Shoe Carnival Inc (SCVL) 2015 Q4 法說會逐字稿

Good afternoon, and welcome to Shoe Carnival's fourth-quarter FY15 earnings conference call.

Today's call is being recorded.

It is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

Management's remarks may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the Company's actual results to be materially different from those projected in such statements. Forward-looking statements should be considered in conjunction with the discussion of risk factors included in the Company's SEC filings and today's earnings press release.

Investors are cautioned not to place undue reliance on these forward-looking statements, which 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 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.

Thank you, and welcome to Shoe Carnival's fourth-quarter and 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 fourth-quarter and annual performance, as well as an overview of our FY16 guidance. Kerry will review the financial results. Then we'll open up the call to take your questions.

We had a strong finish to FY15. The initiatives we implemented over the past three years, including our multi-channel sales initiative, has lead to the enrollment 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 team 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 lead 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, fueled our sales and we ended the quarter with a 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 0.5% 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 a strategic decision to be more promotional in the fashion boot categories for the 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. While our 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 trend which drove 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 FY15 we achieved a record number of loyal shoppers by adding almost 3 million members to Shoe Perks, our loyalty program. Today, we have nearly 9 million members who spend on average 29% more per transaction than non-members, and accounted for 55% of our FY15 sales. Shoe Perks has become a very important and effective tool for communicating special promotions and sale events to our customers.

We have made tremendous progress in creating a seamless, endless aisle experience for our customers. In July we launched our Shoes To You 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 customers looking for a particular size or style the store does not have, the associate can order it on the spot and have it shipped directly to the customer's home.

Our sales associates and our customers have embraced this technology, which has produced a solid increase in conversion rates. Since the launch of this technology, we are converting sales that previously may have left our store and gone to a competitor.

We continue to make improvements through our multi-channel capabilities. In the fourth quarter we redesign and launched our new and improved Shoe Carnival App. Every customer shops today with a mobile device in their hands. They can comparison 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 multi-channel 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 buy online/ship to store.

We ended the year with 405 stores in 34 states and Puerto Rico. During the fourth quarter we opened two stores and closed one store. Our store growth plan continues 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 renegotiate lease terms, relocate or close the store.

As previously announced, we grand opened our first two small market stores early in the fourth quarter. We continue to be very pleased, as both stores performing above expectations. In 2016 we'll open approximately 20 new stores with roughly 6 of those being a small market stores. We continue to expect consistent small market unit growth over the next several years as we take advantage of the opportunity to expand into new and fill-in existing markets.

The advantage we have in making this initiative a success is our multi-channel strategy, which gives our customers access to millions of pairs, representing the vast majority of our total assortment. They can choose product either through the individual store's assortment, through Shoes to You, 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 eight stores as part of our ongoing strategy to exit stores that we don't believe will 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 over the past several years.

Moving onto merchandise, as I mentioned earlier on today's call, we were very pleased with the sales performance of our athletic department and fashion boot categories. Focusing on sales by department for a moment, women's non-athletic ended the quarter down low single digits 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 30%s. However, these increases were offset by a decrease in women's Fall and Winter sport casuals.

Men's non-athletic was up low single digits for the quarter, driven primarily by men's dress, canvas casuals and boots. Kids was up mid-single digits, driven by athletic, boots, and sandals. Adult athletic was up mid-single digits, driven by men's and women's canvas and running, along with men's basketball.

As I mentioned earlier, inventory was up 0.5% on a per-door basis at the end of the quarter. With the strong athletic trend and the anticipation of a stronger than planned tax refund season, we shifted some February receipts into January to take advantage of the opportunity. As you have heard from other retailers, tax refunds were actually delayed by several weeks and began in mid-February. With the shift these receipts from February to January, we were well positioned to take advantage of both the later tax refund season and the warmer than normal February weather. We are pleased with the content of our inventory and believe our inventory is well positioned in the right categories for the first quarter.

Now I'd 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 are also pleased with the early performance of our casual sandal category. In addition, our team is finalizing our Fall boot buys as we speak, and we are pleased with the assortment they are building.

We believe we once again can plan fashion boots up slightly for the fiscal year. Therefore we expect full-year net sales to be in the range of $1.007 billion to $1.027 billion with a comparable store sales increase in the range of 1% to 3%. Earnings per diluted share are expected to be in the range of $1.58 to $1.65.

Included in the earnings estimate for the fiscal year is the expectation that at the high end of our guidance, the gross profit margin will be flat with buying, distribution, and occupancy costs slightly leveraging, offset by the growth of our multi-channel initiatives. 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.

Thank you Cliff, and good afternoon everyone.

Fourth-quarter net sales increased $6 million to $233.7 million compared to the fourth quarter last year. The net sales increase was driven by sales of $7.1 million from the 21 new stores open since the beginning of the fourth quarter of FY14 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 the fourth quarter of FY14.

Our gross profit margin for the quarter was 29.2%, compared to 28.6% in the fourth quarter of FY14. This was driven by a 10 basis point decrease in our merchandise 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 costs, primarily due to returning to more normalized costs after seeing significant increase in cost in Q4 last year due to the port issues. The remaining 20 basis point decrease resulted primarily from the leveraging of occupancy costs against the higher sales base.

