Shoe Carnival Management Discusses Q3 2013 Results - Earnings Call Transcript

Dec. 2.13 | About: Shoe Carnival, (SCVL)

Shoe Carnival (NASDAQ:SCVL)

Q3 2013 Earnings Call

December 02, 2013 4:30 pm ET


Clifton E. Sifford - Chief Executive Officer, President, Chief Merchandising Officer and Director

W. Kerry Jackson - Chief Financial Officer, Chief Operating Officer, Senior Executive Vice President and Treasurer


Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Jeffrey S. Stein - Northcoast Research

Sam Poser - Sterne Agee & Leach Inc., Research Division


Good afternoon, and welcome to Shoe Carnival's Fiscal Year 2013 Third Quarter Earnings Conference Call. Today's call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today's press release to reflect future events or developments.

In the company's earnings release and their prepared remarks on this call, the company will refer to adjusted earnings per diluted share for the fourth quarter of fiscal 2012, which financial measure has not been calculated in accordance with United States' Generally Accepted Accounting Principles or GAAP. This non-GAAP measure eliminates the impact of the special cash dividend paid by the company in December 2012 to earnings per diluted share in that quarter.

The company believes that adjusted earnings per diluted share for the fourth quarter of fiscal 2012 is a useful measure of its performance and allows the company and investors to analyze the financial and business trends related to the company's results of operations separate from the impact of the special cash dividend. More information on this non-GAAP financial measure, including a reconciliation to the company's GAAP results, is including in the company's earnings release.

I will now turn the call over to Mr. Cliff Sifford, President, Chief Executive Officer, Chief Merchandising Officer of Shoe Carnival, for opening comments. Mr. Sifford, please begin.

Clifton E. Sifford

Thank you, and welcome to Shoe Carnival's third quarter fiscal 2013 earnings conference call. Joining me on today's call is Kerry Jackson, Senior Executive Vice President, Chief Operating and Financial Officer.

For today's call, I will give a high-level review of company's third quarter performance and provide some insight into the fourth quarter thus far. Kerry will review the third quarter financial results, along with the fourth quarter guidance, and we'll open up the call to take your questions.

As a reminder, the 53rd week in fiscal 2012 caused a 1-week shift in our fiscal 2013 calendar. This resulted in the third quarter of fiscal 2013 ending 1 week later on November 2 versus October 27 last year. We have adjusted our reported quarterly and year-to-date comparable store sales results for fiscal 2013 to reflect this calendar shift.

Now focusing on our results for the third quarter. As we reported in our second quarter conference call, we ended August with a low single-digit comparable store sales increase. We believe that negative press surrounding the debt ceiling and the subsequent government shutdown, along with warm weather patterns throughout our geographic footprint, had a negative impact on our customer traffic in September, which in turn negatively impacted our sales.

The agreement to reopen the government coincided to the day with the arrival of cooler fall weather. The combination of the 2 events had an immediate positive effect on traffic patterns leading to more robust customer participation. The result was that the comparable store sales for the quarter increased 0.7%.

Traffic for the quarter was down mid-single-digits while conversion, average transaction and units per transaction were all up low single-digits. Merchandise margin was flat as we were slightly more aggressive with our adult athletic departments.

Even though sales for the third quarter were just under our expectation and our profit margin of 30.1% was lower than the third quarter last year, we continued to aggressively manage our selling, general and administrative expenses. And as a result, we were able to report third quarter earnings of $0.54 per diluted share. This performance was at the high end of our guidance of $0.52 to $0.55.

Kerry will talk about guidance for the fourth quarter, but I'd like to give you a glimpse into our November results. As I said earlier, with the combination of the end of the government shutdown and the arrival of fall weather in October, our sales rebounded. I'm happy to report that, that rebound continued through November with boots leading the way.

Our November comparable store sales increased by high single-digits, driven primarily through double-digit growth in our boot categories.

As importantly, however, was the aligning of the strong boot assortment at attractive prices, along with changing our store hours, to better serve the customer over the important Thanksgiving and Black Friday sales period.

Inventories on a per-store basis ended the quarter flat, which was in line with our expectations. As mentioned in the last call, we initiated a strategy to increase inventory turns in our stores. We feel that this strategy, along with our strategic initiative to raise our women's percent to total, will give us the ability over the next few years to improve cash flow and merchandise margin. We will accomplish our turns goals by flowing seasonal product into our store on a timely basis and aligning our lower volume stores inventories closer to customer demand.

