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

Hi, everyone. Thank you so much for joining us today as part of our 28th Annual Goldman Sachs Retail Conference. My name is Jenna Giannelli. I'm the retail consumer credit analyst here at Goldman Sachs. And today, I have the pleasure of hosting members of the management team of Shoe Carnival. Shoe Carnival is one of the nation's largest family footwear retailers offering customers a broad assortment of dress, casual and athletic footwear for the entire family with a key emphasis on national name brands. At the start of the year, Shoe Carnival had over -- nearly 400 stores across 35 states and Puerto Rico, and continues to grow that number as its footprint expands. With that, I'd like to welcome Mark Worden, recently elected the company's new CEO, currently Chief Customer Officer; and Kerry Jackson, Senior Vice President and CFO of Shoe Carnival. Mark, Kerry, thank you so much for being with us. Can I kick it over to you for some prepared or introductory comments to start off the session today? And Mark, I think -- we're still just on mute.

Let's try that again. Good afternoon. Can you hear me now? Wonderful. Well, let me start by saying thank you to Goldman Sachs for hosting us today and for our investors and analysts for joining us. It's been a great pleasure to be here. I've been the President since 2019 of Shoe Carnival and I have the privilege of becoming CEO later this month. And I wanted to share briefly before we jump into Q&A. The Shoe Carnival brand, our financial performance and the underlying business fundamentals have never been stronger than they are now in 2021 coming out of the pandemic for the past 1.5 years. Our customers have resoundingly across the country returned to shopping live in our stores across our footprint from New York to Florida, Texas to Ohio and everywhere in between. Our e-commerce sales are booming, up triple-digit from pre-pandemic levels and profits, most importantly, have more than doubled this year versus the 5 years leading into this. We're incredibly well positioned to deliver on our strategic plans, make share gains. And in the years ahead, we think the profit profile is quite exciting. So we look forward to the discussions with you today, and please, we're ready for Q&A to begin.

Thanks, Mark. So let's start with that. You talked about that strength and health of the consumer shopping in your stores. What are some of the most notable changes that you're seeing in consumer behavior post pandemic? Are they shopping more frequently? Are they shopping bigger baskets, different categories? And talk to us about how you're thinking about long-term sustainability as we emerge from some of the tailwinds such as stimulus that we had at the beginning of the year?

It's been really interesting. If you look at 2020 early in the pandemic, our customers' buying behavior surged online. The benefits of safety of convenience were really heightened drivers of where and when to shop. And a pattern emerged then that people, our customers are coming to stores on a mission. If you were calling out during 2020 pandemic era, you were coming in with a clear set of shoes you wanted to get and we experienced record conversion rates, higher transaction sizes and we have the inventory on hand and brands our customers wanted. Now building on that, if you pivot to 2021, we plan for growth. We plan for the consumers to want to get to some normalcy. And we bought for it, we staffed for it, and we've prepared and invested for it. The 2 things happened. The vaccination rates and vaccinations have created a different consumer perspective on shopping, and dealing with COVID has pivoted from the unknown early on to figuring out how to live with it and deal with the necessities of life and be buying footwear for yourself and your kids is one of those important things. So we have seen the footwear consumers resoundingly return to shopping in-store live at levels we didn't think would return this quick with the pandemic. Recently, specifically, we guided that our first 3 weeks of our Q3, our traffic was up over 50% versus the same period in 2020 and over 20% pre-pandemic 2019. So to say bricks and mortars are not healthy, would be incorrect in our business. They are stronger than ever at this moment. I would say there was a lot of pent-up demand that was captured in 2020, of course, and we benefited from stores being closed and then a huge purchase occasion catch-up. But in 2021, we find that it's not pent-up demand anymore. We find we're being able to get introduced to some customers that may have more disposable income due to the government stimulus benefits this year. We're finding that they are trying us at a rate that is double digit beyond prior records, and we're having new customer acquisition accelerate. So all in all, we're incredibly optimistic on the consumers' behavior. It shifted favorably for Shoe Carnival dynamics all across the country.

That's helpful. And then this may answer or may have answered my next question. But just in terms of what we're seeing with more current behavior in light of the Delta variant, has there been any more recent shift or even a moderation of slowdown, any sort of hesitancy that you might be seeing in that consumer behavior of them coming back into the store?

Yes. Simply no. But as we guided, the 2021 back-to-school season will be by far the strongest sales and the most profitable in our company's 43-year history despite Delta's challenges across the country. Customers resoundingly returning to brick-and-mortar is recent as August. And again, we saw store traffic up over 50% versus August the prior year. In fact, if you think about all the store divisions from the North all the way down to Texas, we saw mid-double-digit traffic gains across all regions during that 3-week period in August. So back-to-school, kids are going back, sports are starting and despite Delta, people are shopping for shoes at Shoe Carnival stronger than ever before.

