about last year. Would you just give us some thought or reference about how big that is?

[Cliff Sifford:]

It’s obviously much stronger than the fourth quarter than it is in the third. I’m not -- I don’t want to give it to you some percent of business for each quarter. I will tell you that we are planning boots, up high singles for the second half.

[Chris Svezia:]

Okay. I mean, is it fair to say it’s roughly 20% of your second half business for Shoe Carnival?

[Cliff Sifford:]

It’s not quite there? I’ll take it half and it’s higher than that for the fourth quarter.

[Chris Svezia:]

Okay. That’s helpful. And then, I’m curious your small box story. Could you just maybe talk about the 5,000 square foot box? How do you plan to get the inventory in there? How do you plan to incorporate technology into that so people can still find product and you can get conversion. Just talk a little bit about that? Is it backfilling your existing market et cetera?

[Cliff Sifford:]

It’s mainly backfilling existing markets throughout the Midwest and Southwest. We see this as a tremendous opportunity. We can put in -- we can go into a market with a 5,000 square foot story. We have the ability as you know to merchandise the store based on the customer that’s shopping in the store. Not only we have that capability but with our Shoes 2 U program, the customer comes in and we don’t have a wide enough assortment for them. We open up the majority of the assortment of our entire company to them through our Shoes 2 U program. So that in itself separates us from our competition. Then third, we have the ship-from-store initiative. So, if we put on items on that store that doesn’t quite -- in one of those stores that doesn’t quite work and resonate with the consumer, we just turn to lever up on our ship-from-store initiative and ship products out to the customers through our e-commerce stores. So there is all the things that we -- and most importantly is the fact that we went national advertising this past year. So, you take all of the initiatives that we’ve put in to place over the past two years to help drive our sales, which we believe have begun to pay dividends over the past several quarters, gives us very, very excited about the opportunities to open up smaller markets and to fill in larger markets where we have struggled to get building opportunities.

[Chris Svezia:]

Okay. And then when you guys are closing stores, the amount of stores you closed, how is the sort of the transfer of sales through either existing stores in those trade markets or the profitability? I know it seems early but just any color around maybe how that’s going given the number of stores you’ve closed so far in the first half?

[Cliff Sifford:]

It is early for us to tell that, Chris. We do believe we are going to see transfer of sales. We believe we may have already seeing transfer of sales, but our sales trajectory is actually -- other than last two weeks of July, when we transferred sales into August, our sales trajectory across our fleet has been pretty good. So, I can’t tell you that is because of transfer of sales from one store to another but that’s something that we will be studying and as we continue to move forward.

[Chris Svezia:]

Okay. Last thing. Just e-commerce, I think it was -- is it accretive? I don’t want to get too deep into that. But from a profitability perspective, where is it going, is it accretive, just any color about that piece?

[Cliff Sifford:]

And we would prefer to talk about that as our omnichannel program whether it’s e-commerce or Shoe 2 U or any of the other things that we are doing digitally. And yes, to answer your question it is accretive.

[Chris Svezia:]

Okay. All right. All the best. Thank you.

[Cliff Sifford:]

Thank you.

[Operator:]

And there are no more questions at this time. I’d like to hand the conference back over to our presenters for any closing remarks.

[Cliff Sifford:]

I appreciate you listening in today and we look forward to talking to you about our third quarter results in November. Thank you.

[Operator:]

This does conclude today’s conference. You may now disconnect and have a wonderful day.