Now let's move on to merchandise. In our women's nonathletic department, sales for the quarter were up low single-digits on a comparable store basis. Similar to the previous 2 quarters, canvas and fabric shoes continued to produce strong sales results.

In addition, we experienced increases in our athletic sandals and molded footwear classification.

Boots for the quarter were flat on a comparable store basis due to the overall weaker sales trend in September. However, the categories of Ryder boots and short boot has continued to perform very well due to our fashion quotient.

Once October arrived and our traffic returned to a more normal level, our women's boot department responded by producing double-digit sales growth on a comparable store basis. As most of you are aware, in September, we began a test in approximately 20% of our stores on selected better brands in our women's department. We created strong visual elements in front of our stores to highlight this product for the customer as soon as she entered the store, we utilized a digital ad campaign, along with the email marketing to let our customers know that we added more of her favorite brands in our stores.

In addition, on the first Sunday of November, we held a VIP reception in these stores for our most important customers and the results of these efforts have been outstanding. We will expand this assortment to another 25 stores for fourth quarter and most new stores in 2014. This long-term strategy is a key element to growing our women's nonathletic sales to 30% of our overall sales from 26% at the end of 2012.

In our men's nonathletic department, we ended the quarter with a low single-digit decrease on a comparable store basis. We continued to see throughout the quarter the warm weather categories of canvas casuals and sandals produce double-digit comparable store sales increases. These categories with a low single-digit increase in boat shoes were not enough to overcome the mid-single-digit loss in men's boots.

Our children's business ended the quarter with a mid-single-digit comparable store sales increase. We're happy with the continued strong performance of children's shoes in both athletics and nonathletics. We believe Shoe Carnival continues to be the store of choice in the family channel for children's shoes.

Sandals for both boys and girls posted comparable store sales increases in the 50s, and girls and boys running, along with canvas, produced high single-digit growth in our children's athletic department.

In adult athletics, comparable store sales were down low single-digits for the quarter. The classification of product driving the losses of adult athletic for the third quarter were women's running, skate and basketball, along with men's basketball and skate.

Inventories in this department are now in line with our expectations, with the per-store inventories down low single-digits. I'm also pleased to report that since the 1st of October, adult athletics produced a mid-single-digit comparable store sales increases.

Turning now to store expansion. We ended the third quarter of 2013 with 378 stores operating in 32 states and Puerto Rico. The 8 new stores we opened in the third quarter were primarily in existing markets as we continue with our strategy of opening new large markets on a biannual basis.

For the remainder of 2013, we continued our accelerated store growth with 3 new stores and a relocation of 1 store earlier this month. This will bring our total new stores opened for the year to 32, including 3 additional stores in Puerto Rico. At this time, we plan to close a total of 5 stores at the end -- at year end. Therefore, we expect to end fiscal 2013 with approximately 376 stores.

As we look forward to 2014, we will continue to aggressively grow our store base. Although I'm not ready for competitive reasons to announce specific new markets for next year, we will expand into 2 new large markets and 1 medium-sized market. We fully expect our new store growth to approach 40 new stores. We believe our strong unleveraged financial position leaves us well positioned for additional square footage growth, averaging in the high single-digits over the next decade.

Lastly, with the new markets we'll be entering next year, we have reached the tipping point of where it would be more advantageous for us to begin a national advertising strategy as opposed to adding additional spot TV in these markets.

National advertising not only delivers the Shoe Carnival message into our new markets and potential new markets in the future, but it also delivers our message into existing markets where we do not currently advertise on TV. We have spent a good deal of time analyzing our current marketing initiatives and we will fund this program through a combination of eliminating some current marketing programs that have a low ROI and by increasing our advertising-to-sales ratio slightly.

We believe this strategy will go a long way in introducing the rest of America to our brand and play hand-in-hand with our aggressive real estate strategy.

Now I'd like to turn the call over to Kerry Jackson for details on our financial results.

W. Kerry Jackson

Thank you, Cliff. I will discuss our third quarter financial results in more detail, followed by information on cash flows and then conclude with our outlook on the fourth quarter of fiscal 2013.

Net sales were $235.8 million for the third quarter ended November 2, 2013, as compared to net sales of $244.4 million for the third quarter ended October 27, 2012, a decrease of $8.6 million.

As Cliff indicated at the beginning of our call, as a result of fiscal 2012 consisting of 53 weeks, each of the first 3 quarters in fiscal 2013 has shifted 1 week later when compared to fiscal 2012. This 1-week shift moved an important week of back-to-school sales from the third quarter of fiscal 2012 into the second quarter this year. While this shift positively affected our Q2 results, it has negatively affected our net sales comparisons for the third quarter of fiscal 2013, reducing sales by approximately $21.2 million. The other components of our third quarter change in net sales included a comparable store sales increase of $437,000 and an increase in sales from new stores net of store closings of $12.1 million.

