Shoe Carnival, Inc.
Q4 2015 Earnings Call Transcript

Published: 18 Mar 2016

[Operator:]

Good afternoon and welcome to Shoe Carnival’s Fourth Quarter Fiscal 2015 Earnings Conference Call. Today’s call is being recorded and 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. These 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 comments. Mr. Sifford, you may begin.

[Cliff Sifford:]

Thank you, and welcome to Shoe Carnival’s fourth quarter and 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 fourth quarter and annual performance as well as an overview of our fiscal year 2016 guidance. Kerry will review the financial results then we’ll open up the call to take your questions. We have a strong finish to fiscal 2015. The initiatives we implemented over the past three years including our multi-channel sales initiative has led to the enrolment of nearly 9 million Shoe Perks’ members and helped drive our record annual sales and diluted earnings per share. The fourth quarter represents our sixth consecutive quarter of comparable store sales growth. We are particularly pleased with this result as we have successfully operated our business in an economic environment that has negatively affected many retailers. Our store level associates executed our strategies with enthusiasm and our merchant teams did an excellent job of identifying key footwear trends and categories. We finished the year with a comparable store sales increase of 3% and diluted EPS of $1.45. Our diluted EPS improvement not only represents an increase of 14% from the previous year but also was the highest earnings per share performance in the Company’s history. Today, I’ll review the initiatives we have implemented in just the past two years that have led to this success. But first, I’d like to discuss our fourth quarter performance. As we discussed on our third quarter call, the fourth quarter got off to a slow start in November with women’s fashion boots comping down for the first time in several years. However, we experienced a strong mid-teens increase in the fashion boot categories for December and January. This along with the strength of our athletic categories build our sales and we ended the quarter with 1.8% comparable store sales increase on top of the 9.5% comparable store sales increase for the same quarter last year. In addition, we’ve benefited from a combination of higher conversion rates and average sales per transaction, which offset a mid-single digit decline in traffic. We ended the quarter with inventory up approximately five tens of percent on a per store basis, which was in line with our expectation. Merchandise margins were down 10 basis points. I want to provide some more detail here. As we planned our promotional calendar for the year we made the strategic decision to be more promotional in the fashion boot categories for the full fourth quarter. We took this approach to help us achieve a positive comp knowing that we were cycling a double digit increase in the category from last year. As a result of our slower November performance, we decided to be even more promotional than we had originally planned. Dollar margins on boots were lower than we originally anticipated. We were able to get through our fashion boot inventory without significant margin erosion. This was partially offset by the strong athletic trends which grow sales at higher margins in the same time period last year. Kerry will give more detail on our full fourth quarter financial results in his prepared remarks. Now I want to provide an update on our key strategic initiatives that have helped us achieve comparable store sales increases over the past six quarters. In fiscal 2015, we achieved a record number of loyal shoppers by adding almost 3 million numbers to Shoe Perks our loyalty program. Today we have nearly 9 million members whose spend on average 29% more per transaction than non-members, and accounted for 55% of our fiscal 2015 sales. Shoe Perks has become a very important and effective tool for communicating special promotions and sale-offs out to our customers. We have made tremendous progress in creating a seamless, endless aisle experience for our customer. In July, we launched our SHOES2U initiative, which allows our store associates to increase conversion by opening the overwhelming majority of our inventory assortment to every store through the point of sale. The customer is looking for a particular size or style, the store does not have and have it shipped directly to our customers' home. Our sales associate and our customers have embraced this technology which has produced a solid increase in conversion rates. Since the launch of this technology, we're converting sales at previously may have left our store and gone to a competitor. We continue to make improvement to