Q1 2023 Shoe Carnival Inc. Earnings Call
Speaker 1: Good morning and welcome to Shoe Carnival Inc. Fiscal Year 2023 First Quarter Earnings 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.
Speaker 1: 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 also be considered in conjunction with the discussion of risk factors included in the
Speaker 1: 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 conference over to Mr. Mark Worden, President and CEO of Shoe Carnival for opening remarks.
Speaker 2: financial officer.
Speaker 3: the embankment community ahead.
Speaker 2: Let me start out today saying that Q1 was a challenging quarter.
Speaker 2: While we continue to make significant progress against our long-term strategies and achieve many important milestones, we saw softer than expected consumer trends develop in March and April and unseasonable weather persist throughout quarter-ends.
Speaker 2: The biggest headwinds that our customer faced in Q1 were persistent inflation across everyday expenses they need to spend on, interest rates continuing to climb, and unexpectedly, federal tax refunds ended the quarter with a nearly 10% reduction versus the prior year.
Speaker 2: Historically, our traffic and sales surge when our customer receives their annual tax refund.
Speaker 2: This year, the reduced tax refund amounts did not generate traffic levels at prior year.
Speaker 2: These headwinds resulted in store traffic declining approximately 10% versus prior year.
Speaker 2: What we saw was a segment of customers from lower income households who had stretched disposable income. They delayed their shopping trips for footwear, apparel, and accessories.
Speaker 2: Further more, spring weather did not improve in the second half of the quarter, as unseasonably cold, wet conditions persisted across most of our markets.
Speaker 2: This resulted in a sample season that did not mean to start at the March or April .
Speaker 2: All combined, Q1 sales and earnings finished at the low end of our annual expectations.
Speaker 2: We see a pathway to deliver the low end of our original annual guidance if economic conditions improve this summer. However, we do not have clear visibility to when the economic landscape will turn positive. As such, we are reducing our annual sales and our profit guidance.
Speaker 2: to reflect the short-term economic uncertainty.
Speaker 2: Eric will review the updated guidance shortly. Despite the challenging economic backdrop, I'm incredibly thankful for our nearly 6,000 team members' commitment to deliver the preferred footwear shopping experience.
Speaker 2: Their focus on advancing our long-term strategies led to many wins and has us in a strong financial and operational position to accelerate profitable growth as soon as we have visibility to the economic landscape improvement.
Speaker 2: I will now provide an overview of the company's key strategic progress and results of the quarter.
Speaker 2: overview of the company's key strategic progress and results of the quarter. Guardian
Speaker 2: The achievement I'm most energized about is how fast we grew our loyal customer base this quarter.
Speaker 2: in a quarter end, growth of 12% versus the prior year. This is the fastest expansion of members in any quarter over the last three years.
Speaker 2: Although a segment of customers are currently not in a strong buying position, they're still engaging actively with retailers they love and making decisions of where they will shop for a book where, when economic conditions improve. Simply put, more and more customers every day are taking months.
Speaker 2: Our CRM platform has now reached a meaningful scale and have advanced capabilities to engage with the American footwear shoppers wherever and whenever they choose.
Speaker 2: We now engage all in going with approximately one out of every eight American adults, up nearly 55% from just five years ago. We now engage all in going with approximately one out of every eight American adults, up nearly 55% from just five years ago.
Speaker 2: Our commitment to providing this group to prefer family footwear shopping experience has customers rapidly choosing to become part of our shoe perks customer loyalty program. With this large-scale customer reach, 70% of our sales now come from our loyalty members at a very efficient cost to engage.
Speaker 2: We continue to see this a core advantage of our company and our confidence. We will keep growing our customer base this year and in the year that.
Speaker 2: margins of over 35% for the ninth consecutive quarter.
Speaker 2: Over the last few years, we have sustainably transformed our margins from among the lowest tier in our industry to the top tier.
Speaker 2: We've done so by leveraging our deep customer relationship management capabilities and analytics to engage profitably with our customers.
Speaker 2: to provide the freshest in-demand products they want at the right value, and to deliver the customer the preferred shopping experience.