Comparable store sales for the 13-week period ended November 2, 2013 increased 0.7% compared to the 13-week period ended November 3, 2012.

The gross profit margin for the quarter decreased 1.2% to 30.1%. The merchandise margin remained unchanged from Q3 last year due to -- well, due to the deleveraging of the occupancy expenses, primarily attributable to the shift in the fiscal calendar, buying, distribution and occupancy expenses, increased 1.2% as a percentage of sales.

Selling, general and administrative expenses decreased $2.7 million in the third quarter of fiscal 2013 to $53.2 million or 22.5% as a percentage of sales. Significant decreases in SG&A included a $3.5 million reduction in advertising expenditures, largely due to a shift in an important portion of the back-to-school sales period falling in second quarter in fiscal 2013 versus the third quarter in fiscal 2012, along with a $2 million decrease in incentive compensation as compared to the third quarter of last year when our financial performance drove material increases in performance-based compensation. These decreases in expenses were partially offset by a $2.5 million increase in expenses for new stores, net of expense reduction of stores that have closed since the beginning of the third quarter of fiscal 2012.

Preopening costs included in selling, general and administrative expenses were $521,000 in the third quarter of 2013 as compared to $523,000 in the third quarter of last year. The effective income tax rate for the third quarter of 2013 was 38.6% as compared to 40.2% in the same period in fiscal 2012. The decrease in the effective income tax rate between the comparative periods was primarily due to the nondeductibility of compensation attributable to the retirement of our former president and chief executive officer in the third quarter of fiscal 2012. The annual effective income tax rate for fiscal 2013 is expected to be a little over 38%.

Net earnings for the third quarter of fiscal 2013 were $10.9 million or $0.54 per diluted share as compared to our expectations provided on August 29, 2013 of $0.51 to $0.55 per diluted share. For the third quarter of fiscal 2012, we reported net earnings of $12.2 million or $0.60 per diluted share.

Now turning to our cash position and information affecting cash flow. During the first 3 quarters of fiscal 2013, we declared and paid in each quarter a cash dividend of $0.06 per share to our shareholders, which represents a 20% increase over the quarterly dividend rate paid in 2012. No purchases were made this year under our share repurchase program. We currently have $20.3 million available under our existing repurchase authorization.

Depreciation expense was $4.4 million in Q3 and $12.8 million on a year-to-date basis. Depreciation expense is projected to be approximately $17.4 million for the full fiscal year.

Capital expenditures for fiscal 2013, including actual expenditures during the third quarter, are expected to be between $29 million and $30 million. Approximately $12.3 million of our total capital expenditures are expected to be used for new stores and $12.6 million will be used for store relocations and remodels. Lease incentives, anticipated to be $9 million to $10 million for the year.

My final comments today will focus on sales and earnings expectations for the fourth quarter fiscal 2013. We expect fourth quarter net sales to be in the range of $215 million to $219 million with a comparable store sales increase in the range of 4% to 6%. This takes into account the comp store sales increase of 7.8% for the month of November and the expectation of a comp increase ranging from 2% to 5% for the combined December-January period.

Earnings per diluted share in the fourth quarter of fiscal 2013 are expected to be in the range of $0.18 to $0.22. Included in the earnings estimate for the fourth quarter is the expectation at the high end of our guidance that the gross profit margin will be slightly higher due to leveraging the occupancy costs and SG&A as a percentage of sales will leverage about the same amount.

As a reminder, in the 14-week fourth quarter last year, net sales were $205.7 million and diluted earnings per share were $0.13.

Earnings per diluted share in the fourth quarter of fiscal 2012 included a $0.03 reduction due to the application of the 2-class method of computing earnings per share, in connection with our $20.4 million special cash dividend paid in December 2012.

One last comment. Due to the recent announcement from the IRS that they will not be accepting tax returns or distributing tax refunds any earlier than they did last year, we have not projected a significant increase in comparable store sales in January, compared with January last year. If the IRS changes their estimate of when refunds will be distributed, that could have a material change in our January comparable store sales guidance.

This concludes our financial review. Now I'd like to open the call for questions.

Question-and-Answer Session


[Operator Instructions] All right. We'll take Jill Nelson with Johnson Rice.

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Could you talk about the performance of women's athletic? Typically you talked about last conference call that it was a weaker category. It seemed to have a soft start to back-to-school. Can you talk about how that's turning -- how that trended in third quarter and, I guess, into November?

