Shoe Carnival said it gained market share in the family footwear channel due to a robust back-to-school season with particular strength in kids on strength in athletic; however, the retailer lowered its annual guidance or the third straight quarter as hot and dry weather in September and October caused a decline in the twenties in the boot category.
In the quarter, sales slid 6.4 percent to $319.9 million, short of analysts’ consensus target of $321 million and at the low end of the retailer’s expectations. Net earnings fell 33.0 percent to $21.9 million, or 80 cents a share, down from $32.7 million, or $1.18, a year ago and behind analysts’ consensus estimate of 94 cents.
“We started out Q3 with a very successful back-to-school campaign and strong results. We found momentum building in key categories, market share growing and moderating sales trends compared to earlier in the year,” said Mark Worden, president and CEO, on a call with analysts. “However, once back-to-school shopping concluded, the sales trend softened significantly heading into Labor Day weekend. And we saw disappointing seasonal sales for the remainder of September and October.”
On Thursday, shares of Shoe Carnival fell $2.08, or 8.6 percent, to $22.09. The stock started the year at $23.91.
Worden noted that quarterly sales of $320 million marked a level the company had never come close to achieving in any quarter prior to 2021. And while earnings and sales in the quarter fell short of Shoe Carnival’s expectations, the 2023 year-to-date EPS is more than 40 percent higher than any full-year EPS results prior to 2021. Added Worden, “In fact, the Q3 EPS results at 80 cents is more than any full-year EPS delivery prior to 2018. I am disappointed with our performance shortfall versus our expectations that we set too high. Yet, by steadily advancing our long-term strategies, the company has achieved transformative profit growth compared to results just a few years earlier.”
Comparable store sales in the quarter declined 7.4 percent, primarily due to softening trends after Labor Day.
Worden said Shoe Carnival had a “successful” back-to-school season, led by kids growing low single digits versus the prior year. The overall kids’ category grew to over 30 percent of total sales during back-to-school as compared to a typical full-year historical range. of 18 to 20 percent of total sales. The kids’ category acceleration was driven by growth in athletic sales, led by court and basketball in both girls and boys., record high transaction value as well as conversion and margins that were among the highest levels in Shoe Carnival’s history.
Similar to the second quarter, Shoe Carnival “invested aggressively” supporting back-to-school marketing campaigns “as we were seeing encouraging sales trends.” He noted that the investments supported “significant market share gains” year-to-date for the company within the backdrop of the family footwear industry, where sales have declined approximately 10 percent year-to-date.
“Momentum was improving as we headed into our last earnings call and that gave us increased confidence that the balance-of-the-year trends appeared likely to continue to moderate,” said Worden. “In hindsight, we were wrong about trends moderating for the balance of the year. After back-to-school finished, our top-line performance quickly softened as the normal seasonal business and fall season did not kick in.”
He said the weather was “persistently hot and dry” in most of its geographies during September and October, leading to high-single-digit and low-double-digit declines for multiple weeks in the early fall period. He added, “From a category perspective, boot sales have been very soft with the warm dry weather. Total boot sales declined low-20s in the quarter and certain seasonal segments barely started at all.”
A bright spot was Shoe Station, which saw net sales grow by low double-digits in the quarter, led by sales from new stores and the launch of the Shoe Station e-commerce site in early 2023. Shoe Carnival acquired the Southeast independent shoe chain in December 2021, Overall e-commerce sales increased nearly 10 percent year over year, benefiting from investments in digital marketing and CRM.
Gross Margins Decline 150 Basis Points
Gross margins in the quarter eroded 150 basis points to 36.8 percent from 38.3 percent a year ago but were still up 590 basis points compared to the third quarter of 2019. Shoe Carnival noted the period marked the 11th consecutive quarter the company’s gross profit margin exceeded 35 percent.
The year-over-year margin decline was primarily due to the unseasonable fall weather, which slowed boot sales and led to increased promotions of seasonal merchandise in September and October.
SG&A expenses increased 2.9 percent to $89.8 million, or to 28.1 percent of sales from 25.5 percent. The increase reflected an increase in advertising investment to support back-to-school selling. Operating earnings declined 35.9 percent to $27.9 million from $43.6 million a year ago.
Inventories Down 6 Percent
Inventories ended the quarter 6 percent lower than the prior year as the chain’s inventory optimization improvement plan continued to progress ahead of target. The retailer said it remains on track to achieve further inventory efficiencies this year and expects year-end inventory dollars to be down over 10 percent versus fiscal 2022 year-end.
In October, Shoe Carnival opened its 401st store, now operating 373 Shoe Carnival stores and 28 Shoe Station stores. The company said store productivity and profitability have increased significantly for the fleet since the last time the company operated 400 stores in 2018. As of October 28, 55 percent of the fleet modernization was complete and is expected to approach two-thirds complete in the summer of 2024.
Shoe Carnival said it has a strategic growth roadmap in place to surpass 500 stores and aims to be a multi-billion-dollar retailer by 2028, inclusive of organic growth and strategic M&A activity.
As an extension to its store modernization program, the shoecarnival.com website was modernized and relaunched in late October 2023 and shoestation.com was launched earlier this year.
Looking ahead, sales are now expected in the range of $1.16 to $1.18 billion, down 7.1 percent at the midpoint from sales of $1.26 billion in 2022. That compares to recent guidance in the range of $1.19 to $1.21 billion and expectations in the range of $1.26 to $1.32 billion at the year’s start.
Comparable store sales for the year are now expected to decline in the range of 8.5 percent to 9.5 percent compared to previous guidance calling for a decline between 6 percent and 8 percent. At the year’s start, comps were expected to be in the range of positive 2 percent and negative two percent.
Net earnings are now projected in the range of $2.65 to $2.75, down 14.1 percent at the midpoint against $3.96 in 2022. The updated EPS target compares to previous guidance between $3.10 to $3.25 and guidance at the start of 2023 ranging from $3.96 to $4.20.
Shoe Carnival now plans to open six new stores in 2022 versus prior guidance between six to 10 and guidance at the year’s start of between 10 and 20 new stores.
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