Speaker 2: As a benchmark, the 35% for us profit achieved this quarter is growth of over 500 basis points from just four years ago. Our customer sales conversion climbed this quarter to the highest level in nearly two years.
Speaker 2: The customer that is ready to make a footwear shopping trip into the challenging economy is finding the brand and shopping experience they love at Shoe Carnival and Shoe Station stores.
Speaker 2: Our compelling assortments at the right value for our target customers generated not only strong margins and conversion growth, but resulted in yet another quarter of market share growth for our company.
Speaker 2: sustain and healthy margins, and build it even stronger financial position for future growth, while also providing our customers the freshest products for the remainder of 2023.
Speaker 2: Progress is encouraging on all fronts, and Karl and Eric will elaborate more shortly. But here are the headlines.
Speaker 2: We ended 2022 with inventory of $105 million versus the prior year, with plans and plays with our vendor partners to right-side this level rapidly during 2023. I'm so pleased with the progress made already, as we ended Q1 with approximately 45 million, more inventory versus prior year, chipping away about 60 million...
Speaker 2: with no material-based inventory concerns.
Speaker 2: I can share if we remain confidently on track for inventory to be below prior year levels after back to school and on track to deliver our annual guidance to be approximately $40 million below prior year inventory by year end.
Speaker 2: Our merchant team has done an excellent job managing the balance of freshness, margins of liberty, and inventory levels. As always, demonstrating they, along with our partners, are best in class.
Speaker 2: Carve a little elaborate on him as for any moment.
Speaker 2: Our athletic inventory position has also materially improved versus last year.
Speaker 2: As you recall, vendor supply chain issues disrupted our on-hand inventory for back to school 2022, and we disappointed some of our athletic shoppers last year. This year, we have the athletic brand consortium, depth, and freshness in hand that we did not have last year.
Speaker 2: While I'm not saying the customer economic issues driving soft traffic will be solved in Q2, I do see we are in position to continue to grab athletic market share this year, convert it to very high levels and maintain our healthy growth profits in this declining market environment we face.
Speaker 2: Our store development plans continue to advance with success.
Speaker 2: The Shoe Carnival fleet modernization continues to roll out rapidly and is on track for approximately 60% of the chain to be completed fiscal end. We see this as a key contributor to our sales conversion growing and a differentiator to our customers who are rewarding us with continued market share growth.
Speaker 2: New Shoe Station store growth continues to deliver on our expectations. One of our big wins has been the market entry into Birmingham, Alabama grand opening two stores over the past six months. These stores are pacing to be among the strongest in the shoe station fleet.
Speaker 2: and in the top tier stores across the entire corporation. We're seeing great success as we bring our new GewStation prototype store to customers in adjacent markets.
Speaker 2: These expansion winds give us confidence to advance the fodder rate on a roadmap to reach 100 stores for shoe station and over 500 stores for the corporation in 2028. We are seeing our shoe station battles show positive signs over the past weeks.
Speaker 2: With shoe stations more of fluid customer base, the addition to our CRN platform and the launch of the online platform, shoe station is outperforming the overall company.
Speaker 2: compared to shoe carnival, low-delted engine. However, over the past few weeks, the shoe station batter is building momentum and growing mid-to-high slingles.
Speaker 2: We continue to see shoe station capable of growing in the quarters ahead despite the economic headwinds discussed.
Speaker 2: The bottom line for the quarter is that customer traffic was disappointing due to unfavorable near-term macro conditions and unseasonable weather. Yes, our foundations were stronger than our customer growth accelerated to a record level. Gross margins sustained at very high levels. Customer conversion surge, a fresh product, great-
Speaker 2: with the top-tier returns in our sector.
Speaker 2: I am confident in the American consumer resilience and in our economy returning to health ahead. When it does, we are ready to rapidly accelerate growth. We are ready to rapidly accelerate growth.
Speaker 2: I would now like to ask Carl to provide further color on the quarter and year ahead. Carl, thank you Mark. As highlighted, today's first quarter performance was below our aspect patients.