Clifton E. Sifford

We actually had an increase in sales -- comparable store increase, low single-digit -- we were flat -- excuse me. In the third quarter, we were -- because of August, we were down mid-single-digits. So let me start over. Because of August, we were down mid-single-digits in women's athletic. We had a mid-single-digit increase in the month of October. So what we saw as the business started to turn around in October, we also got a bump in our women's athletic business. So one thing I want to caution you on though, is that the way we track women's athletic is not the same way that every department -- every store tracks it. Some of our product that some people would put in women's athletic, we actually put into the women's nonathletic business. So it's hard to compare athletic sales in our store or in anybody's store to anyone else unless you know how they classify the product.

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Okay. And then if you could talk about maybe, you mentioned national advertising, you're -- you feel as though the store base is kind of getting to that level to where it makes sense for you to do that. If you could talk about maybe the timing of that launch and when we should expect it.

Clifton E. Sifford

We expected to launch it in the spring. I don't want to give you the exact time, because to be honest with you, we're still working through that. But we do expect to launch it in the spring. And at this point, we expect to add a few weeks to our overall advertising calendar. We're still, as I said, still working through all the logistics of that. But right now, I would look toward the spring.

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Okay. And then just last one, it seems that you're very pleased with the test you did in the women's nonathletic with the fashion brands and whatnot. Could you maybe talk about some of your early reads? Do you feel like you're bringing in a new customer or you're just increasing that basket? And just some early insight into that test, I appreciate it.

Clifton E. Sifford

We have seen an increase in basket size since we launched the program, but I don't want to say that it's because of the program that's happening. I really believe that has more to do with probably boot sales or -- if you asked Carl, it probably has to do with the fact that the assortment is just so much better. But anyway, what we noticed, Jill, is the very first week we had this out and put it on in the front of the store, we started seeing sell-throughs immediately on the product. And out of the 4 new lines, there was -- I think it was a total of 9 brands that we either increased our assortment or added, 4 of those were new lines. Out of the 4 new lines, 3 performed past our expectation from the very first week, 1 did not. But we knew that there were going to be some things that didn't work and maybe we got a little ahead of the customer on that particular line. But I'm -- we're very pleased with it. And then like I said in my prepared remarks, we had the VIP weekend or VIP day in the first Sunday of November and the results of that was just outstanding. And since that time, we've been seeing elevated sell-throughs of that product.


We'll hear next from Jeff Stein with Northcoast Research.

Jeffrey S. Stein - Northcoast Research

Yes, I would -- just to kind of amplify on that a little bit, Cliff, what were the -- can you tell us what the comp store sales in November were for those 75 locations? Were they...

Clifton E. Sifford

I do not -- that's a great question and I do not have that in front of me, so I cannot give you that. Not because I wouldn't, I just don't have it.

Jeffrey S. Stein - Northcoast Research

Okay. Can you talk a little bit about the loyalty program and how that's going? I know that was kind of on the board as one of your initiatives for Q3.

Clifton E. Sifford

I'm really glad you asked that question. I probably should have talked about that in my prepared remarks. We set a goal of doubling our loyalty base this year, which we have met. I set an outside goal of getting our loyalty base up to 4 million and that we have not quite gotten to yet. But there's still -- as I keep reminding my marketing department, there are still 2 more months left in the year. So I'm hoping that we can get there. The goal is to double it again next year. We -- just to give you an idea, Jeff, the VIP day that we had in the first weekend in November, that was driven strictly off an email campaign and digital blast to our loyal customers. So it's working and it was proof to the stores. In fact, the feedback we got from the stores was just incredibly positive as to how well it did work. So I'm very excited about the loyalty program and what it's doing for us, not only in the stores, but even online.

Jeffrey S. Stein - Northcoast Research

So Cliff, at the end of the quarter, how many loyalty members did you have? Would it be kind of like in the 3.5 million range or better than that?

Clifton E. Sifford

We're just short of 3 million right now, just short. We started the year at 1.2 million of true loyalty customers, so ones that -- who we could actually talk to. We had more than that, but we didn't have the email addresses. So true loyal members we started the year at 1.2 million, we're just under 3 million.

Jeffrey S. Stein - Northcoast Research

Okay. And you mentioned in the last conference call the fact that you were going to be expanding Merrell to roughly 55 new doors and then maybe to 100 by the end of the year. How has that program gone for you?

