Shoe Carnival Inc (SCVL) 2015 Q2 法說會逐字稿

Good afternoon and welcome to Shoe Carnival's FY15 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. These forward-looking statements should be considered in conjunction with a 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 speak only as of today's date. The Company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release, to reflect future events or developments. I will now turn the call over to Mr. Cliff Sifford, President, Chief Executive Officer and Chief Merchandising Officer of Shoe Carnival for opening comments. Mr. Sifford, please begin.

Thank you and welcome to Shoe Carnival's second-quarter FY15 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 a 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 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 expectations. As a reminder, last year in the markets we serve 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 conversions showed positive growth for the second quarter, due to the strength of our inventory selection. We ended the quarter with inventory of 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 continue 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 then 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 by providing a robust selection of nationally recognized footwear brands.

We continue 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 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 opening our full inventory selection to every store. For example, if the store does not have the particular size or style a customer is looking for, the store associate can order it on the spot and ship it directly to the customer's home. We continue to make improvements in our multi-channel capabilities and our next steps will include the options for customers to buy online, and pickup in store and the ability to buy directly from our Shoe Carnival path 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 renegotiate lease terms or relocate or close the store. We ended the quarter with 400 stores and 34 states and Puerto Rico. We recently hosted a major brand 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 onto merchandise. As I said earlier in this call, we started off the quarter strong and then in this 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. Focusing on sales by department for a moment. 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 basketball.

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. And the men's casual boots were up low double digit. As I mentioned earlier, we are pleased with our comp sales performance in August which is in line with our expectations for the quarter. The result for August is included in our guidance for FY15 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 a potential for us to outperform our guidance if we see similar weather patterns to last year. But 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 the second half of last year. With that overview, I would like to turn the call over to Kerry.

Thank you, Cliff. Second quarter net sales increased $5.7 million to $227.8 million as compared to the second quarter last year. The net sales increase was driven by higher sales then $9.2 million from that 36 new stores opened since the beginning of the second quarter of FY14, and a $1 million increase in comp store sales. Partially offsetting the net sales increase was a $4.5 million loss in sales from the 18 stores closed since the beginning of the second quarter of FY14. Our gross profit margin for the quarter increased 110 basis points to 29.1% from 28% in the second quarter last year. This was driven by a 110 basis point increase in the merchandise margin while buying, distribution, occupancy expenses remain 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 points due to a tepid response by customers to our spring merchandise and higher levels of clearance products. 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 FY15 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 costs included in both cost of sales and SG&A decreased $1.5 million in the second quarter of FY15 to $355,000. Store closing and 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 FY15 was 38.8%, as compared to 38.9% for the same period in FY14. For FY15, 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 share repurchase authorization. Depreciation expense was $5 million in Q2. We continue to expect depreciation expense to be approximately $23 million for the full fiscal year. We expect capital expenditures for FY15, 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 will be used for store relocations or remodels. And we continue to expect lease incentives in the range of $5 million to $6 million for the year.

My final comment today will focus on adding a little color on our sales and earnings expectation for the third quarter of this year. We expect our Q3 comp store sales to be up mid-single digits. In Q3, we expect to deleverage our SG&A primarily due to a $3.5 billion increase in advertising costs, primarily based in the shift in back to school and tax-free 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 margin is due to a combination of the shift in back-to-school and tax-free dates as well as expenses related to our multi-channel sales initiatives.

Based on our view of the second half of the year, we believe we're on track to achieve our FY15 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 $1.42 to $1.48. This represents an increase of 12% to 17% over our FY14 earnings per diluted share of $1.27. This concludes our quarterly review. Cliff and I are now available to take your questions.

(Operator Instructions)

Eddie Plank, Jefferies.

Hi. Good afternoon, guys. Thanks for taking the question. 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 boots. I know the compare is tough from here. How do we think about it playing out over the next month? 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.

Well, 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 very pleased, and I think I've mentioned this in the prepared remarks, but very pleased with the performance of our athletic business during the month of August. We still believe -- all of our schools are not going back. So we still believe we have back to school sales yet to go for athletic.

As far as boots is concerned, we've been very pleased with the boots actually all year. But in 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 it only takes one bad day in the month of November to wipe away the increase you have in the month of August. But the fact is that we have double digit increase in the month of August last year in boots and this year we're confident to have double digit on top of that.