our multichannel capabilities. In the fourth quarter, we redesigned and launched our new and improved Shoe Carnival app. Every customer shops today with a mobile device in their hands, make compares and shop, they solicit input from their friends on social media and once they have found the perfect style our app now allows the customer to quickly make a purchase online directly from the app. We will continue to make investments in our multichannel capabilities. In the near future we plan to launch additional enhancements to our online store by providing Shoe Carnival customers the option to buy online and pick-up in store and by online ship-to-store. We ended the year with 405 stores and 34 states in Puerto Rico. During the fourth quarter, we opened two stores and closed one store. Our store growth plan continue to focus on the strong trade areas within our current footprint and to take our underperforming stores that have minimal opportunity to improve and either we negotiate lease terms, relocate or close the store. As previously announced we came up in our first two small market stores early in the fourth quarter. We continue to be very pleased as both stores are performing above expectations. In 2016 will open approximately 20 new stores with roughly 6 of those being small market stores. We continue to expect consistent small unit growth over the next several years as we take advantage of the opportunity to expand it to new and fill-in existing market. The advantages we have and make this mission a success is our multichannel strategy which gives our customers access to millions of payer representing a vast majority of our total assortment, they can choose product either through the individual stores assortment, which shoes to use from our online store in the comfort of their home or from our mobile app for those on the go. Our plan is to close approximately 8 stores as part of our ongoing strategy to exit stores and we don't believe we'll deliver results in line with our internal hurdle. We will not enter into a new large market during 2016 as we continue to fill in larger markets we have entered under the past several years. Moving on to Merchandise, as I mentioned earlier on today’s call, we are very pleased with the sales performance of our athletic department and fashion boot category. Focusing on sales by department for a moment, women’s non-athletic ended the quarter down low single digit to last year on a comparable basis. Women’s boots and women's dress shoes ended the quarter with a low single digit increase. While women's sandals were up in the 30s, however these increases were all set by decrease in women's sport fall and winter sports casuals. Men's non-athletic was up low single-digits for the quarter driven primarily by men’s dress, canvas casuals, and boots. Kids were up mid-single digits driven by athletic, boots and sandals. And non-athletic was up mid-single digits drive by men's and women's canvas and running along with men's basketball. As I mentioned earlier inventory was up by five-tenths of a percent on a per store basis at the end of the quarter. Anticipation of a stronger than planned tax rate refund fees we shipped some February receipts into January that take advantage of the opportunity. As you've heard from other recolor, tax refunds were actual delayed by several weeks the mid-Jan and mid-February with the shift of these receipts from February to January, we will well positioned to take advantage of both the later tax refund season and the warmer than normal February weather. We are pleased with current content of our inventory and believe our inventory is well positioned than the right categories for the first quarter. Now, I would like to give a little color on our projected 2016 performance. We believe the strong athletic market we have been in for the past year or so will continue throughout 2016. We're also pleased with the early performance of our casual sandal category. In addition our team is finalizing our fall boot buys as we see and we're pleased with the assortment they're building. We believe we once again can play on fashion boots with up slightly for the fiscal year therefore we expect full year net sales to be in the range of 1,007 million to 1,027 million with the comparable store sales increase in the range of 1% to 3%. Earnings per diluted share are expected to be in the range of a $1.58 to a $1.65. Included in the earnings estimate for the fiscal year is the expectation made at the high end of our guidance, that gross profit margin will be flat with buying, distribution and occupancy costs slightly leveraging, offset by the growth of our multichannel initiative. We expect SG&A will decrease slightly as a percentage of sales. With that overview I would now like to turn the call over to Kerry.