Clifton E. Sifford

The Merrell program in men's has worked very well. We got off to somewhat of a slow start in women's, but we've seen recent pickups as the weather turned cooler. But that's going well and we are expanding that to 100 doors before the end of the year. But it is working better in men's than it is in women's.

Jeffrey S. Stein - Northcoast Research

Okay. And final question would be on the real estate side of the business, if you're going to be expanding the women's better brands into all new stores for next year, does that imply that you're going to be looking for better real estate and therefore, perhaps having to pay a little bit more for rents next year?

Clifton E. Sifford

I wouldn't, no -- I wouldn't -- we're always looking for better real estate. So let me answer that in 2 ways. We're always looking for better real estate. We are entering into some malls next year, which we're very excited about, and those brands definitely belong in malls. And then what we -- the decision we made was that as we enter into these new markets or enter in to a new store, we want to give that store every opportunity to succeed. And we don't want to -- we -- so therefore, we made the decision strategically that as we open up the new stores to put these better brands in there. I'm not going to tell you that we're 100% confident they're going to work in every store, but I am 100% confident that we should put our best foot forward in every store.


[Operator Instructions] We'll hear next from Ben Shamsian from Sterne Agee.

Sam Poser - Sterne Agee & Leach Inc., Research Division

It's Sam Poser. A couple of questions. Number one, Cliff, what did the traffic do in October and November? I mean, did you see the improvement in both -- in the traffic in the last 2 months?

Clifton E. Sifford

Absolutely, Sam, and it was -- it's hard to say whether it was the government shutdown or whether it was the weather. But as I said in my prepared remarks, the weather turned cool the day the government shutdown ended and we saw an immediate improvement in traffic, going from down mid-single-digits to down -- either flat to down very low singles. And with that, because of the fact that we have been increasing conversion, we have been increasing basket size and average transaction, our business immediately turned around. And we ended up October -- with a good October and that just continued straight into November as well.

Sam Poser - Sterne Agee & Leach Inc., Research Division

With traffic in the flat area?

Clifton E. Sifford

Flat to -- after this weekend, I'd have to say, slightly up.

Sam Poser - Sterne Agee & Leach Inc., Research Division

Okay. And then, Kerry, the marketing budget for next year, you saw that -- are you implying that it's going to be a little bit higher, given the new -- you said that -- it sounds like the additions will be more than the takeaways plus the extra weeks. Am I thinking about that correctly?

Clifton E. Sifford

It will. Yes, you are thinking about that correctly. It will be slightly higher. We're still finalizing the plans on that as we speak, Sam. But at this point, it does appear to be slightly higher.

Sam Poser - Sterne Agee & Leach Inc., Research Division

Okay. And how many -- given the mark -- given the national marketing plan, even though it will probably be in its -- it will be in its infancy next year, what -- when you go into the 3 or the 3 new markets that you're going to get into, are you going to go in with a big store count? Or are you going to be able to limit it a little bit more based on timing because you won't have to be adding a marketing message directly -- as much of a marketing message directly targeted to those new markets?

Clifton E. Sifford

We believe in future years, we will not have to open up a new market with as many stores as we open up new markets today. Next year, however, in the 2 new large markets, we are going to go in with multiple stores on the days as we open those stores up, so that we can utilize our marketing. As you said, next year it's going to be in its infancy stage. So we -- it takes a while for -- marketing doesn't have an immediate impact, especially, television marketing doesn't have an immediate impact. You don't run it today and get a sales boost on it tomorrow. So we need to have a period of time for that marketing to work before we can change the strategy of how we enter into these new markets -- new large markets.

Sam Poser - Sterne Agee & Leach Inc., Research Division

Okay. And lastly, is Miami, Philadelphia or Detroit a small market?

Clifton E. Sifford

All of those are pretty large markets.

Sam Poser - Sterne Agee & Leach Inc., Research Division

And again, I have to go back to this because we haven't had entertainment on this call, you were announced as the Chief Merchandising Officer by the operator. So I began to get really worried.

Clifton E. Sifford

Well, I appreciate you saying that. But the fact is that the board saw fit, even though Sam didn't, keep me as a Chief Merchandising Officer. So you got to also remember that the new Chief -- the new GMM that we hired was a decision that the new president made. So pretty good decisions, I would say.


And with that, gentlemen, we have no further questions in the queue. I'd like to turn the call back over to you.

Clifton E. Sifford

We really do appreciate you joining us today and we hope you all have a very happy holiday season with your families. And we look forward to speaking to you again on our fourth quarter call. Thank you.


And with that, ladies and gentlemen, that does conclude today's call. Thank you for your participation and have a great day.

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