SG&A expenses increased $1.2 million in the fourth quarter of FY15 to $61.7 million. As a percentage of sales these expenses decreased to 26.4% compared to 26.6% in the fourth quarter of FY14. 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 FY14. 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 in our non-qualified retirement plan.

Pre-opening costs included in both cost of sales and SG&A decreased $206,000 in the fourth quarter of FY15 to $173,000. Store closing and impairment charges included in both cost of sales and SG&A in Q4 this year increased $205,000 to $701,000.

The effective income tax rate for the fourth quarter of FY15 was 36% compared to 34.6% in the same period in FY14. Net earnings for the fourth quarter were $4.2 million, or $0.21 per diluted share. For the fourth quarter FY14 we reported net earnings of $3 million, or $0.15 per diluted share.

Now I'd like to transition to our full-year FY15 financial results. FY15 net sales increased $43.8 million to $984 million compared to FY14. The net sales increase was driven by sales of $36.5 million from the 51 new stores opened since the beginning of FY14 and a $26.6 million increase at comp store sales. This net sales increase was partially offset by a $19.3-million loss from the sales of the 22 stores closed since the beginning of FY14. Net earnings for FY15 were $28.8 million, or $1.45 per diluted share, compared to net earnings of $25.5 million, or $1.27 per diluted share in the last fiscal year.

Now turning to our cash position information affecting cash flows. We declared and paid cash dividends in each quarter of FY15. During the first quarter we paid a cash dividend of $0.06 per share and during the second, third and fourth quarter we paid a dividend of $0.065 cents per share to our shareholders. The cumulative amount of dividends returned to shareholders in FY15 was $5 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 effective January 1, 2016. The previous plan expired December 31, 2015. During Q4 we repurchased 380,000 shares for $8.6 million. For the full year of FY15 we repurchased 809,000 shares for $18.8 million.

During FY15 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 finish received from landlords was $6.6 million. Cash and cash equivalents 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 FY15. Free cash flow for FY16 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 FY16 we expect to open 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 expenditures will be used for store relocations and 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 increase -- to increase low mid-single digits. 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 Instructions)

We'll take our first question from Eddie Plank with Jefferies.

Good afternoon. Thanks for taking the question, and a nice job in a tough environment.

Thank you, Eddie.

Cliff, I wonder if you can give an update on your national advertising strategy? Maybe what else you've been learning from it, how you're thinking about it going forward into this year, and what the spend might be relative to the prior year? Thanks.

I'll take the last part of that question first. The spend this year is going to be flat to what we spent last year dollar-wise, not even percentage-wise. So as a percent, it will go down. It's very difficult to measure the results of the national advertising, Eddie.

We run focus groups -- not focus groups, but we do all kinds of research to see what the 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 and make a decision as to whether or not we want to increase that rate into 2017.

Got it. And then touching on the comp for the fourth quarter, I think at ICR you had said you were up 2.9% quarter to date. Is the decrease since then just as a result of the delay in tax refunds, or was something else happening in January? Just any color there. And as a last question, 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.

On the comp store increase, we believe, and it's really hard to quantify, but we believe that the tax refunds moving out of the last 10 days of January into the middle of the second week of February had -- was the affect of ending the quarter at 1.8% up, because we were up 2.9%, you're correct on that.

Your second question, remind me again?

Small markets.

Small markets. We're excited about small markets. We're going to open up approximately six small markets again this year. If we can get to more, I'd actually open more. But we think -- we love the concept. We like the way the store looks. And we see that as a viable impact of robust growth opportunity as we go forward over the next few years.

And what we said is we think that the upward potential of that small market concept might be 450 stores for us. So between our traditional stores and the small market, we now say that we think we would have about 1200 stores across the nation.

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

Well, we're having very nice cash flow. And we showed a propensity to buy back in the second half, and 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.

But it's not baked in the guidance right now?

There's a minimal amount built into the guidance. I think there's an average of 80,000 shares purchased per quarter built in that guidance. And that equates to about a penny's worth of benefit of that high end of $1.65.

Great. Thank you for that clarity. And best of luck, guys. Take care.

Thanks, Eddie.

We'll take our next question from Chris Svezia with Susquehanna Financial Group.

Good afternoon, gentlemen. And congratulations on a really good quarter in a tough environment there, Cliff and team.

Thank you, Chris.

I was wondering if you could maybe talk a little bit about -- you gave some Q1 guidance in terms of comps, so you know what I'm going to ask. But I'm just curious about where you are broadly at this point. Any color you can add about what happened as you stepped into February and refunds started pouring in, et cetera?

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 up. But the tax refund season moving into February certainly helped fuel some sales growth, and then the week earlier Easter. So right now we're up high single digits.

Okay, and then can you remind me what you're up against as you go through from March and April last year? What were comps in March and April last year?

You have to combine because Easter moved around on us. So if you were high mid-singles combined March/April.

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

Here is what we are concerned about, Chris, is that we had a very warm February and a 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.

