Shoe Station Group Inc. (SHOE) Earnings Call Transcript & Summary

My name is Alex Straton, I'm a Vice President on Kimberly Greenberger's team covering branded apparel and footwear, department stores and specialty retailers here at Morgan Stanley. We are very pleased to have Shoe Carnival here with us today. Shoe Carnival is a $500 million plus market cap family footwear retailer with nearly 400 U.S. stores. Its broad assortment of moderately priced dress, casual and athletic footwear for men, women and children, with an emphasis on national named brands make Shoe Carnival one of the nation's leading family footwear retailers. In 2019, Shoe Carnival generated over $1 billion in revenue across store locations, mobile app and website, delivering its 11th consecutive year of comparable store sales growth. Today, we are joined by Shoe Carnival's Vice Chairman and Chief Executive Officer, Cliff Sifford; as well as Kerry Jackson, Shoe Carnival's Chief Financial Officer. With respect to background, Cliff was appointed to the CEO role in 2012 before adding the Vice Chairman role in 2019. He previously served as Shoe Carnival's Chief Merchandising Officer. And prior to joining Shoe Carnival, Cliff was merchandise manager in shoes for Belk. Moving to Kerry's background. Kerry has served in the Chief Financial Officer role since 1996, so his responsibilities have expanded meaningfully since then. His most recent title is Senior Executive Vice President, Chief Financial and Administrative Officer and Treasurer, a role he's held since 2019. Cliff and Kerry, thanks for joining us today, and welcome.

Thank you.

Thank you, Alex.

It's good to be here.

So we'll spend the majority of today's session in a question-and-answer style fireside chat, where we look forward to business' current strategies and recent performance. We have also reserved time to answer your questions. For those of you joining via the webcast, please click the Ask A Question button on the webcast to submit your questions. Lastly, before I begin, I need to remind everyone that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. With that, we'll kick it off with the fireside chat with some bigger questions on the Shoe Carnival business model, strategy and marketplace position.

So Cliff, I'll kick it over to you. Let's start with thinking about Shoe Carnival compared to other major footwear players. How do you think about your position in the footwear market? Who do you view as your biggest competitors? And how is Shoe Carnival differentiated? Even more than that, has COVID changed the competitive landscape at all?

I'll take the latter part of that question first. I don't believe that COVID as of today has changed competitive landscape. I do think that it will -- I believe the weaker players, they'll get continue get weaker and especially the ones with a great amount of debt and -- will end up going away. So I believe that we'll see change. But as of today, we just have not seen a lot of change even with -- except for 2 regional players, Stage stores closed earlier in the pandemic and then Modell's also closed early in the pandemic. Modell's is a competitor for us in the Northeast and Stage down in Texas. But there's -- Macy's, Penneys, Belk are all -- have already announced major store closing by the end of the year. I think Famous has just -- or at the last conference call, announced up to 150 store closures. So the competitive landscape is going to open up. And I believe that's going to be -- I believe that's what retail has needed, okay? It's been the over-retail environment for quite some time. And I think the pandemic accomplished that goal.

Great. And could you also just touch on your company -- just your position in the footwear market. Who should we think about as some of the other competitors?

That's a great question. I'm sorry, I didn't answer that. We're a family footwear retailer. Our customer is $100,000 household income and down. We carry -- we're very branded. We carry almost very little private label product. So 52% of our business is athletic. Obviously, the rest is nonathletic, very strong kids business, really strong, and you can see that with a name like Shoe Carnival. Famous Footwear is our #1 competitor. We -- only because we compete with them in more markets. They're pretty much all over the U.S. with the exception of the Southeast, DSW and Rack Room, which is a privately held family footwear retailer in the Southeast.

Great. That's super helpful context. And this segues quite nicely into the next question because you hit on a little bit about your customer and what the profile looks like. So Shoe Carnival has described its core customer as a working-class family with school-aged children that wants one destination for brands, service and value. Could you just elaborate a little bit more on that description as well as give us an overview of how Shoe Carnival thinks about its target customer base?

When you think about our business, 18% of our total business is what we classify as children. Now children grow out of children's shoes once they get to about the third grade, and they start wearing adult shoes and -- adult sizes. So for anyone who's just had children prepare yourself because you're going to be paying more for children's shoes once they get about the third grade. Anyway. So we have a very strong, very strong kids business, and that is not by accident. That is part of our strategy because they don't drive. Moms have to bring them, moms and dads bring them. So that's what makes us a family footwear destination. So they come in to buy children's shoes, and they buy quite a few, like I said, 18% of our total volume. And then while they're there, they buy their own shoes. We do about 50 -- I said this earlier, about 52% of our business in athletic, which goes to kids and adults that then have an incredibly strong men's work shoe business about -- men's represents also about 18% of our total volume and work shoes represents about 25% of that. So the reason all that's important is that we become destinations for those kinds of shoes. And while they're in our store, our concept allows us to sell them more. And I'd like to expand on that for just a second. The concept is what makes part of the Carnival, if you would, is that we have -- every store has a microphone. And all during the day, the store manager will make -- will call out a special and the whole idea is that if you have a crowd in the store, we assume that you're there to buy a pair of shoes. Our goal is to get you to buy the second pair. So if he will run a special or run -- we have a spinning wheel at the front of the store, an opportunity to spin the wheel, if you buy 2 pair more, 3 pair more. So the whole idea is once you're in the store, is to get you to buy more than 1 pair, and we're very successful at that.

