Shoe Carnival, Inc. reported record earnings in the third quarter but shares still fell last week after the family shoe chain provided weaker-than-expected guidance for the final quarter of the year.
EPS in the fourth quarter is expected to come in the range of 19 cents to 23 cents. That’s up from 16 cents a year earlier but short of Wall Street’s consensus estimate of 27 cents a share ago. The guidance only assumes merchandise margin improvement of 50 basis points, with analysts expecting a bigger recovery from the 150 basis-point margin decline seen in the 2011 fourth quarter.
On a conference call with analysts, Cliff Sifford, its new president and CEO, noted that four out of the last five weeks have been “rather soft.” And while athletic has been “good,” its brown business “has not been where we wanted it.” Added Sifford, “Until we see a little better run rate and we get through this weekend, we really wanted to plan conservatively.”
In the third quarter, earnings rose 16.9 percent in the quarter, to $12.2 million, or 60 cents a share, besting Wall Street’s consensus estimate by 2 cents a share and reaching the high end of Shoe Carnival’s outlook. Boosted by a successful BTS selling period, comparable-store sales ran ahead 6.2 percent, coming in at the high end of guidance.
Traffic for the quarter was up low single digits, and conversion was down slightly, said Sifford. Both average transaction and average unit retail increased mid single digits. Merchandise margins increased 60 basis points, due primarily to selling fewer units of low-margin toning product versus the prior year, as well as lower inventory ownership of spring sandals going into the BTS selling period.
By category, adult athletic led the way, with comps climbing high single digits due to both higher unit sales and unit retail. The gains were driven by strength in basketball, skate and running across both genders. Said Sifford, “Color remains a key driver for both men's and women's running.”
Women's non-athletic department’s comps were up low single digits for the quarter, driven entirely by average unit retail. The chain sold fewer units of sandals and more units of higher unit retail categories, such as boat shoes, boots, and casual flats than last year. Vulcanized canvas and molded footwear also saw increases. While the dress category is still trending down, double-digit increases are being seen in its traditional pumps.
In men's non-athletic, low-single digit gains were also scored, driven entirely by average unit retail as fewer units of sandals were sold on a comp basis than last year. Boat shoes, traditional pennies, driving mocs, and sport hikers all achieved both unit growth and average unit retail growth in men's non-athletic.
Children’s saw a mid single digit comp increase, led by girls' and boys' retro fashion, skate, running, and infants athletic.
Gross margins overall improved to 31.3 percent compared to 30.2 percent a year ago. SG&A expenses increased slightly, to 22.9 percent compared to 22.4 percent, due to operating more stores and increased incentive compensation versus the third quarter last year.
The quarter included a one-time retirement and severance payment of $1.4 million for Mark Lemond, who announced his retirement last month for health reasons. Sifford, formerly EVP and general merchandise manager, said the chain is actively conducting a search for a new GMM.
Shoe Carnival ended the quarter with inventory up 5.1 percent on per-door basis, primarily due to increased unit cost and increased depth on key categories such as athletic. On-hand footwear units were down 2.6 percent on a per-door basis at the end of the third quarter. Aged inventory remains low.
Six stores were opened in the quarter with one more store open in November to bring its total store openings for 2012 to 31. It plans to open 30 to 35 in 2013.
Fourth-quarter sales are expected to come in the range of $215 to $220 million with same-store sales increasing in the range of 2 to 4 percent, which compares to a 3.0 percent decrease a year ago.
Despite the EPS guidance disappointment, Sifford said “there is opportunity there,” to support a more bullish forecast, citing several trends working in Shoe Carnival’s favor. This includes the “Americana” trend supporting categories such as nautical, western, bucks, and riding boots, Said Sifford, ”Additionally, we still believe that the athletic sales trend that we have experienced all year will continue with fresh color and exciting technologies. Lastly, we expect a positive but promotional performance in our boot categories, as we begin to experience a more seasonable weather pattern versus what we experienced last year.”
Also, although comps quarter-to-date were running slightly negative, Shoe Carnival feels better positioned to capitalize on Black Friday sales. The stores will be open five hours longer than last year and its “promotions are spot on as compared to the circulars we have already seen on blackfriday.com,” said Sifford.
For fiscal 2012, sales are expected to range from $864 to $869 million with a comp increase in the range of 4.8 to 5.3 percent. EPS is expected to be in the range of $1.47 to $1.51. For fiscal 2011, comparable store sales increased 0.7 percent and EPS was $1.31.