That's great to hear. And I think thing that we are asking all companies who are participating in the conference today and tomorrow is just as they think about that consumer demand and moving away from the first half, maybe some of those tailwinds that we saw how you're thinking about that demand cadence into the end of '21 and into '22. If you had to characterize it as staying the same, accelerating or decelerating what would be your best guess?

Well, I'd say the fundamentals for '21 have been very strong and remain very strong and our outlook for the remainder of 2021 fundamentals, traffic, conversion, transaction size, margins, all robust. And our guidance has those continuing to be strong throughout the calendar year. We've provided guidance, Q2 earnings that we see record sales and profits for the back half of 2021, and that takes in consideration the COVID-19 situation. Ultimately, I think our shareholders, we will be providing earnings per share this year that exceeds the prior 2 years combined. So we're excited that the customers are back and we can provide shareholders really a step change in profit this year.

That's great. So I mean, I guess, switching a little bit away from the top line, which it sounds like is incredibly strong, your customer base and at the macro level. There are a few more puts and takes just on the margin side. And inflation has certainly been a big topic across all companies that we've spoken with today. So can you just walk us through a little bit, what are the biggest areas of inflation as it's flowing through your P&L, whether it's wages, freight, distribution, et cetera. How does your guidance incorporate it? And then what are the best -- some of the best mitigants that you have or levers to pull to offset some of those headwinds that we're seeing?

Well, Jenna, the 2 primary inflationary pressures we're seeing, and we've built this into our guidance that we've seen in all years, supply chain costs and labor costs. Everyone in the global supply chains have been under significant pressure due to shortage of the assets and higher shipping volumes. This has increased our costs. We saw this in the first half, even though we had record profits, we had much higher cost. We're expecting to see then in the second half much higher cost, both from the supply chain cost and tight labor market. We're going to continue to fund labor costs so that we had -- we give our customers that great experience, the exceptional shopping experiences they are looking for, and we need to have experienced maximum employees in the aisles, so they can have quick checkout, maintain the inventory and clean environment. The escalating labor rates are really a market-by-market item. We see a lot of different variances between markets. But that's -- we factored all of that into our guidance for the second half and in all honesty, it will be a headwind for next year also. You may be surprised I didn't talk about product costs being a headwind of inflation this year. We are expecting product costs to go up, but it's one that is not going to affect our P&L this year, there will be a headwind against our operating margins for next year.

And do you guys have a point of view or thought around as we think about the moderation of some of those supply chain headwinds, when we might see that normalize a bit, how long will the industry and you'd be waiting? And then as we think about mitigates our ability to offset those, another common question we're asking all companies participating, your biggest lever to mitigate it. So whether it's increasing your lead times, shifting production, air freight? And then separately, do you expect your inventories to grow faster or slower than sales in the second half, and that really speaks to just, I guess, the availability of product, but curious your thoughts?

Well, some of the costs will be transitory. The supply chain cost, as I said, are really based on an increase in demand and a shortage of assets to basically transport those goods. Eventually, the assets we put in place and demand will probably come down. But we see that as a headwind, probably at least what we're hearing in the industry at least through back-to-school next year. So -- but we wouldn't expect that to fall back to pre-pandemic levels. I think that we're going to see elevated costs on an ongoing basis. The labor costs are probably going to be an ongoing issue. We don't foresee that changing. That's -- we have factored that to be more of a permanent change, and we see it escalating at least for the next couple of years, as labor rates across the country continue to increase. You asked about the mitigating factors. I'd tell you the -- what we have found is the biggest mitigating factor for us is to have our merchants, our supply chain people working closely with our vendor partners to come up with creative solutions to try to get the inventory to our distribution center and then from our distribution centers to our stores. Product is late. It's across the board for everybody. But what we're trying to do is trying to be creative to get it into the stores and what you're seeing right now is kind of rolling lateness. So we didn't receive all the goods we expected in August, and we're seeing late shipments in September, but we're receiving the products we expected in August and September. So we're having a fresh assortment of goods coming into our stores at all times. It's just a little later than we had expected. You asked about inventory levels, you know, what we've seen is going into back-to-school on a per-store basis, our inventories were up 4%. So we did a great job. Our merchant team and our supply chain team have done a great job of getting the inventory in prior to our peak season. We are to typically be lowering our inventories at the end of the year as we sell through the fall and winter goods, and we're waiting for spring to start. But one of the mitigations we may take into account is to bring in our spring goods earlier. Some of the transitionary athletic goods. If they're available, we're going to try to bring them in prior to the time we would normally bring it into February. We might be agreeing them in January. So if our plans work, we'll probably see higher inventory levels at the end of the year than we would historically have seen.