[Kerry Jackson:]

Thank you Cliff, and good afternoon everyone. Fourth quarter net sales increased 6.0 million to 233.7 million compared to the fourth quarter last year. The net sales increase was driven by sales of $7.1 million in the 21 new stores opened since the beginning of the fourth quarter fiscal 2014 and a $3.8 million increase in comp store sales. This net increase was partially offset by a $4.9 million loss in sales from the 20 stores closed since the beginning of fourth quarter fiscal 2014. Our gross profit margin for the quarter was 29.2% compared to 28.6% in the fourth quarter of fiscal 2014. This was driven by a 10 basis point decrease in the merchant debt margin and a 70 basis point decrease in buying, distribution and occupancy expenses as a percentage of sales. For the quarter we saw a 50 basis point decrease in distribution cost primarily due to returning to more normalized costs after setting significant increase in cost in Q4 last year due to the court issue. The remaining 20 basis point decrease resulted primarily from the leveraging of occupancy cost against the higher sales base. SG&A expenses increased 1.2 million in the fourth quarter of fiscal 2015 to 61.7 million. As a percentage of sales these expenses decreased to 26.4% compared to 26.6% in the fourth quarter of fiscal 2014. For the quarter the increase in expenses for new stores was mostly offset by expense reductions for stores that have closed since the beginning of the fourth quarter of fiscal 2014. The significant changes in SG&A for the quarter were increases in advertising, incentive and equity compensation and employee healthcare, partly offset by reduction in wages and earnings on our non-qualified returns plan. Pre-opening costs included in both cost of sales and SG&A decrease 206,000 in the fourth quarter of fiscal 2015 to 173,000. Store closing and impairment charges included both cost of sales and SG&A Q4 this year increased 205,000 to 701,000. Effective income tax rate for the fourth quarter of fiscal 2015 was 36.0% compared to 34.6% in the same period in fiscal 2014. Net earnings for the fourth quarter were 4.2 million or $0.21 per diluted share. For the fourth quarter of fiscal 2014 we reported net earnings of 3.0 million or $0.15 per diluted share. Now I'd like to transition to our full year fiscal 2015 financial results. Fiscal 2015 net sales increased 43.8 million to 984.0 million compared to fiscal 2014. The net sales increase was driven by sales of 36.5 million from the 51 new stores opened since the beginning of fiscal 2014 and a $26.6 million increase in comp stores sales. The net sales increase was partially offset by 19.3 billion loss from the sales of the 22 stores closed since the beginning of fiscal 2014. Net earnings for fiscal 2015 were 28.8 million or a $1.45 per diluted share compared to net earnings of 25.5 million or a $1.27 per diluted share in the last fiscal year. Now turning to our cash position information affecting cash flows. We declared a paid cash dividend in each quarter of fiscal 2015 during the first quarter we paid a cash dividend of $0.06 per share and during the second, third and fourth quarters paid a dividend of $0.065 per share to our shareholders. The cumulative amount of dividend returned to shareholders in fiscal 2015 was 5.0 million. During the fourth quarter our board of directors authorized a new share repurchase program for up to $50 million of our outstanding common stock as that of January 1st 2016. The previous plan expired December 31st, 2015. During Q4 we repurchased 380,000 shares for $8.6 million. For the full year of fiscal 2015 we repurchased 809,000 shares for 18.8 million. During fiscal 2015 we expended 27.9 million for the purchase of property and equipment of which 18.2 million was for new stores remodels and relocations, and centers receipts from landlords were 6.6 million. Cash and cash equivalent at the end of the year were $68.8 million, an increase of $7.4 million compared to year-end last year. Free cash flow defined as cash provided by operations less purchases of property and equipment increased to $30.6 million for fiscal 2015. Free cash flow for fiscal 2016 is expected to range between 40 million and 45 million. Depreciation expense was $5.9 million in Q4. Depreciation expense was $23.1 million for the full fiscal year. As Cliff mentioned in fiscal 2016, we expect over approximately 20 stores which will account for approximately $9 million to $10 million of our total capital expenditures. Approximately $7 million of the total capital expenditure will be used for store relocations, remodeling of approximately 5% of our existing store base. Incentives from landlords are expected to be approximately $4 million to $5 million. My final comment today will focus on adding a little color on our earnings expectations for the first quarter. We expect our Q1 comp store sales to increase low to mid-single digit. Additionally, we expect our gross profit margin to be flat to slightly down compared to Q1 last year, and SG&A should be relatively flat to last year as a percentage of sales. We expect to open two stores in Q1 and close four stores. This concludes our financial review. Now I’d like to open up the call for questions.

