Shoe Carnival, Inc. suggested this week that American households faced a challenging inflationary environment, putting pressure on disposable incomes and its store traffic numbers in the second quarter as the family footwear retailer posted a 6 percent sales decline in the fiscal second quarter versus the year-ago quarter. Another factor for the decrease came from supply chain issues on the athletic footwear front late in the period that hindered sales for the quarter that ended July 30.

Still, the parent company of the Shoe Carnival and Shoe Station retail banners sees profitability continuing to increase as its strategic plans to double operating profit margins versus historical levels “continue to work,” according to management.

“Our merchant organization has worked in close partnership with our strategic vendors throughout the year,” explained company President and CEO Mark Worden on a Thursday conference call with analysts. “Together, they delivered the freshest product assortments from our customers’ favorite brands and applied customer analytics to unlock highly profitable promotions, resulting in Q2 operating profit margins of 12.4 percent and marked the sixth consecutive quarter in double-digits. We were most encouraged that operating profits delivered sequential growth in Q2, above the 11.1 percent operating margin achieved during Q1.” Worden said the operating profit margin was just 5.9 percent for the prior 10-year period.

“Throughout 2022, we’ve been lapping the stimulus-impacted 2021 quarters,” Worden continued. “The more normalized quarters with no stimulus benefits in 2022 have helped provide clear visibility into the sustainability of our operating profit levels. As such, today, we are increasing our operating profit margin expectations for 2022 and providing guidance to achieve between 11.4 percent and 11.6 percent operating margins, doubling the company’s historical levels.”

SCVL shares closed up more than 11 percent on Thursday.

Fiscal second-quarter net sales were $312.3 million, down 6.0 percent from $332.2 million in fiscal Q2 2021. Comparable store sales declined 13.8 percent versus the year-ago quarter. The company reported that sales increased 16.4 percent compared to the pre-pandemic 2019 second quarter, driven by sales from the Shoe Station banner and a comparable store sales increase of 8 percent from the Shoe Carnival banner. Year-to-date net sales have increased $107.8 million or 20.6 percent compared to 2019, with both store banners contributing nearly equally to the year-to-date increase. The Shoe Station banner stores, acquired in December 2021, had net sales of $27.2 million for the quarter and $53.4 million in sales year-to-date.

The 2022 Q2 results were reportedly up against the comparable store sales increase of 11.4 percent in Q2 2021, which was on top of a 12.6 percent increase in Q2 2020.

“Customer counts for our loyalty membership climbed to just below 30 million at the end of Q2, setting a new record, up 28 percent compared to 2019 and up nearly 7 percent versus 2021,” Worden said. “Non-athletic sales growth has been exceptional, up over 30 percent versus 2019.” He said that the company grew net sales of 10.5 percent in Q2 2021, on top of a 12.1 percent increase in Q2 2020.

“The team posted solid non-athletic category performance across genders and styles offset by declines in our athletic categories, driven by supply chain delays,” Worden continued. He shared that key athletic inventory shipments did not make it entirely through the global supply chain and into its stores in time to support June and July sales as planned. “While we forecasted athletic sales to pull back during Q2, due to our customers having loaded up on athletic product during 2021, this supply delay led to steeper declines,” he said.

The quarter started strong for SCVL, but sales weakened as athletic inventory levels reportedly slipped by the quarter’s end due to late deliveries.

The quarter finished with men’s, women’s and kid’s athletic comparable store sales down in the low-teens compared to Q2 2019 and down in the mid-20s versus the comp 2021 period.

On the other side of the store, women’s non-athletic was said to be up in the high-20s versus Q2 2019, with sales driven by dress, which was up over 50 percent. Sandals were up in the mid-teens. Men’s non-athletic sales were up in the mid-20s versus Q2 2019. Men’s dress and casual shoes were both up over 20 percent, with men’s boots up over 30 percent. Children’s non-athletic sales were up in the high-50s, driven by kids’ casuals, up over 90 percent, and infants, up in the high 70s. Women’s was reportedly up low-single-digits versus Q2 last year, while men’s and kids were down mid-singles.

