25 May Shoe Carnival Eyeing Opportunity To Gain Share In Athletic Footwear
Shoe Carnival lowered its full-year guidance as the first quarter was impacted by consumers pulling back due to inflation and lower federal tax refunds. However, improved inventory levels are expected to help the family footwear chain gain share in athletic footwear this coming back-to-school season.
“Our athletic inventory position has also materially improved versus last year,” said Mark Worden, president and CEO, on a quarterly call with analysts. He noted that vendor supply chain issues disrupted on-hand inventory for back-to-school 2022 and led to missed opportunities in athletic footwear last year.
“This year we have the athletic brand assortment depth and freshness on hand that we did not have last year,” said Worden. “While I’m not saying the customer economic issues driving soft traffic will be solved in Q2, I do see we are in a position to continue to grab athletic market share this year, convert to very high levels and maintain our healthy gross profits in this declining market environment we face.”
Carl Scibetta, senior EVP and chief merchandising officer also related that Shoe Carnival faced delays in securing athletic product with some product never arriving last fall. This year, he expects athletic inventory to be up in the teens year over year. He added, “But it’s really that the quality of the inventory that we have and the timing of the delivery of that inventory actually ending July in the mid-teens and as we move through the early part of August, up around 20 percent.”
Sales in the first quarter ended April 29 slumped 11.4 percent to $281.2 million, below Wall Street’s consensus estimate of $288.2 million. Shoe Station banner sales came in at a mid-single-digit decline versus Shoe Carnival banner sales at a low double-digit decline.
Worden said Shoe Carnival continued to make significant progress against long-term strategies, but softer than expected consumer trends developed in March and April and unseasonable weather persist throughout the quarter end, leading to the sales shortfall
“The biggest headwinds that our customer faced in Q1 were persistent inflation across everyday expenses they need to spend on, interest rates continuing to climb and unexpectedly federal tax refunds ended the quarter with a nearly 10 percent reduction versus the prior year,” said Worden.
He noted that historically, traffic and sales surge when Shoe Carnival’s customer receives their annual tax refund. This year, the reduced tax refund is expected to have played a large role in reducing store traffic by approximately 10 percent versus the prior year. Worden said, “What we saw was a segment of customers from lower-income households who had stretched disposable income they delayed their shopping trips for footwear, apparel and accessories.”
Worden added that spring weather did not improve in the second half of the quarter as unseasonably cold, wet conditions persisted across most markets, delaying the start of sandal season during March and April.
The sales decline in the quarter reflects difficult comparisons as the year-ago quarter benefited from a recovery in in-store shopping as pandemic restrictions eased. The latest first quarter still ranked in the top three of any first quarter in company history.
“All combined Q1 sales and earnings finished at the low end of our annual expectations,” said Worden. “We see a pathway to deliver the low end of our original annual guidance if economic conditions improve this summer. However, we do not have clear visibility to when the economic landscape will turn positive. As such, we are reducing our annual sales and our profit guidance to reflect the short-term economic uncertainty.”
The updated guidance for 2023 calls for:
- EPS in the range of $3.60 to $3.85 against $3.96 in 2022, down about 6 percent at the midpoint. Previous guidance called for EPS in the range of $3.96 to $4.20, up 3 percent at the midpoint;
- Net sales in the range of $1.23 billion to $1.25 billion, down from $1.26 billion in 2022. Previous guidance called for revenue in the range of $1.26 to $1.32 billion; and
- Gross margins in the range of 36-to-37 percent against 37.1 percent in 2022. Previous guidance called for gross margins of 37 percent.
By categories in the first quarter, comp sales in adult athletic footwear were down low-teens in the latest first quarter. Men’s non-athletic comps were down low double digits with casuals down mid-singles. Men’s dress was down low double digits and boots down high teens.
In women’s, non-athletic footwear was down low double-digits with dress and boots being down over 20 percent. Sales of women’s sandals were down in the high teens within the non-athletic category. Sport and casuals were the bright spots in women’s footwear with sport down to low-single digits and casuals increased to mid-single digits.
Children’s comp sales were down high singles with non-athletic flat and athletic down low teams.
Net earnings in the quarter declined 38.7 percent to $16.5 million, or 60 cents per share, missing Wall Street’s consensus estimate of 75 cents. EPS was 30.4 percent higher than in the pre-pandemic first quarter of 2019.
Gross margins eroded 50 basis points to 35.0 percent but continued to be over 500 basis points higher versus pre-pandemic 2019. Merchandise margin decreased 30 basis points year over year, reflecting an increase in promotional intensity.
SG&A expenses were controlled to be nearly flat against year-ago levels in the first quarter of 2023 compared to the first quarter of 2022, with higher depreciation and healthcare costs offset by reduced selling costs. As a percent of sales, SG&A expenses increased to 27.6 percent from 24.4 percent.
Highlighting some progress on its long-term objectives, Worden noted that customer membership surged to a record 32.7 million at quarter end, representing growth of 12 percent versus the prior year and marking the fastest expansion of members in any quarter over the last three years. Worden said, “Although a segment of customers is currently not in a strong buying position, they’re still engaging actively with retailers they love and making decisions on where they will shop for footwear when the economic conditions improve.”
He also noted that 70 percent of Shoe Carnival’s sales now come from our loyalty members at a very efficient cost to engage, and Shoe Carnival’s CRM (customer relationship management) platform now regularly engages with approximately one out of every eight American adults, up nearly 65 percent from just five years ago.
Worden also noted that Shoe Carnival delivered gross margins of over 35 percent for the ninth consecutive quarter.
“Over the last few years, we have sustainably transformed our margins from among the lowest tier in our industry to the top tier,” said Worden. “We’ve done so by leveraging our deep customer relationship management capabilities and analytics to engage profitably with our customers, to provide the freshest in-demand products they want at the right value and to deliver the customer the preferred shopping experience. As a benchmark, the 35 percent gross profit achieved this quarter is the growth of over 500 basis points from just four years ago. Our customer sales conversion climbed this quarter to the highest level in nearly two years.”
Inventories ended the quarter at $389.5 million, up $45 million higher than the prior year but an improvement from being up $105 million higher than the prior year at the end of the fourth quarter. After back-to-school shopping, the company expects inventory to be lower than last year and to be approximately $40 million lower by year-end 2023 compared to year-end 2022.
“Importantly, we are not reducing inventory levels by dumping product in the market nor drastically eroding margins,” said Worden. “The hard work on this inventory reduction topic is complete. Receipts and inventory uploads are updated. We continue to have our inventory fresh with no material-aged inventory concerns.”