[Operator:]

Thank you [Operator Instructions]. And we’ll take our first question from Eddie Plank, Jefferies.

[Eddie Plank:]

Thanks for taking the question and nice job in a tough environment. Cliff I wonder if you can just give an update on your national advertising strategy. Maybe what else you’ve been learning from it, and how are you thinking about it going forward into this year? And what the spend might be relative to the prior year? Thanks.

[Cliff Sifford:]

I’ll take the last part of that question first, because the spend this year is going to be flat to what we spend last year dollar wise, not even percent wise, so as a percent it will go down. It’s very difficult to measure the results of national advertising and yet we run focus groups and not focus groups but we do all kinds of resource to see what our recall is and how well the customers are accepting or know the name Shoe Carnival. But this, it really is not an exact science. So, that’s the reason why we remain flat on our spend with national advertising. We’re going to do further research to make a decision as to whether or not we want to increase that rate into ’17.

[Eddie Plank:]

And then just touching on the comp for the fourth quarter I think that ICRE [ph] guys had said you were up 2.9% quarter-to-date. Is it decrease in spend just a result of the delay in tax refunds, or was there something else happening in January, if any color there. And then as a last question I guess Cliff do you have a sense of how big the small market opportunity might be as you go forward with this, or is it still maybe too early to gauge that? Thanks.

[Cliff Sifford:]

On the comp store increase we believe it’s really part to quantify, but as we believe that tax refunds moving out of the last 10 days of January into the middle of the second week of February was the effect, of our ending the quarter at 1.8% up, but we were up 2.9, you’re correct on that. Your second question remind me again, on small markets? I’m very excited about small markets. We’re going to open up approximately six small markets again this year if we can get to more -- actually open more. But we think we love the concept, we like the way the store looks and we see that as a viable in fact the robust growth opportunity as we go forward over the next few years.

[Kerry Jackson:]

And what we said is we think that there is an upward potential of that small market concept might be 450 stores for us. So between our traditional stores in the small market we now say that we think we have about 1,200 stores across the nation.

[Eddie Plank:]

Great, thanks for the clarity and the update there. Kerry real quick if I could sneak one more in. Should we expect the similar amount of buybacks in 2016?

[Kerry Jackson:]

Well, we had a very nice cash flow and we have -- we showed capacity to buyback in the second half and we -- it depends on the stock price, we’re not going to chase it and compete with shareholders, who are driving the stock up, but if we see some opportunity we will buy into it.

[Eddie Plank:]

Okay, but it's not baked in the guidance right now?

[Kerry Jackson:]

There is a minimum amount built into the guidance. I think there is average of 80,000 shares purchased per quarter built in that cut in net guidance and that equates to about a pennies worth of benefit of that high end of the $1.65.

[Operator:]

And we’ll take our next question from Chris Svezia with Susquehanna Financial Group.

[Chris Svezia:]

good afternoon gentlemen and congratulations on a really good quarter in a tough environment there Cliff, I was wondering if you would maybe talk a little bit -- you've gave Q1 guidance in terms of comp, so you what I am going to be ask so I am just curious about where you are broadly at this point. Any color you can add what happened as you stepped into February and refund started pouring and accelerated?

[Cliff Sifford:]

I'll tell you where we are. I just want to caution right up front that we're entering into the Easter season, so Easter moved up a week, so that's going to make the comps look a little better than they may end, but the tax refund season move into February certainly helped fill some sales growth and then the week earlier Easter. So right now we're up high single digits.

[Chris Svezia:]

Okay and then can you remind me of what you're up against as you go through the bet for March and April last year, just what were comps in March and April last year?

[Kerry Jackson:]

You have to combine to Easter moved around on this so they were mid-high single combined March to April.

[Chris Svezia:]

So basically you're assuming, basically low single digit comps for the balance once you get through Easter?