Okay, got it. And Cliff, you made some comment about declines from a category perspective in, you said, sport casual categories and something else when it came to women's. Could you maybe explain what that was?

It was a sport casual category. That would be heavier -- I don't want to name any brands, but brands that traditionally bought in the Fall time period, worn with jeans. And I'm just not going to mention brands, but it's a more Fall-looking casual product.

Okay.

Non-flats.

Right. Okay. And then you made some comment on athletic, you had higher margins year over year in athletic in the quarter. Can you just explain, is that just mix?

Well, we're in a strong athletic trend. There's no question about that, as you know. And there's no reason to get too promotional on athletic as a way of selling. So we didn't. And it was canvas product, because again we had a 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.

And the guidance for 2016, I just want to understand. Could you just walk 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?

Yes, sure. We expect -- I'm going to just read it back to you. The expectation that high end of our guidance gross profit margin will be flat with buying, distribution and occupancy slightly leveraging, offset by the growth of our multi-channel initiatives. We expect SG&A to decrease slightly.

What happened -- I'm just curious on a product -- what happens with product margins? If you're getting better margins in athletic, which would technically from a mix perspective maybe skew it down slightly, and your inventories look pretty good. I'm curious from a product margin perspective -- . (multiple speakers).

We don't expect product margins to be down. We expect product margins to be maybe even slightly up. But what happens is we build in the shipping cost for our multi-channel initiatives into that margin that I talked about.

Okay, I see. Got it. All right. That's all I have. Thank you very much, and all the best.

Thank you.

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

Good afternoon. Quick clarification just on 2016 SG&A. Do you plan to be up or down slightly?

2016? We expect we'll decrease slightly as a percent of sales.

Okay. And then I know you talked about marketing spend leveraging. Could you talk about the wages you're looking, given we've got higher minimal wage across the board, retailers are increasing, just that component of it?

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

Okay. And then just e-commerce, if you could update us. Is it still tracking around 1% penetration of total sales? And if you segmented out, is it a profitable business yet, or when can we get to that?

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.

Okay. Thank you.

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

Good afternoon. Just real quick. Most of my questions have been answered.

Do you expect the comps to be up each quarter during the year, or -- I mean, you had one big quarter last year. Is it going to go from low-mid to low singles of getting to the 3% that way? (Multiple speakers).

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

Got you. That's just a crap shoot?

Well no. We don't anticipate a move back into July until we have another 53-week year.

Which is next year?

That's correct.

Anyway, thank you very much. Good luck.

Thanks.

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

Hello. This is [Chris Schon] calling in for Jeff. Thanks for taking my questions.

What do you expect to be the key drivers of comp store sales growth over the next year in areas of units per transaction, conversion, rates and price? And also if you can talk a little bit more about your CapEx plan for the year, talking about maybe key areas of focus. What do you expect to achieve in the year as far as capital spend and focus there? Thank you.

As far as [Robert], 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 of our sandal category. And we think that we're going to have another decent year in the boot category with what we've seen our merchants put together. Kerry, if you want to talk about the CapEx?

Yes. CapEx total is supposed to $19 million to $20 million. You're going to see it heavily weighted to the standpoint of store openings, relocations, and remodels are account for the majority of that $19 million to $20 million. Outside of --

All right. Thank you.

We don't really have any unusual projects this year outside the normal store growth, remodels, relocations and just upkeep of our stores.

Okay. Thank you.

(Operator Instructions)

We'll take our next question from Steven Martin with Slater.

Hello.

Hey, Steve.

Kerry, just a quick ministerial question. Can you give us the shares outstanding at year end and whether you've bought shares quarter to date so far?

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

Yes, the actual shares outstanding.

I don't have my finger on that. And obviously, we've been in a closed period since year end. We do have a 10b5 plan that's out there. And we've bought a few shares back through that, but the stock's been reacting well. So it hasn't been a significant number of shares.

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

Are you saying the 20 stores is on a low of our historical level?

I'm sorry, 20. Yes, I was looking at the net. But 20 is about where you've been. And I know you've been talking about where you want to head, so --

We do want to extend greater growth. We've made some additions to our real estate team, and we've got them out working on it. The fruits of their labor may not come in until next year, until FY17, where we would expect to accelerate our growth in 2017 if the economy supports that a growth level. But there may be a little upside to the 20 stores. They're out there working hard to get us to more of it right now. That's our best guess on the 20.

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

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

Okay. Going -- in 2016, you've talked about the categories you expect to drive comp. Where do you expect that to come from, or is it a continuation of the dress area?

Well, I think the driver of the comps, we've shifted dollars out of other categories. And you know what? For competitive reasons, Steve, really don't want to tell everybody that's listening exactly where the 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 a couple of other categories. But the ones I've just talked about in my prepared remarks are where I really believe it's coming from.

Where do you expect ASPs in 2016?

We expect ASPs to be up low singles.

Okay. Thank you very much.

Thanks, Steve.

We have no additional questions in the queue. I'll turn the call back to Cliff for closing remarks.

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.

That does conclude today's conference. Thank you for your participation.