Shoe Carnival’s Q1 Revenues Drop 42 Percent

Shoe Carnival Inc. reported a loss of $16.2 million in the first quarter as sales slumped 41.9 percent.

First Quarter Highlights

• Net sales were $147.5 million for the quarter;
• Net loss was $16.2 million, or a loss of $1.16 per diluted share, for the quarter;
• All stores closed effective March 19, 2020 as a result of the COVID-19 pandemic; between late-April and May 5, 2020, over 50 percent of stores re-opened in states that relaxed or canceled stay-at-home orders;
• No employees were furloughed during the quarter;
• Comparable store sales increased 3.9 percent through March 12, 2020 prior to when the company began experiencing the effects of COVID-19, but decreased 42.3 percent for the entirety of the quarter;
• E-commerce sales increased over 160 percent for the quarter, and for the time period the brick & mortar stores were closed, e-commerce sales increased over 350 percent;
• As of May 2, 2020, cash and cash equivalents were $13.1 million and no cash borrowings were outstanding on the company’s recently amended $100 million line of credit.

“Our customers and the entire organization were challenged during the first fiscal quarter of 2020 as, together, we navigated uncharted waters as the COVID-19 virus engulfed the country in mid-March. In this trying time, the commitment and dedication of our team really shined through, and I could not be prouder. We continued to serve our loyal customers through our e-commerce platform, which resulted in triple-digit sales increases, while at the same time, we made swift decisions to ensure we mitigated the impact of this global pandemic on our business,” commented Cliff Sifford, Shoe Carnival’s Vice-chairman and chief executive officer.

“We are thrilled that, as of late-April, we are once again serving our customers in-person at our stores. As of today, we have successfully re-opened over 80 percent of our stores, which are delivering sales above our expectations. While many unknowns remain, we are taking the necessary steps to ensure we are well-positioned to address our customers’ summer footwear needs. These are unprecedented times, but Shoe Carnival’s customer-centric culture, dedicated workforce, brand strength and business model resilience will enable us to emerge stronger as a leader in the family footwear segment.”

First Quarter Financial Results
The company reported net sales of $147.5 million for the first quarter of fiscal 2020, a 41.9 percent decrease compared to net sales of $253.8 million for the first quarter of fiscal 2019. The decrease resulted from substantially all stores being closed for approximately 50 percent of the quarter, offset by increased e-commerce sales.

Gross profit margin for the first quarter of fiscal 2020 decreased to 21.3 percent compared to 29.6 percent in the first quarter of fiscal 2019. Merchandise margin decreased 1.9 percent and buying, distribution and occupancy expenses, which are generally fixed costs, increased 6.4 percent as a percentage of net sales compared to the first quarter of fiscal 2019. The decrease in merchandise margin was primarily due to higher shipping costs associated with e-commerce sales. The increase in buying, distribution and occupancy costs as a percentage of sales were primarily due to the deleveraging effect of lower sales.

Selling, general and administrative expenses for the first quarter of fiscal 2020 decreased $4.8 million to $54.7 million. As a percentage of net sales, these expenses increased to 37.1 percent compared to 23.4 percent in the first quarter of fiscal 2019 primarily due to the deleveraging effect of lower sales. The decrease in selling, general and administrative expenses was primarily due to lower wages and the recording of an employee retention payroll tax credit authorized by the CARES Act offsetting wages paid to employees while they were not working. Expenses were also lower in the quarter due to market return volatility associated with the company’s deferred compensation plans. The decrease was partially offset by impairments of long-lived assets recorded on seven stores during the first quarter of fiscal 2020.

Net loss for the first quarter of fiscal 2020 was $16.2 million, or a loss of $1.16 per diluted share. For the first quarter of fiscal 2019, the company reported net income of $13.9 million, or $0.91 per diluted share. Included in the first quarter of fiscal 2019 was a tax benefit of approximately $1.9 million, or $0.13 per diluted share, associated with the vesting of equity-based compensation.

Business Update COVID-19
As the company implemented its response to the impact of COVID-19, the primary focus has been on the well-being of its employees, customers and the communities Shoe Carnival serves. During the first quarter, the following actions were implemented to mitigate the financial impact of the pandemic and ensure the safety of Shoe Carnival employees and customers:

• Closed all stores effective March 19, 2020 to prevent the spread of the virus and align with guidance from health officials;
• Began re-opening stores in late-April, and by May 5, 2020, over 50 percent of stores were re-opened in states where stay-at-home orders were relaxed or canceled. As of May 20, 2020, 318 stores are open, which represents 82 percent of store locations. Pending any government changes, the company expects to have over 95 percent of stores open by the second week of June;
• Maintained the company’s store base as shipping points for e-commerce sales; e-commerce traffic and conversion significantly increased in the quarter;
• Implemented a new payment option to allow e-commerce customers to pay for merchandise over time;
• Undertook measures to ensure stores were supplied with personal protective equipment (PPE), intensified cleaning and sanitation procedures and prominently displayed signage to reinforce social distancing and hygiene
• Reduced non-essential corporate spending;
• Exercised the accordion feature in the company’s credit agreement, which increased the capacity of the line of credit from $50 million to $100 million;
• Assessed potential benefits of the CARES Act, including recording approximately $2 million of credits associated with an employee retention payroll tax credit in the first fiscal quarter of 2020;
• No employees were furloughed during the quarter;
• Temporarily reduced the base salaries of the company’s executives and other senior members of the management team and the annual cash retainer fee of the Board of Directors and delayed the implementation of wage increases for certain employees;
• Temporarily suspended the repurchase of common stock as a part of the company’s share repurchase program;
• Worked with supply chain partners to reduce inventories and extend credit terms;
• Negotiated modified lease terms including the deferral of certain lease payments;
• Deferred non-essential capital projects;
• Postponed marketing activities for brick & mortar stores and evaluated promotional activities; and
• Implemented a temporary freeze on company hiring efforts.

As stores have re-opened, the company has experienced higher conversion ratios and higher per-unit transactions, offset by reduced traffic. Generally, sales have been better than the original plan set for fiscal 2020 for those stores that are open, with some stores exceeding plan and some stores showing declines. E-commerce sales continue to trend higher than in the prior year and the original plan for fiscal 2020; however, some tapering of this increase is anticipated.

Fiscal 2020 Earnings Outlook
The impacts of the COVID-19 pandemic are expected to continue as the company’s operations and supply chains, economic conditions and consumer spending adapt to the impacts of COVID-19 being present where the company operates, procures merchandise and raises capital. Considerable uncertainty exists regarding how this pandemic may affect sales and operations for the remainder of the fiscal year. As a result, the company is not providing guidance for fiscal year 2020.

Store Openings and Closings
No new stores were opened in the first quarter of fiscal 2020 and two stores were closed. The company expects to open four stores and close seven to ten stores during fiscal 2020 compared to one store opening and six store closings in fiscal 2019.

Share Repurchase Program
As of May 2, 2020, the company had $43.1 million available for future repurchases under its share repurchase program. The company does not anticipate repurchasing any shares in fiscal 2020 but will continue to reevaluate further share repurchases on an ongoing basis.

Photo courtesy Shoe Carnival