[Cliff Sifford:]

Here's what we're concerned about Chris is that we had a very warm February, very warn February and warmer than normal first part of March. Our sandal business is really strong not only in dress sandals, but in casual sandals and we're concerned that maybe we moved some sales that would have happened in April earlier into the season and we want to be cautious about that.

[Chris Svezia:]

Okay, got it and Cliff your recent comment about declines from a category perspective in you’ve said sport casual categories and something else when it came to women, can you maybe explain what that --?

[Cliff Sifford:]

It was a sport causal category that would be heavier at it. I don't want to name any brands but -- brands that traditionally bought in the Fall, warm period worn with jeans and I’m just not going to mix in brands, but its more Fall looking casual product [Multiple Speakers].

[Chris Svezia:]

And then you've made comments about athletic you had higher margins year-over-year in athletic in the quarter, can you just explain where it touches mix?

[Cliff Sifford:]

We're on a strong athletic trend. There is no question about that as you know and there is no reason to get promotional on the athletics’ way of selling, so we didn't and it was canvas product. Again we had warmer than normal fourth quarter, so canvas continued to comp up at a tremendous rate fashion athletic including retro kind of classics and running both fashion and performance.

[Chris Svezia:]

And the guidance for 2016, I just want to understand Cliff, can you walk to that one more time on the gross margin, you're expecting it to be flat, where buying distribution and occupancy is what is -- could you just walk through that one more time?

[Cliff Sifford:]

Yes, sure. We expect -- I am going to just read it back to you, the expectation that high end of guidance gross profit margin will be flat with buying distribution and occupancy slightly leveraging offset by the growth of our multichannel initiatives. We expect [indiscernible] made a decrease like --.

[Chris Svezia:]

What happened, I am just curious on the product margin -- what happens with product margin, I mean if you're getting better margins in athletics which would technically, if I mixed perfective may skew it down slightly and your inventories look pretty good, I am just curious from product margin perspective I don’t think --.

[Cliff Sifford:]

We don’t expect product margins to be down, we expect product margins to be, maybe even slightly up, but what happens as we build in the shipping cost for our multichannel initiatives into the margin that I talk about.

[Operator:]

We'll move to our next question from Jill Nelson with Johnson Rice.

[Jill Nelson:]

Good afternoon, quick clarification just on 2016 SG&A, do you plan to it up or down slightly?

[Cliff Sifford:]

2016, we expect we’ll decrease slightly as a percent of sales

[Jill Nelson:]

Okay and then I know you've talked about marketing spend leveraging, could you just talk about kind of the wages you're looking given we've got hormonal wage across the board, retailer share increasing just kind of that component of it?

[Cliff Sifford:]

Jill our operations team has done an excellent looking at wages on a door-to-door basis based on sales for each door and actually putting together schedules in each stores for minimum coverage or not minimum coverage, but appropriate coverage, and we're going to be on the leverage payroll.

[Jill Nelson:]

And then just e-commerce, if you could update us, is it still tracking kind of around 1% penetration of total sales and if you segmented that is it profitable share, when can we get to that?

[Cliff Sifford:]

We don't talk about e-commerce as a percent of sale at all, I'm not even sure where the 1% came from. We don't talk about that at all. It's just another store to us.

[Jill Nelson:]

Okay, thank you.

[Operator:]

And we'll take our next question from Sam Poser with Sterne Agee.

[Sam Poser:]

Just real quick, most of my questions have been answered. Do you expect the comps to be up each quarter during the year or you had one big quarter last year, is it sort of going to go from low mid to low singles of getting to the 3 that way [multiple speakers].

[Cliff Sifford:]

We're not looking to have a decrease in any quarter although we don't give quarter guidance. The reason we had one quarter that was higher than normal last year was remember back to school tax free three days moved into August, out of July.

[Sam Poser:]

Got you, and that's just sort of a crap shoot.

[Cliff Sifford:]

Well know, this, we don't anticipate a move back into July until we have another 53 week year.

[Sam Poser:]

Which is next year.

[Cliff Sifford:]

That's correct.

