Shoe Carnival, Inc. Q2 FY2025 earnings call

• Strategic decisions shaped the quarter: prioritized margin dollars over lower-quality sales, invested in inventory depth for back-to-school, continued rebanner program despite market uncertainty. • Q2 gross margins reached 38.8%, a 270 basis point expansion from disciplined pricing, improved mix, and better inventory availability. • Rebanner strategy contribution was significant, with Shoe Station outperforming Shoe Carnival on merchandise sales during Q2 and back-to-school. • Shift in demographics from Shoe Carnival's sub-$30,000 household to Shoe Station's over $50,000 range, driving improved economics. • Inventory investment was strategic, improving in-stock rates during back-to-school and driving margin expansion and earnings beat. • Kerry Jackson returned to executive leadership team to support strategic growth initiatives.

Shoe Station: Sales grew high single digits, expanded margins, outperformed Shoe Carnival on merchandise sales during Q2 and back-to-school. Product margins expanded 280 basis points in Q2 plus fiscal August versus prior year. Shoe Carnival: Q2 net sales were $306.4 million compared to $332.7 million in the prior year, a 7.9% change. Comparable store sales declined 7.5% with approximately 100 basis points of impact from 20 rebanners completed. Children's category had positive comp sales growth. Rogan's: Net sales were approximately $20 million, in line with integration plans, and expanded both comparable sales and margins.

• Raised annual EPS guidance range to reflect Q2 profit beat and fiscal August comp growth results. • Net sales guidance revised to $1.12 billion to $1.15 billion. • Gross profit margin guidance increased to 36.5% to 37.5%. • SG&A expected to be $355 million to $360 million. • Capital expenditures expected to be $45 million to $55 million, with $30 million to $35 million for rebanners. • Third quarter net sales guidance $290 million to $300 million, EPS $0.50 to $0.55.

• Macro-economic volatility could impact inventory levels and sales. • Supply chain issues and tariffs could affect inventory normalization timing. • Dependence on rebanner strategy success and consumer shift to median-income households. • Competitor pricing activities could impact margin integrity.

Q: Going to be a handful. First of all, Mark, I'm curious on the second quarter. Your sales came a little below plan, but obviously, your gross margins were well ahead of plan. You talked about prioritizing margin dollars. I'm just curious, is there something about the quarter that was a bit unexpected? Or did you kind of change your priorities in the quarter in order to kind of achieve the results that you did that were a bit different than what you kind of laid out 3 months ago?

A: Mitch, thanks for the question. I think the opportunistic buys and additional inventory that the team brought in performed better than we expected. We captured success at a lower cost basis and strength at a higher-margin run first. Second, the Shoe Station performance continues to accelerate. And as that grows towards a higher percent of our mix, that's helping us drive our margins higher than we expected. And third, we continue to see competitors do irrational things related to pricing, and we believe that's not the strategy for us. We've stayed true while others were doing very aggressive profit dilutive activities before back-to-school. We stayed true and steady to our focus of where we're going to be, ready to deliver growth when the customer is ready to shop profitably during back-to-school. And it delivered, with comparable growth coming in Q3 right away as soon as back-to-school started. It was an exciting period of time.

Q: And then, Patrick, on the third quarter, you gave us guidance in terms of sales and earnings. Is there anything more you can say in terms of kind of what your comp expectations are for the quarter and then also margins gross versus SG&A?

A: Mitch, thanks for the question. Yes, there's a little bit more detail that we can provide on our third quarter results. First, our -- on our sales, the $290 million to $300 million range that we've given is down 2 to down 5. So midpoint somewhere in the 3% range, similar to our annual guide in the back half of the year. We don't have any meaningful difference in stores, so our comp would be very similar to our total sales on that front. With respect to margin, we earned 36% in the quarter last year. We would expect a number that is 100 to 150 basis points above that in Q3 this year. So targeting a number of like 37% to 37.5% would be the thought process. SG&A, I think the best way to think about that is a pure number that is $95 million. So consistent with what we spent in Q2, which was about $94 million.

Q: Just a follow-up. So we know a hard number. The inventory was $449 million. That's a hard number that can tell us what's happening. Is that -- what is the number -- I mean, I don't know, since we don't know what the mid-single-digit increase year-over-year means, is -- what -- I mean, what is the number? Is it higher or lower than $449 million? Is it -- since you had that strong August, is that now at 420? Because it's really what the number is, not what the increase is. It's looking forward, not looking backwards.

A: Sam, it's Mark. We're not going to give an interim inventory for a right to second, books aren't closed for all of that. We're sharing -- sales are closed for fiscal August, and we're really delighted to be able to give the full back-to-school growth and margins closed. We're really delighted to be able to share that and the category information. Here's the message on inventory. We have too much, as I said in my speech. And as Tanya said, we have it in places we feel good about delivering strong margins as we work through the fall season, the spring season and the key items. Next year, once we have complete clarity or better clarity on the supply chain and tariffs, we will be working through and normalizing inventory levels. But we do not see that margin erosion becoming relevant in this fiscal year, and we do not see that product being margin deteriorating next year. It's a good product.