So is that a uniform approach across geographies? And have kind of the tactics and your customer base change with COVID?

No. Again, we're very young -- I'm not telling -- I don't believe that the customer base has changed that much. I do believe that younger people are not as afraid of the COVID virus as the older generation is, and they continue to shop and buy. So now we have seen geographically where the governors and the mayors have put tighter restrictions on shopping, obviously, the traffic in those stores go down. And that seems to be regional-based South, Southeast, even Southwest, not as many restrictions when you get to to the Northeast and even in the North Central, like Chicago more restrictions.

Great. I think that's a super helpful framework for understanding the groundwork of the business. So perhaps now we shift to some of your strategic priorities. So Shoe Carnival has identified 3 strategic priorities for 2021 through 2023. The first is e-commerce growth; the second is store development; and the third is CRM. Let's first start with the e-commerce growth strategy. It looks like e-commerce grew over 150% year-over-year in the latest quarter, which is a phenomenal number, with penetration surpassing 13% of revenue, up from just 6% in 2018. So quite a large penetration job. Can you just talk about the businesses pre-COVID e-commerce strategy and how this year's pandemic has impacted Shoe Carnival's long-term strategy? And then even further on that, could you just address some of the anticipated margin impacts have just been such a hot topic for retailers this year?

I'll address the first part of that and I'll get Kerry in a second. But the -- just talk about the e-commerce growth. 2 years ago, not -- obviously, not by luck, but our strategy was to create a customer centricity program to a CRM program where we could talk one-on-one with our customer. And that turned out to be an incredible -- incredibly important decision as we entered into the pandemic. We had -- at the time, we had about 20 million Shoe Perks members as loyalty members. Since that time, we've added another 5 million. But we really didn't have a way to talk to them efficiently. So we decided, again, 2 years ago, to implement a CRM strategy, which basically tells us takes our customer and segments them by customer profile, lets us know their buying habits, what they like, what they don't like, whether they have kids, based on where they live, whether they have kids, what kind of income they have. And it allows us to talk to them on a one-on-one basis. And when we entered into the pandemic, that was so key to our success because once we had to close our stores down, we were able to talk to customers, again, one-on-one, lead them to our website, and you talked about our over [ 150% ] increase on our website increased 550% during the time that our stores were closed, that was key to our success in the second quarter because we gained about 25% of the business that we did once we reopen was -- were customers that had never shopped at Shoe Carnival before. So we gained new customers through our CRM program and going after look alikes. So we know the customer profile, we were able to then target through our digital marketing customers that look like us. And they came, and that's the reason for our success in the second quarter, and we'll be -- or we'll actually continue to fuel our growth as we go into '21 and beyond. The second part of that question, I got so excited about my CRM program and how do we build...

Just focusing on -- you saw such outstanding growth of your e-commerce and online business during COVID. Has the strategy there changed now? And what are you thinking about for maybe penetration levels long term? And then also, I think a question for Kerry is more the margin impact on the shift to digital.

So let's talk about long term our -- before the pandemic, our long-term goal, our 3- to 5-year goal is to get to 20% penetration e-comm to total volume. We're going to get very close to that this year, somewhere between mid-teens and high teens penetration to our total business. So we're about 3 years ahead of our strategic goal that we set last year. We think that next year, as we open our brick-and-mortar stores, we'll continue to stay in that mid-teen range. And then growth from there as we hit later '21 and into '22, and we believe we now can see as high as 20% to 25% of our overall volume being done online. The customers have discovered us. There are certain customers that are very -- they like shopping online, they feel much safer shopping from their homes than they do in the stores. And until we have a vaccine that everyone is a believer in and has taken in the pandemic behind us, I believe that the e-commerce portion of our business will continue to grow. And then even once we get open back up fully with a vaccine, I think there are customers that just love the service that we offer online. As far as a margin perspective, I'll let Kerry address that.

So when we kind of went into e-commerce, we not only wanted to give the customer an additional way to shop, but we also wanted to create a robust profit channel for us also. So -- but we knew the key behind that was to grow the sales, so the initial investment of building an e-commerce business, we would leverage that over time through increased sales growth. Today, we're looking at our -- if you look at four-walls contribution, our e-commerce business is just below what our average store does. We think as we continue to grow that sales business, we're going to continue to see that delta between the bricks-and-mortar stores and the e-commerce business continue to get smaller by leveraging the expense structures, the variable and the semi-variable -- or the fixed and the semi-variable cost in the e-commerce, we'll leverage those and drive that four-walls profitability higher.