Speaker 4: Persistent inflation and the large reduction in tax refunds were major factors of effective Q1.
Speaker 4: We anticipate that the weather won't have normalize the back half of the quarter, but unfortunately that number would carry a lot.
Speaker 4: As a result, cells and seasonal categories, they're not hidden expectations and contributed to the shortfall.
Speaker 4: our consumers using our CRM program to maximize sales, reducing our inventory throughout the year, and continuing to deliver our transformational product margin. Five categories, first quarter cop sales and women's non-athletic footwear, were down low double digits with dress in boots.
Speaker 4: being down over 20%.
Speaker 4: Sales and movement sends were negatively affected by the lane of arrival of spring, and consales were down high to the category.
Speaker 4: Sport and Casuals were the bread spot, the sport down most single digit, Casuals increased mid-send images.
Speaker 4: Men's not at all accounts, we're also down low double digits with casual style mid singles. Men's dress was down low double digits and boots down high tens.
Speaker 4: Children's comp sales were down high singles with non-ethnic blood and athletic down low genes.
Speaker 4: Comp sales and adult athletic football were down low teens. Due to the late start of new seasonal selling and enhanced promotional activity in the marketplace, merchandise margins were down, however remained up 750 basis points over pre-pandemic levels.
Speaker 4: This further demonstrates the transformation of our promotional strategy. Our outstanding team of mortgages continues to collaborate closely with our vendor partners ensuring the appropriate flow of product to our stores.
Speaker 4: Our best in class and under relationships are enabling us to adjust to the consumer demand.
Speaker 4: The result of the inventory reducing has been moved through the year.
Speaker 4: We entered first quarter with inventory up 36.9% versus the previous year. First quarter ending inventory was up 13% versus 2022.
Speaker 4: anticipate we will finish the year at the previously stated level approximately $40 billion below fiscal 2020 to ending inventory. Currently, our inventory content is clean and we see no reason to aggressively promote distressed inventory to achieve our goals.
Speaker 4: As we move into the back to school timeframe, we will be in a much better new toy position versus 2022 with the most desirable key and athletic brands.
Speaker 4: This will position us the maximum sales opportunity during this critical selling season.
Speaker 4: appropriate as we move through the second quarter of the balance of fiscal 2023.
Speaker 4: will help customers grow.
Speaker 4: We have seen success engaging with our oil consumers with targeted offers. This program continues to drive sales and plays a key role maximizing margins or reducing inventory levels. Using this data enables us to communicate to our over 30 million, 32 million consumers and continues to maximize sales opportunities.
Speaker 4: without reducing margins below expectations. With that, I would turn to holding the air for a review of our financials. Air is.
Speaker 4: margins below expectations. With that I will turn the call to Eric for a review of our financials. Thank you Carl, good morning everyone.
Speaker 4: First, I joined Shoe Carnival in late April and am appreciative of the collective team and how they have supported me in the transition from Kerry Jackson, the previous CFO . Kerry, as you know, is 35 years and recently retired.
Speaker 4: I am looking forward to continuing the good work you started and working with the team that's you vulnerable.
Speaker 4: Having worked over 30 years with most of that time in retail, I'll look forward to sharing experiences in collaborating with the shoe carnival team.
Speaker 2: The company has long-term plans to grow to over 500 stores and become a multi-billion dollar retailer in 2028 and I am excited to be a part of it.
Speaker 4: Now moving to the financial results.
Speaker 4: In my remarks, I will compare our first quarter results with the first quarter of 20,022.
Speaker 4: Noting comparison to 2019 if needed for context.
Speaker 4: Starting with revenues, our net sales in Q1 were 281.2 million.
Speaker 2: This is down 11.4% on a comp decline of 11.9% versus prior year.
Speaker 2: To offer some perspective, while representing a larger than expected decline, the sales were the third highest first quarter in company history. The conflict line was driven by a approximately 10% reduction in traffic. Our consumers are being negatively impacted by inflation and lower tax refunds.