[Sam Poser:]

Anyway, thank you very much, good luck.

[Operator:]

And we'll take our next question from Jeff Stein with Northcoast Research.

[Unidentified Analyst:]

Hi guys this is Sean Conon [ph] calling in for Jeff. Thanks for taking our questions. What do you guys expect to be the key drivers of comp store sales growth of next year in areas of unit per transaction conversion are raised and price. And also we’ll be talking a little bit more about your CapEx spend for the year. Talking about maybe your key areas of focus that you guys expect to shield in the year as far as capital spend and focus there, thank you.

[Cliff Sifford:]

Sean its Sifford, we do as I said in my prepared remarks we do expect to see a continuation of the athletic trend that we've seen so far. We're really pleased with the early results from our sandals category and we think that we we're going to have another decent year in the boot category with what we've seen our merchants put together. Kerry do you want to talk about CapEx?

[Kerry Jackson:]

CapEx totals of a 19 to 20 million, you're going to see it's heavily weighted, but to second point of store opening relocations and remodels account for the majority of that 19 to 20 million. Outside we don't really have any unusual projects this year outside the normal store growth, remodels, relocations, and just keep up our stores.

[Operator:]

[Operator Instructions] And we'll take our next question from Steven Martin from Slater.

[Steven Martin:]

Hi, guys, Kerry just a quick maybe a serial question, can you give us the shares outstanding at year end and whether you bought shares quarter to date so far?

[Kerry Jackson:]

You're talking about the actual shares outstanding, not the weighted average shares?

[Steven Martin:]

Yes, the actual shares outstanding.

[Kerry Jackson:]

I don't have my finger on that. Obviously we've been in closed period since year end, we do have a 10B5 plan out there and we bought a few shares back through, but the stocks spin reacting well so it hasn't been a significant number of shares.

[Steven Martin:]

Okay and on your store openings 12 is sort of the lowest number you guys have had in a while, is that sort of a minimum signed number or is that sort of what your real target is. Is there upside to that if sites become available.

[Kerry Jackson:]

Are you saying that 20 stores is on a low over historical levels?

[Steven Martin:]

I'm sorry 20, I was looking at the net. But 20 is sort of about where you've been and I know you've been talking about where you know to head. So.

[Kerry Jackson:]

We do want to accelerate our growth. We've made some additions to our real estate team and we got in are working on it, it's -- the fruits of their labor may not come in till next year, till fiscal '17 where we'd expect to accelerate our growth in '17 if the economy supports that kind of growth level, but there may be a little upside to the 20 stores that are out there working hard to get us to more of the right now that's our best guess on the 20.

[Steven Martin:]

Let me ask in a different way. How many of the 20 are signed and sealed?

[Kerry Jackson:]

It's still very early and we haven’t located the sites that’s having, there's probably only a third of them that have actual signed deals on. And I'm not worried about that because that’s not unusual at this stage.

[Steven Martin:]

Okay, going in 2016 you talked about the categories you expect to drive comp. where do you expect that to come from or is it a continuation of the addressed area?

[Kerry Jackson:]

Well I think it's, I think the driver of the comps, we've shifted dollars out of other categories but you know what for competitive reasons we really don’t want to tell everybody that's listening the exact dollars are coming from but we've shifted dollars to fund the categories I’ve just talked to you about that I mentioned in my prepared remarks along with the couple of other categories. But the ones I’ve just talked about in my prepared remarks is where I really believe it’s coming from.

[Steven Martin:]

And where do you expect ASPs in 2016?

[Cliff Sifford:]

We expect ASPs at to be up low singles.

[Operator:]

And we have no additional questions in the queue. I’ll turn the call back to Cliff for closing remarks.

[Cliff Sifford:]

Okay. I want to thank each of you for your interest in Shoe Carnival, and I look forward to speaking to you again in May as we announce our first quarter results. Thank you again.

[Operator:]

And that does conclude today’s conference. Thank you for your participation.