Great. That's helpful. Kerry, I just wondered if you could give us a little bit more clarification? The color on the third quarter was very helpful. Maybe how to think about merchandise margin you have in the fourth quarter because you have a similar opportunity. I don't think it's as big as the 90 basis point two year decline you had in the second quarter but it's pretty meaningful. I guess maybe how to look at it in the context of the tougher compare. Thanks.

Well, because we do have -- 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 to get a benefit of a positive merchandise margin or gross profit. On top of that, we don't expect to incur the additional cost we did for the fourth slowdown issues and therefore, we expect the leverage of our BD&O -- we should expect to leverage that nicely on a mid-single -- on an increase in comps because of lower expense structure.

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

Thank you.

Chris Svezia, Susquehanna.

Good afternoon, everyone. First, I'm just curious, August, how important is August relative to the third quarter? And can you just remind when the business really began to accelerate last year? Just sort of the comp cadence maybe by month in the third quarter of last year?

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

We'd expect August to represent a little under half of our sales for the quarter. And that's a little higher than typical because of the shift in back to school.

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

Yes, the largest week of the year moved out of the last week of July and into the first week of August.

Okay. I guess Kerry for you, number one, I'm surprised you were able to leverage the BD&O 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? Could you maybe talk about why it was so easy to have it flat as a percent of sales and why that couldn't be up get significant leverage in the third quarter on a mid-single digit comp?

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 of back-to-school and our omni-channel initiatives. Like we've said all year long, we'll put some pressure on the top line. 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.

Okay. Just last question on this. I'm just curious, your guidance, everyone's going to say hey, your guidance in the back half of the year or for the balance of the year, it's been flat. It's nowhere earnings growth. And I know what you're saying, there's some shifting going on between the SG&A expense component but that's still wasn't side the improvement in comp. And you're comfortable about product and what could unfold potentially for upside in the third quarter and fourth quarter. So just help us understand where you're really being conservative? Where the opportunity is if you could at all?

We said in our press release and I think Cliff said in his remarks, I should say, is that the opportunity is that -- we have big comps that will go against starting in October, tail end of 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 that we saw last year, then we -- as Cliff said, we should see some opportunity and it'll really come from the top line and potentially from the margin of having better sales will typically lead to better margins.

Okay. All right. I'll get back in the queue. Thank you and congratulations.

Thanks.

Jill Nelson, Johnson Rice.

Afternoon. I was wondering if you could talk about, I know you mentioned that some of your markets are not back-to-school. Could you maybe quantify that for us? What percentage is not back-to-school yet?

Jill, I don't have that number directly in front of me. I do have people here that can figure that out for you however. It is roughly 10%, about 10% to 12% of our stores are not -- that will -- no actually, in another good Lord, in another week or two. A week or so.

Okay. It sounds like you are pleased with the launch of the Shoe 2 U initiative. Could you maybe just talk a little bit more about that and what upside you seeing with that initiative?

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

And just last quick one on Texas. If you could talk about any varies of performance there just given what's going on with the energy market and what have you?

Texas, it actually almost total of three states. You got the border stores and with the strength of the dollar, we are seeing some issues there. Then you do have the energy cities where with what's going on with oil prices, 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 is not near as bad as I think you guys think it is. It's not as positive as our total company. But it's doing okay.

Okay. Thanks so much.

(Operator Instructions)

Sam Poser, Sterne Agee.

Good afternoon. You answered some of my questions already. Can you give us some idea within the guidance, within the range of the guidance that your giving, one, what mid-single digit range means? Is it 3% to 6%? Tell us what that is. And then two, on a base case, what's the range you're looking for, for Q4 in this number given the fiscal comparison.

We consider mid-singles, Sam, I believe we've talked about this in the past, but 3.5% to 7%. And the second part of your question, I'm sorry. -- Go ahead.

What was that -- what kind of range, given you're up fiscal compared in the fourth quarter, in your current guidance, what kind of range are you looking for? Are you looking to be positive in the fourth quarter?

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

Even with the difficult comparison?

That is correct. We are very -- I'm telling you, we're bullish on our boot assortment. We're bullish on what's happening with boots today. The fact that boots as a category is changing from a fashion standpoint, the shafts aren't as high. Lower shafts are working well today. We think mid-shafts are going to be good. We're very excited about where we stand in boots even though we had a -- I think we led the family channel last year in our boot increases and we believe that we have the opportunity to do that again this year.