Speaker 4: him in at a mid-single digit decline versus shoe station banner sales at a low double digit decline. Q1 gross profit margin was 35%, reflecting the ninth consecutive quarter at or exceeding 35%. The margin reflex continued advancement.
Speaker 2: in our CRM capabilities, resulting in high customer conversion and increased loyalty to members as Mark discussed.
Speaker 2: The gross margin represents an increase of over 500 basis points compared to pre-CRM implementation and pre-pandemic in 2019. Compared to prior year, merchandise margins decreased 30 basis points, reflecting our promotional intensity.
Speaker 4: Buying distribution and occupancy costs declined, however. We're deleverging by 20 basis points as a result of the sale of declines.
Speaker 4: The buying, distribution, and occupancy expense reductions
Speaker 4: We're primarily the result of the absence of the high distribution cost experience in the prior year with a return to more normal levels this year. We're primarily the result of the absence of the high distribution cost experience in the prior year with a return to more normal level.
Speaker 5: Cash G&A expense in Q1 was 77.6 million.
Speaker 5: while essentially flat in cost to the prior year was deleveraging to 27.6% as a result of the sales decline. Overall SG&A expenses were under planned with increases in depreciation associated with our store modernization program and healthier costs.
Speaker 5: offset by reduced selling costs when compared to the prior year. Q1 operating income lost $20.9 million or 7.4% of sales.
Speaker 5: This is at the low end of our expectations. Net income for the first quarter of 2023 was 16.5 million, or 60 cents in diluted earnings per share. Although this was our third highest Q1 diluted EPS, with only 2022 and 2021 being higher, this was at the low end of our expectations.
Speaker 5: We closed out the quarter with inventory of 389 million, which was up approximately 45 million compared to the prior year, or 12.3% on a per store basis. The increased inventory reflects an improved athletic merchandise assortment for back to school shopping this year.
Speaker 5: the increase of 45 million compares to 105 million higher than the prior year just three months ago.
Speaker 5: After back to school shopping, we do expect a mentor to be lower than last year and be approximately 40 of me in lower by year end 2023 compared to year end 2022.
Speaker 5: We continue to have ample liquidity to fund our growth initiatives. At the end of Q1, we had total cash, cash equipments, and marketable securities of 44 million and no outstanding debt. As of the end of 2022, the company has maintained no debt for the 18th consecutive year.
Speaker 6: purchases.
Speaker 5: We currently have the full amount of 50 men available for the SHIR Repurchase Program.
Speaker 5: Given the Q1 results driven by traffic declines and consumer trends, we now are updating our Sales Guidance for Fiscal 2023.
Speaker 5: To down three to down 6%.
Speaker 5: compared to the prior range of down to to up to. We are expecting gross profit margin to be between 36 and 37 percent.
Speaker 5: versus prior guidance of approximately 37%.
Speaker 5: For the year including the extra week, we are lowering our deluded EPS guidance to 360-385 from previous expectations of 396-420. This expectation of 396-420.
Speaker 5: In closing, allow me to share some initial observations about the company. There are headwinds upon the industry. We highlighted them.
Speaker 5: macroeconomic conditions, promotional intensity, and higher inventory. However, I am encouraged about the company.
We have no debt. We are producing product and gross margins that are up meaningfully in a transformative way versus pre-pandemic periods. Plans are underway to reduce the inventory and are being implemented as evidenced by the current quarter reduction. For more information, visit www.fema.gov
has solid financial fundamentals to build and grow upon that can outlast an economic downturn. There is an ample growth opportunity for the business.
I am glad I am here and look forward to working with the team and all of you.
This does include our financial review. Now I would like to open the call up for questions. Thank you. If you have a question, please press star one on your telephone keypad to withdraw your question, simply press star one again. One moment please for your first question.
Your first question comes from the line of Mitch Kumitz with Seaport Research. Please go ahead.
Yes, thanks for taking my questions and I'd like to welcome Eric. Let me start with the guide. Can you update us on SGNA and either Operating Margin or EBIT for the year? There's nothing in the release and I didn't hear anything in your comments, but I think you previously had given guidance on those. Why not?
