Footwear retailer Shoe Carnival (NASDAQ:SCVL) beat analysts' expectations in Q2 FY2023, with revenue down 5.65% year on year to $294.6 million. The company's outlook for the full year was also close to analysts' estimates with revenue guided to $1.2 billion at the midpoint. Shoe Carnival made a GAAP profit of $19.4 million, down from its profit of $28.9 million in the same quarter last year.
Shoe Carnival (SCVL) Q2 FY2023 Highlights:
- Revenue: $294.6 million vs analyst estimates of $286.3 million (2.89% beat)
- EPS: $0.71 vs analyst expectations of $0.84 (15% miss)
- The company dropped its revenue guidance for the full year from $1.24 billion to $1.2 billion at the midpoint, a 3.23% decrease
- Free Cash Flow of $4.68 million is up from -$32.1 million in the same quarter last year
- Gross Margin (GAAP): 35.8%, down from 36.2% in the same quarter last year
- Same-Store Sales were down 6.5% year on year (beat)
Known for its playful atmosphere that features carnival elements, Shoe Carnival (NASDAQ:SCVL) is a retailer that sells footwear from mainstream brands for the entire family.
A shopper can find shoes from Nike, Adidas, Skechers, Converse, Vans, and Crocs for sale at a typical store. Because Shoe Carnival focuses on keeping prices low and attracting a value customer, the selection from these brands will likely not be the newest, hottest releases but the staples. The company’s purchasing approach is also a major reason prices are competitive–Shoe Carnival acquires some inventory through excess inventory and closeouts. The company also maintains direct relationships with many suppliers, cutting out the expenses of middlemen.
On average, Shoe Carnival stores are mid-sized in the world of retail at approximately 10,000 square feet. Stores are typically located in both urban and suburban areas shopping centers and malls alongside other apparel and footwear retailers. The floors are easy to navigate, with sections for men, women, and children and those sections with further subsections for athletic, casual, and dress shoes. Shoe Carnival does have an e-commerce presence, established in 2008, but it is a concept and category that tends to draw shoppers in person.
Footwear sales–like their apparel counterparts–are driven by seasons, trends, and innovation more so than absolute need and similarly face the bigger-picture secular trend of e-commerce penetration. Footwear plays a part in societal belonging, personal expression, and occasion, and retailers selling shoes recognize this. They therefore aim to balance selection, competitive prices, and the latest trends to attract consumers. Unlike their apparel counterparts, footwear retailers most sell popular third-party brands (as opposed to their own exclusive brands), which could mean less exclusivity of product but more nimbleness to pivot to what’s hot.Footwear retailer competitors include Designer Brands’s (NYSE:DBI) DSW banner, Foot Locker (NYSE:FL), and TJX (NYSE:TJX).
Shoe Carnival is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.
As you can see below, the company's annualized revenue growth rate of 4.18% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre despite not opening many new stores, implying that growth was driven by higher sales at existing, established stores.
This quarter, Shoe Carnival's revenue fell 5.65% year on year to $294.6 million but beat Wall Street's estimates by 2.89%.
Number of Stores
A retailer's store count often determines on how much revenue it can generate.
When a retailer like Shoe Carnival keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. As of the most recently reported quarter, Shoe Carnival operated 400 total retail locations, in line with its store count a year ago.
Taking a step back, the company has only opened a few new stores over the last eight quarters, averaging 1.92% annual growth in new locations. Although it's expanded its presence, this sluggish store growth lags other retailers. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.
Shoe Carnival's demand has outpaced the broader consumer retail sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 14.6% year on year. Given its flat store count over the same period, this performance could stem from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online.
In the latest quarter, Shoe Carnival's same-store sales fell 6.5% year on year. This decrease was an improvement from the 13.8% year-on-year decline it posted 12 months ago. It's always great to see a business improve its prospects.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
As you can see below, Shoe Carnival has averaged a decent 37.2% gross margin over the last eight quarters. This means the company makes $0.37 for every $1 in revenue before accounting for its operating expenses.
Shoe Carnival produced a 35.8% gross profit margin in Q2, relatively flat with the same quarter last year. This steady margin could stem from its efforts to keep prices consistently low or signal that it has stable input costs (such as freight expenses to transport goods).
Operating margin is a key profitability metric for retailers because it accounts for all expenses that keep the lights on, including wages, rent, advertising, and other administrative costs.
In Q2, Shoe Carnival generated an operating profit margin of 8.37%, down 4.1 percentage points year on year. We can infer that Shoe Carnival was less efficient with its expenses or had lower leverage on its fixed costs because its operating margin decreased more than its gross margin.From an operational perspective, Shoe Carnival has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer retail business, producing an average operating margin of 11.2%.
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q2, Shoe Carnival reported EPS at $0.71, down from $1.04 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-range EPS growth rather than short-term movements.
Between FY2020 and FY2023, Shoe Carnival's adjusted diluted EPS grew 325%, translating into an astounding 108% average annual growth rate. This growth is materially higher than its revenue growth over the same period, indicating that Shoe Carnival has excelled in managing its expenses (leading to higher profitability), bought back a healthy chunk of its outstanding shares (leading to higher PER share earnings), or did some combination of both.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Shoe Carnival's free cash flow came in at $4.68 million in Q2, representing a 1.59% margin and flipping from cash flow negative in the same quarter last year to cash flow positive. This was an awesome development for the business.
Over the last eight quarters, Shoe Carnival has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to invest organically into its business, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 0.41%, subpar for a consumer retail business. However, Shoe Carnival's margin has been flat, showing that the company's cash flows are relatively stable.
Return on Invested Capital (ROIC)
Shoe Carnival's subpar returns on capital may signal a need for future capital raising or borrowing to fund growth. Its five-year average return on invested capital (ROIC) is 13.6%, somewhat low compared to the best retail companies that consistently pump out 25%+ returns.
We argue ROIC is one of the most important indicators of quality because it tells us how much return (profit) a company makes on the money it invests into its business, shedding light on its prospects and its management team's decision-making prowess. ROIC is also a helpful tool to benchmark performance versus peers, and just like how we focus on long-term investment returns, we care more about a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Shoe Carnival's Q2 Results
Sporting a market capitalization of $596.2 million, Shoe Carnival is among smaller companies, but its more than $46.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
While the company beat expectations for quarterly same-store sales and revenue, EPS missed. Additionally, full year guidance was lowered, which is the major negative driving the stock down. Management said that they noticed "improving conditions related to the impact of inflation in the second quarter, but some of our urban customers remain challenged in the current economic environment." The company is down 5.92% on the results and currently trades at $20.5 per share.
Is Now The Time?
When considering an investment in Shoe Carnival, investors should take into account its valuation and business qualities as well as what happened in the latest quarter. Although Shoe Carnival isn't a bad business, it probably wouldn't be one of our picks. And while its sturdy operating margins suggest disciplined operating expense controls, the downside is that its operations are burning a modest amount of cash and its mediocre ROIC suggests it is growing profits at a slow pace.
We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Shoe Carnival, it seems that it's trading at a reasonable price point.
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