Shoe Carnival, Inc. reported sales reached the second highest level for any quarter in the family footwear chain’s 44 years in existence, only behind last year’s levels that benefited from government-stimulus measures. Boosted by non-athletic offerings, the family footwear chain’s sales were well above the pre-pandemic third quarter of 2019, indicating strong growth momentum.
Shoe Carnival said it’s on track to deliver previously announced full-year guidance within a tightened range.
“Throughout Q3, American households continued to face a challenging inflationary environment, putting pressure on the disposable incomes and on our traffic,” said Mark Worden, president and CEO, on a call with analysts. “Despite the macroeconomic volatility, the company’s strategic plans to expand customer accounts and double operating profit margins versus historical levels continue to work. Q3 earnings per share of $1.18 exceeded consensus expectations and profitability growth has continued to accelerate each quarter as 2022 progressed.”
Third-Quarter Revenues Sink Year-Over-Year
In the third quarter ended October 29, sales decreased 4.1 percent to $341.7 million. In the year-ago quarter, sales jumped 29.8 percent as significant government stimulus distributions enhanced discretionary incomes.
Gross profit margin decreased 210 basis points to 38.3 percent from 40.4 percent a year ago. Merchandise margin decreased 70 basis points and buying and distribution while occupancy costs increased 140 basis points as a percent of sales.
SG&A expense jumped 31.1 percent to $87.3 million, or to 25.5 percent of sales from 22.9 a year ago. The increase in the SG&A was primarily due to investments in advertising and store-level wages along with the expenses for the Shoe Station banner acquired last year.
Operating income fell 30.2 percent to $43.6 million from $62.4 million a year ago with operating margins sliding 470 basis points to 12.8 percent from 17.5 percent. Net income declined 30.3 percent to $32.7 million, or $1.18 a share, from $46.8 million, or $1.64, the prior year.
Shoe Carnival said that given the volatility experienced over 2020 and 2021, it believes the most relevant comparison for the 2022 third quarter is to the third quarter of 2019, prior to the onset of the COVID-19 pandemic and related government stimulus and supply chain disruption.
Compared to the third quarter of 2019, sales grew 24.4 percent, gross margins increased 740 basis points; and operating margins expanded 620 basis points with the quarter, marking the company’s seventh consecutive quarter in double-digit operating margins. Operating margin averaged 6.0 percent for the prior 10-year period.
Third-quarter EPS of $1.18 was up 151 percent versus the third quarter of 2019. For the nine-month year-to-date period, EPS was $3.17, up 138 percent from 2019 levels and more than double any full year of earnings in its history.
Non-Athletic Outpaces Athletic
By category in the quarter, non-athletic sales overall remain hot, climbing 35.1 percent versus 2019. Athletic sales stabilized in Q3, up 4.4 percent versus 2019, driven by improvements in inventory positions and reduced supply chain challenges as the quarter progressed. Sales versus 2021 were up in the mid-singles for non-athletic and down in the low-20s for athletics.
By department, women’s non-athletic was up in the mid-20s versus 2019, according to Carl Scibetta, senior EVP and chief merchandising officer. Sales were driven by dress, up mid-40s; sport, up mid-30s; and sandals, up high-20s. Men’s non-athletic sales were up high-30s versus 2019, driven by men’s casuals up over 50 percent, which further reflects the consumers’ move from athletic to non-athletic footwear for the back-to-school time period. Men’s boots were up in the high-20s, and men’s dress was up in the mid-teens compared to 2019.
Children’s non-athletic sales versus 2019 were up in the high-60s. Children’s casuals drove increases up over 100 percent, and infants’ non-athletic sales were up in the low-60s. Sales of children’s athletic were up in the low-teens, and adult athletics were up in the low singles versus 2019.
Scibetta said, “With the fashion trends we are seeing and the improved product flow, we anticipate strong sales results in the non-athletic categories for the remainder of 2023.”
Product margins, improved 700 basis points versus 2019, reflected a more-optimized promotional strategy. Scibetta said, “We continue to use the data provided from our best-in-class CRM program to drive loyal customer growth. This data provides us valuable insights into our over 31 million customers and enables us to engage with these consumers through smart effective promotions that are not margin-dilutive.”
During the third quarter, Shoe Carnival experienced a 50-50 athletic, non-athletic sales split, marketing a shift of 700 basis points to the non-athletic category compared to 2019. Scibetta said the retailer anticipated this move in consumer demand to non-athletic product and positioned inventories to take advantage of the fashion change. However, supply chain issues continued to impact athletic inventory availability earlier in the quarter.
Athletic Impacted By Supply Disruption
Scibetta said Shoe Carnival saw improvement in the athletic footwear deliveries in the latter part of the quarter and inventories by category were in line with forward sales expectations entering the fourth quarter. He said, “Looking ahead, we believe the supply chain issues we’ve been dealing with for over two years will continue to improve to a more normalized state as we move into fiscal 2023. At quarter end, our inventory forward weeks of supply was in line with 2019. Importantly, both aged inventory and seasonal carryover inventories are in line. As a result, we do not have a lot of inventory and see no need to provide deep discounts or dump goods in the fourth quarter.”
In the fourth quarter, the non-athletic categories traditionally increase in penetration to total sales. Scibetta said the chain’s seasonal boot inventory position is much better than last year and its athletic inventory levels and freshness are the strongest they’ve been throughout 2022.
Worden noted that customer accounts for loyalty membership surpassed 30 million for the first time at the end of Q3, setting a new record of 31.5 million members, up approximately 35 percent compared to 2019 and up over 10 percent versus 2021. The CEO said, “The continued growth of loyal customers is the strongest indicator that our brand is resonating with customers across geographies, across demographics and across our multiple banners.”
Looking ahead, Shoe Carnival raised its operating profit margin expectations for 2022, but overall now expects to deliver sales on the lower side of its annual 2022 guidance and EPS on the mid-to-lower side of guidance due to softening market conditions. Said Worden, “We expect our customers to face a historically high inflationary environment throughout Q4 and throughout this holiday season, which will put pressure on their disposable incomes and likely on our traffic.”
Shoe Carnival’s updated guidance for the year calls for:
- EPS in the range of $3.95 to $4.10 ($3.95 to $4.15 previously) compared to a pre-pandemic annual high of $1.46 in 2019;
- Net sales between $1.27 billion and $1.30 billion ($1.29 billion and $1.34 billion previously), up 23 percent to 25 percent (24 percent to 29 percent previously);
- Gross margins of approximately 37.0 percent (36.6 percent to 36.7 percent previously), compared to 30.1 percent in 2019; and
- Operating income margin in the range of 11.5 percent to 11.7 percent (11.4 percent to 11.6 percent previously) compared to 5.2 percent in 2019.
Photo courtesy Shoe Carnival