Sure, Mitch, and thank you for that time. Welcome. SDNA, as you know, in our previous guidance, we pulled out approximately 25.6%. As we look through the balance of the year, we continue to look for cost management.
And as we look through operating income, you can see that our EPS does reflect that continued management. So the guidance that we would give is that our, our,
Our percentages are going to be consistent with what we've provided in the original guidance. There will be some increased basis point changes possibly in the range of
30 to 50 basis points.
30 to 50 basis points. Regarding operating the outcome.
Regarding operating income, we've talked about the original guidance of 11.4%. Really, we're looking at a range of, there is going to be some impact to the operating income in the range of 40 to 100 basis points as a result of the sales decline.
Got it. All right. Thanks for that. Then just looking at the revised sales guidance.
All right, thanks for that. Then just looking at the revised sales guidance,
Obviously it came down to the year, but it looks like at least I can kind of back into growth that sort of flat to maybe upload single digits over the balance of the year on a year-over-year basis, which is obviously
better than what you achieved in the quarter. Can you just elaborate on why that is, that just, you know, that we're past tax refunds, you expect the weather to be more normal. I'm just kind of curious your assumptions around the consumer to kind of get to those numbers. And also if there's any color you can kind of provide.
by quarter, I would guess that your movie was optimistic around 3, 2, just given what you set around back to school and better athletic inventory, but maybe some more color that would be helpful.
I would guess that you're maybe most optimistic around 3-2, just given what you said around back to school and better athletic inventory. But maybe some more color there would be helpful. Hey, Mitch. It's Mark. Thanks for joining today. We wish youWell and have a great day.
Yeah, you got it right with those key elements. We see back to school being significantly improved versus last year, as I shared on the call, athletic inventory positions, it's in hand, it's fresh, and it's far superior to the supply chain disrupted back to school we had last year.
We think it's going to come in Q3 of Mitch. We're still seeing the macro headwinds in Q2. But we believe our Q3 position is ready to go from back to school and then moderate as the year continues on, as inflation continues to get more and more in control.
I think the second thing he talked about that is encouraging, I talked briefly about it, as the weather has turned, our shoe station business getting some good momentum along with the new stores, at shoe station the dot com going live, CRM going live, yeah we're growing. The colors changing soon yeah.
nicely as we progress into this Q2. And we see that continuing to accelerate as the year goes on. So we're really highlighting that. We think shoot cardibles.
segment of customers that are really hit by the inflation, it's that small segment, under a third of our customers, that's the variability that we're just not sure yet when that customer is going to be healthier, which quarter that's going to turn. As soon as it does, we're in great shape, so Stark is accelerating growth.
Got it. And then Carl on sandals, I know they were challenged in the quarter. I believe that, you know, Q2 is by far your largest sample quarter. You know, what are you thinking there? Do you think there's pent up demand for the category? And how do you feel about that, how do you think the companies would play up to that?
your inventory and your ability to kind of work through that in Q2.
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I'm sorry, this is the operator. Could you start again? The line is coming in broken.
Hopefully you guys can hear me better now. The question has to do about sandals. I was asking Carl about sandals. Obviously they perform well in the quarter, but I was curious if you feel like there's Q2 being your biggest quarter for sandals.
Do you think there's pent-up demand and how do you sort of expect that to play out? How are you planning that for the second quarter, especially kind of working through whatever stand-up inventory you have?
Thank you.
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Thank you for your patience, ladies and gentlemen.
We will continue with Mitch Kummitz's question.
So I don't know if you guys heard my question about sandals. It's really for Carl. I was just curious about your outlook for TQ, that being your biggest sandal quarter, wondering if you think there's any pent-up demand, just given the challenges in the first quarter and also how you're expecting to work through your sandal inventory, given the shortfall in Q1. handle this problem in your question. Chase.
Sure, Mitch, thanks. We do believe, I don't even see some movement on the business, as we have consistent warm weather that has hit a part of most of the Midwest. So we're encouraged by some very recent...