“With the trends we are seeing and the anticipated product flow, we see strong sales results in non-athletic categories for the remainder of 2022,” said CMO Carl Scibetta.

SCVL reported gross profit margin was 36.2 percent of sales in the second quarter, a 560 basis point increase compared to the second quarter of 2019 and a 470 basis point decline from the 2021 quarter. The company said that a 680 basis point increase in merchandise margin against the 2019 period was partially offset by a 120 basis point increase in distribution costs due to the impact of inflation on transportation and fuel expenses.

“Excluding the impact of transportation and fuel costs, our merchandise margins increased over 800 basis points,” explained Kerry Jackson, CFO and chief administrative officer, when comparing results to the 2019 period. “We expect higher transportation and fuel costs to persist for the remainder of the year. However, we feel the year-over-year increase will continue to moderate in the second half of this year, allowing us to leverage our buying distribution occupancy costs by 30 basis points or more compared to the second half of 2019.”

Second quarter SG&A rose 90 basis points to 23.8 percent of sales in the quarter, compared to the 2021 comparable period. SG&A dipped 100 basis points versus the 2019 comp period.

Net income was $28.9 million or $1.04 in diluted earnings per share in the second quarter of 2022, a 32 .5 percent decline from the diluted EPS in Q2 2021.

SCVL ended the second quarter with $385.5 million in inventory, up $48.6 million compared to the comp 2019 quarter-end.

“The 14.4 percent increase in inventory is supportive of the 20.6 percent increase in net sales year-to-date compared to 2019 and the expectation of increases in sales for the remainder of the year,” explained Jackson. He noted that approximately 59 percent of the increase in inventory was due to the Shoe Station stores acquired last year or opened this year. Athletic inventories ended the quarter down in the high teens versus Q2 2019 quarter-end.

Shoe Carnival, Inc. had total cash, cash equivalents and marketable securities of $62.6 million and no outstanding debt at the second quarter-end.

“As Q3 began, the delayed athletic products began to arrive, but we remain below our desired inventory levels this quarter as we replenish stores,” Worden offered. “We are updating our annual sales guidance to $1.29 billion to $1.34 billion. While below our original growth ambitions for 2022 top-line, this sales range represents growth of 24 percent to 29 percent versus 2019, demonstrating top-tier growth levels in the channel better reflects the challenging inflationary environment our consumer is now facing and includes the short-term disruption to our 2022 athletic supply.”

Worden also shared that third-quarter sales through August 24 have increased over 15 percent compared to the comp 2019 period and include the “best three days of sales at any three-day period in Shoe Carnival’s history.” He said profitability for the month is “very strong with gross margins on pace to grow 650 basis points versus 2019.”

Still, based on the athletic inventory issues, SCVL included in its guidance that Q3 sales will be down versus 2021 in the low- to mid-single digits, but annual EPS guidance remains in the $3.95 to $4.15 per share range.

“Combining the sales ranging guidance, the increased operating margin range and current inflation trends, we anticipate sales and earnings per share is most likely to deliver on the mid to lower side of our annual 2022 guidance,” Worden said.

He said Shoe Station banner full-year sales are expected to exceed the previous forecast of $100 million by approximately 10 percent. Operating profit expectations were previously communicated at 10 percent for 2022, but they now see an operating profit for Shoe Station to a range between 11 percent and 12 percent for 2022. “Our integration efforts of the recently-acquired banner are pacing far ahead of our preliminary timelines,” said Worden. “We have realized significant back office synergies as well as gaining efficiencies and best practices across merchandising, operations and marketing.”

Worden reported that new Shoe Station store site identification efforts continue to progress throughout the south, and they expect to grow the 21-store chain to 30 stores during fiscal 2023 and build out the expansion roadmap to exceed 100 stores in the next five years. Shoe Carnival is reportedly on track to operate 400 locations by the end of this fiscal year, and we are not expecting any store closures this year.

“This is such an exciting moment for the enterprise,” Worden concluded. “Having completed our store productivity improvement plan, 2022 marks the first year in 20 years that no stores were closed. In conclusion, we have undergone a sustainable profitability transformation and are seeing profit growth accelerate sequentially at a very encouraging rate during 2022.”

Photo courtesy Shoe Carnival