In terms of how you feel positioned for holiday, I appreciate the back-to-school is a very big season for you. But as we think about holiday as well. Do you feel good about the level and the mix of inventory as we approach that you just have a good line of sight to getting that steady flow of goods in the door.

It feels the same as it's been all year long. We're going to have late shipments. Similarly on time, we're going to have product in our stores. We have boots in our stores today. We're taking deliveries of boots right now. We're going to have a nice assortment of boots when the weather turns cool for the customer to be, and we'll continue to -- the difference has been as opposed to having most of your inventory at the beginning of this season, we'll be flowing it through the entire season. So we're replenishing it. I think we feel comfortable that we can achieve our stated guidance that we put out there with the inventories and the visibility we have on it, and I think our customers will be satisfied.

Great. I'd love to switch gears and ask a little bit more about some of the -- a lot of the company's strategic initiatives, which are impressive and exciting more within our control than the things that are outside of our control, whether it's supply chain or the consumer. So let's dive into some of that. Maybe let's start a little bit with just your footprint. I'd say it's probably more recent years, Footprint growth has not been the biggest driver, but you've identified some opportunity now the white space opportunities. So talk to us about how you're thinking about the footprint, the availability of real estate where that number of doors could grow to? And what some of those attractive markets are that you see?

Great. The past few years, our focus has been on rapidly driving company profitability and more specifically, store productivity. And so as part of that, we streamlined the fleet. We closed our low-performing stores and we started a robust investment to modernize our fleet. And this has resulted in more than doubling our operating profit this year as compared to the past 5 years' average. More specifically, on the store productivity front. Now that we've cleaned up the fleet from low performers, our sales per square foot are approaching $300 versus $245 in 2019, and our average sales per door are now $3.2 million versus $2.6 million back in 2019. So a really significantly enhanced productivity from our base. And so now as we enter 2022, we're going to reignite store growth, with the plan to return to net new store growth during 2022 and an accelerating projection as we head into '23 and '24. Near term, you asked about geography and where, our focus is on the 35 states that we currently have significant presence or market share in. And we see material opportunity to expand market share and leverage the current brand awareness and footprint we already have and infrastructure. And so our focus near term will be on the 35 states and particularly the states that we have significant competitive share to be taken.

As we think about other investment opportunities within the store, right, the shop-in-shops and the partnership with Nike. Can you talk to us a little bit about that, those shop-in-shops? You're adding another 100 through 2023. How big can that grow to? What kind of conflicts are you seeing when you add those into the store? And is there an opportunity to take that even higher?

Yes. We're still excited about our shop-in-shop program that we've been rolling out. As we started the year, we had a little over 1/4 of the fleet with Nike shop-in-shops. We are on track now to have over half of the fleet during mid-2022. And we see that providing something incredibly important to our customer experience. They say that having these athletic shop-in-shops, modern, digital, great assortment gives them a distinct shopping experience. It gives them that compelling brand representation. And importantly, we're finding it less sell products at a higher AUR or full price realization because the experience is so enjoyable and the assortment of meeting their needs, we're not having to need discount. So we think that there's room to take athletic shop-in-shops across the entire fleet. And as part of our store modernization plan, we've said over the next 3 to 4-ish years from now, we'll have over 2/3 of that fleet modernized. And our ambition is to go faster than that. Comps and customer responses have all been very encouraging in these early days. So we plan to be increasing our capital prioritization of that store modernization, rolling out the athletic shop-in-shops and getting over half of our fleet with Nike's by mid-2022. We're really excited about it.

And in addition to Nike, I mean, are there other -- obviously leaning into Nike, leaning into athletic and that's been a very strong area across footwear, apparel. But are there other brands as well that you're leaning even more into or that could be interesting expansion or add-on opportunities as you think about your focus on a strong core national brand portfolio?

Yes. I'd say customers are very happy with Shoe Carnival's breadth of categories. It's the real strength of our model that roughly half our footwear sales are athletic and half are nonathletic. And we span a portfolio delighting moms, females, dads, husbands, children and the age spectrum. It's truly a family shopping experience. And the breadth of brands, we believe in family footwear, we have the most brand-centric, brand-focused portfolio based on us being singularly retail focused, not in the wholesale business, not beholden to other vertical integrations. We are singularly focused on the best brands that our partners want to engage with us on. The right trends that our merchants are identifying and buying deep across those. We -- I'm so proud of our merchant teams, strong vendor relations. And I think that has a set up incredibly well to continue with that retail focus building brand.

Kids is another thing. I mean, another area you talked about that family experience and really being a family destination. Kids has been another strategic initiative for you. Can you talk a little bit more about that? I guess what is the biggest growth opportunity there? How could that grow as a piece of your business? And I know you spoke to the strength of back-to-school, but specifically that season relative to if we think about 2019 or 2018, what are some of the consumer trends that you're seeing that make it such an opportunity?