On Dec. 1, footwear retailer Shoe Carnival (NASDAQ: SCVL) gave its Q3 2014 earnings announcement. The company performed well on the top line front. However, its profitability left much to be desired. Let's check out what's going on with the company.
Excellent top line expansion
Shoe Carnival grew its year-to-date revenue 4% versus the same time last year. However, most of that gain came from the company opening 30 new stores versus 29 the same time last year. However, its year-to-date same store sales declined 0.4%. While it's great that the company is expanding, I would like to see the company grow sales at its established locations.
Net income decreased
While Shoe Carnival saw decent top line expansion, it's a different matter with net income. The company saw its year-to-date net income decline by a whopping 14%. Selling, general, and administrative expenses expanded as a percentage of sales from 23.3% this time last year to 24.1% so far this year. The company really needs to bring more customers through the doors in order to grow revenue faster than expenses. It would also pay for the company to focus more on cost control.
Free cash flow deficit expanded
Shoe Carnival is free cash flow negative so far this year. Shoe Carnival went from negative $8.2 million last year to negative $8.4 million this year expanding its deficit 3%. Shoe Carnival's operating cash flow expanded 7% vs. the same time last year. However, capital expenditures expanded 9% year-over-year. Hopefully, the holidays will be kind to this company pushing free cash flow into positive territory.
Shoe Carnival possesses an okay balance sheet. In the most recent quarter, the company possessed cash amounting $29 million or 9% of stockholders' equity. I like to see companies with cash amounting to 20% or more of stockholders' equity so that they can self-finance acquisitions, product innovations, and operations during tough times. Shoe Carnival doesn't possess any long-term debt which means it doesn't have to contend with interest that chokes out profitability and cash flow.
Shoe Carnival paid out $3.6 million in dividends so far this year. Its free cash flow deficit means that the dividend is coming from sources other than free cash flow. The best way to gauge company's dividend sustainability is to calculate the dividend to free cash flow ratio for the full year which covers all the seasonal fluctuations. Last year, the company paid out 63% of its free cash flow in dividends, which lies above my personal threshold of 50%. I prefer to see companies use part of their free cash flow for other purposes. Currently, the company pays its shareholders $0.24 per share per year and yields 1%.
Shoe Carnival operates in a highly competitive retailing environment. I would like to see the company get its expenses under control before reevaluating its investment prospects. Currently, the company trades at a P/E ratio of 21.3 vs. 18.7 for the S&P 500 and 17.3 for Shoe Carnival's five year average, according to Morningstar. On a forward basis, it trades at a P/E ratio of 19.8 vs. 18 for the S&P 500, making it slightly overvalued on all metrics. I think your investing dollars are best served elsewhere.
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