Great. I think that fully covers the e-commerce piece of that strategic -- one of the 3 strategic priorities. And maybe since Cliff, you touched on it, maybe let's go back to CRM a little bit. You kind of mentioned how it really benefited you during COVID. Can you just talk about a brief overview of how you thought about it before COVID? And then kind of where it's going now? Just to give people a little bit more background before COVID, and then we'll move to the second.

It's a great question. And the reason we decided to launch the CRM program. Because again, we had all these customers in our database who really didn't have a concise way if we send out an e-mail, just send out an e-mail for work shoes, that went to the entire database. We so, eventually, if you're not wearing work shoes to work every day, if you're getting work shoes e-mails from Shoe Carnival, you're going to throw me to spam. And then I have no ability to talk to you. So it was important to us that we talk to the customers through the way that they shop. And the only way to do that is to know more about you. It sounds a little -- it sounds a little intrusive, but it's really important to understand what it is you like about us, why you shop at Shoe Carnival, what departments you shop. So if you shop children's shoes, I know you have children. If you shop men's shoes or specific kinds of men's shoes, I can tell whether you're work in an office or in a blue-collar job. Now I can specifically market to you, either digitally or through e-mails and not be an intrusive market -- everybody has experience set. So the CRM program allows us to do that. And that was the reason we decided to go into that. Obviously, we benefited through that decision once we entered into the pandemic, but this is something that is going to benefit us for years to come. And the fact -- and I mentioned this in my previous answer, the fact that 25% of the volume we did in June and early July where the customers that have never shopped us that is also through our CRM program, going to help us as we move through the next couple of years. Strategically, the most important decision we've made over the past 2 years has been this CRM program and what it can do for us from a volume and profitability standpoint.

Perfect. I think that gives us a great overview of the CRM priority. So perhaps let's move to the final priority, which is store development. Can you just elaborate on what this entails? And similarly, to the other questions, has COVID impacted your approach to this priority at all? And even from a larger scale, the retail landscape is shifting so much right now. How do you envision your store fleet in a couple of years, say, by 2023? What change -- what do you think will change the most in your current store fleet? Or alternatively, what do you think will remain the same?

We're fortunate in the fact that about 4 years ago, we made the decision to slow store growth a bit, I hate to use terminology again, so that we could invest in the CRM and update all our systems. We decided that we want to put in a new order management system, a new warehouse system and a new traffic system. So we've done that over the past 18 months to 2 years. And that was put in place. So it would -- we could -- along with our CRM program and now our new systems, develop not only our e-commerce business, but historic growth in the future. One of the things that we decided last year, as we were looking at our stores is that we had -- not had a major refresh to our stores, not that we think they're broken because they're not. But we need to stay relevant with our customer at all times. And we need to make sure that as customers walk through our stores, they feel they're in a modern up to date, and they're getting a great shopping experience. So we talked in our conference call, I guess, 2 conference -- 3 conference calls ago that we're looking at our fleet to update our store environment. That's not a major update. That's just tweaks. We have a spinning wheel, as I mentioned earlier, do we make that a digital spin and we don't know that -- answer to that yet. We're going to test some of those environments out. Then we take our in caps, where today, we make incredible brand statements on our in caps so the customers can see the brands that they're looking for and understand that we are our branded shoe store. Do we turn that into a digit -- some digital format? We don't know the answer to that. We want to test those things out. So we just think that it is important, especially with the young customer today to appeal to them as they walk in and feel relevant to them as they walk in and keep that store environment fresh and new. So that's something that we're working on. We haven't fleshed it all out yet. We've mentioned the fact that in a couple of calls ago that we were looking at that. But as I started to talk about 3 years ago, we took a long hard look at our fleet. And we said, we have not taken the opportunity to close underperforming stores. In the past 3 years, we have done just that. Any store that didn't hit a minimum number we closed. And you have noticed that our store count has gone from, I think, a high of 470 down to currently 383. So we've ridded ourselves of the stores that were detrimental to our income. So now it is time for us to start looking at growth. And we would have done that in a more serious fashion this year had it not been for COVID. So once we got our real estate team out looking for sites, we want to start first in filling our current footprint. We need more stores in Texas, we need more stores in Pennsylvania, more stores in Illinois. And we will first backfill, and then we'll start spread in the Northeast and then eventually Southwest. Lot of growth opportunity, brick-and-mortar as the pandemic ends soon, we hope.

Great. Great. That's a helpful overview of kind of how you're thinking about the stores and how maybe COVID has impacted it. It sounds like the basic strategy remains unchanged, just maybe perhaps a little slowed as you kind of roll it out.

A little delayed.

You and everyone else, yes.