Sandal business, and the shoe carnival business, shoe station business. It actually started a bit earlier, pretty much, I believe, based on the geographic of that business, and a higher income consumer that tends to shop earlier. In regards to the inventory, we have made the necessary adjustments to the inventory for the shoe business.
in a better inventory, more reduced inventory position than we did last year. So we're confident we've got that business under control.
All right, thanks. I'll just get back in the queue. Once again, ladies and gentlemen, if you have a question, it is star 1. And there are no further questions at this time.
You talked about the gross margin. Obviously, it's down year over year, but still way up from four years ago, particularly on the merch margin side. I am curious. You guys still do BOGOs, but you do them very differently than before. Is there any way you can comment on the margin of the BOGOs? Is there any way you can kind of isolate that and talk about how that's – —
different from what it was four years ago? Sure, I'll take that. Any BOGO promotion that we run, and we only do it a couple times a week, a seasonal product that we have purchased at a very advantageous price. So they're planned in on selected items.
and the margin on them during BOGO actually is in line with the total company margin. And in fact, in some cases, this margin increases. So they are limited time, very targeted product, and merchandise that was bought for that intent. And so how does that compare from like –
and how much of that's kind of a story for the overall margin expansion of the business.
Sure, Mitch, that is definitely the story. The BOGOs that we used to run included the entire inventory. They weren't targeted and the margin was you're pretty much dead on about a thousand basis points, allude to the margin we run today on the very selected BOGO products. So that is a major factor in the trend.
We've been producing. Got it. The only thing one lasts for me, just on back to school and athletic. Can you, Carl, can you speak to how much better the athletic inventory is versus last year? I don't know if you can kind of speak to it percentage terms.
And then just remind us of the athletic comparison that you're going up against for back to school. I assume it's a pretty easy call. Yes, it is. The athletic inventory, we go back historically, when we looked at last year, our athletic inventory was really hampered by supply chain leaks.
We received quite a few delays with prior to the pandemic, actually late August into September and missed the back to school timeframe. In addition to that, we...
We have many products that we purchased that frankly we never got. So from an athletic standpoint, I see a major improvement also in products, but in the quality of the brands and the quality of the products we have. And we anticipate with respect to the invention that you have around it for new subject. And if you feel comfortable with that, you're in matches and even there's a little noise in people.
our athletic inventory as we go into the back-to-school time frame being up in the teams. But it's really that the quality of the inventory that we have and the timing of the delivery of that inventory actually
actually sending July and the team and as we move through the early part of August around 20%.
And then yeah, let me check if you want to point up. So if you look at comps last year to remind you Q2 was down 13.8% and it was really driven by.
between 15 and 20% declines in comp in June and July during that period where our supply chain was really disrupted. So we see that as an opportunity with this great position Karl talked about to claw back, gain market share, and have a much more solid Q2 than we did last year.
Okay, and then I guess maybe one last one for me. Just on the loyalty, Mark, I know that Shoe Station is now plugged into Shoe Perks and has access to all of those loyalty members. What have you seen there? Have you seen some of those customers buying?
Product from the shoe station, especially maybe some grants and some price points that they didn't have access to in the shoe carnival stores.
We do. We see we got almost 2 million people already joined Super on two stations. But I would see a great opportunity to grow that rapidly. We're just starting now to engage with them. And we are. We're seeing them buy purchases in different price tiers now that they can cross shop.
We're seeing them engage with different categories that they haven't had before. And importantly, we're seeing the direction to where the Shoe Carnival Shoe Parks members are also being introduced to new products from the new brand too that aren't offered. This is a big opportunity for cross introducing over the quarters ahead and really fueling growth. Thank you.
All right, thanks, guys. Good luck. Thank you, Ms. There are no further questions at this time. I will turn the call back to Mr. Mark Worden. Thank you all for joining us for today's call. Thank you for bearing with our technology struggles there for a moment.
We look forward to talking to you all again as we get into the back of school season and have you to report. This concludes today's conference call. Thank you for joining us. You may now disconnect your line.
We look forward to talking to you all again as we get into the back of school season and have Q2 reports. This concludes today's conference call. Thank you for joining us. You may now disconnect your line.