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

I don't want to get down a week by week compare. I will tell you this, you are correct in the fact that the later the Labor Day is, the better it is for back-to-school sales. You are -- and I know that that's been a question on your mind as you've talked to other public companies, but you are correct in your thought process.

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

The first two weeks of September will become a much more important first two weeks.

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

Certainly. That is the case. Yes.

And so, you said you're going to delever the SG&A in the quarter because of the shift in the market expense for back-to-school from Q2 to Q3. But what kind of comp would it take to not delever the marketing in the third quarter? Not to delever the SG&A -- not to delever the SG&A in the third quarter. Excuse me.

I haven't calculated that specific. I will leave it up to you to -- we've given you -- what our intent was is to give the numbers and let you evaluate it. I'm sure you can calculate that off of -- yourself.

So, it is a pure $3.5 million that's moving that we have to add in?

No, what I said was it was a decrease of $2.7 million in Q2 and we expect a $3.5 million increase in Q3 overall. The majority of the $3.5 million increase was related to the shift from advertising from Q2 into Q3 to follow those sales.

Got you. All right.

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

And that $3.5 million is absolute dollar increase?

Yes.

So if you did -- if you have $59 million in SG&A, we should add $3.5 million to that and that's where you should be at the quarter? For this quarter?

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 helped identify the deleveraging.

So to what degree does it deliver? By just a hair or by (multiple speakers).

Sam --

You're not going to delever by very much.

Sam, this probably not the right place to try to work a model. We give you the general ideas of how to build a model and we'll let you build it from there.

You know I'm very skilled in all of that. Anyway, 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 a little more color there as to the type of things that are working, maybe fashion versus performance and so on?

Well, our business is really no different than anyone else's. Fashion athletic has been very strong. We see our running business, our basketball business, led mainly by canvas, and canvas product in general, all selling. A very strong athletic month. In addition to being a very strong athletic month, again, I have to say it, 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 reason to be positive about the fourth quarter.

And it's booties and boots? Is it mostly booties right now that are --?

Yes. Booties are definitely the strongest part of the boot category today but we are seeing performance out of other boot categories.

All right. Thanks very much. Good luck.

Thank you.

(Operator Instructions)

Chris Svezia, Susquehanna.

Yes. Just a follow up. I'm just curious while we were talking about boots and booties, I'm curious the percentage of the business that comprises the back half or the third quarter or what it was last year and just give us some thought, reference about how big that is?

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

Okay. But is it fair to say it's roughly 20% of your second half of business for Shoe Carnival?

It's not quite there for the second half and it's higher than that for the fourth quarter.

Okay. That's helpful. And then, I'm curious, your small box store, could you just maybe talk about the 5,000 square foot box? How do you plan to do the inventory in there? Or how do 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 existing markets, et cetera?

Is 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 store. We have the ability, as you know, to merchandise the store based on the customer that is shopping in that store. Not only do 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. That in itself separates us from our competition. Then, third, we have the shift from store initiative. So if we put items in that store that doesn't quite -- in one of those stores that doesn't quite work and resonate with the consumer, we just turn the levers up on our ship from store initiative and ship the product out to the customers who are e-commerce stores. It's all of the things that we -- most importantly, this is a fact that we went national advertising this past year. So you take all the initiatives that we have put into 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 a very, very excited about the opportunity to open up smaller markets and to fulfill -- fill in larger markets where we've struggled to get building opportunities.

Okay. And then, when you guys are closing stores, the amount of stores you closed, how is the transfer of sales to either existing stores in those trade markets or the profitability? And with the teens early but just any color around maybe how that's going given the number of stores you closed so far in the first half?

It is early for us to tell that, Christopher. We do believe we're going to see transfer of sales. We believe we may have already seen transfer of sales. But our sales trajectory is actually been, other than the last two weeks of July, when we transferred sales into August, our sales trajectory across our fleet has been pretty good. I can't tell you that's because of transfer of sales from one store to another. But that's something that we'll be studying as we continue to move forward.

Okay, last thing, just e-commerce. Is it -- I think it was -- is it accretive? Just tell us -- I don't know if I get too deep into that but from a profitability perspective where is it? Where is it going? Is it accretive? Just any color about that these.

Yes. We would prefer to talk about that as an omni-channel program, whether it's e-commerce or Shoes 2 U or any of the other things that we're doing digitally. And yes, to answer your question, it is accretive.

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

Thank you.

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

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

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