Dealertrack Technologies Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 29, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to Shoe Carnival's Second Quarter 2023 Earnings Conference Call. Today's conference is being recorded. It is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. Management's remarks may contain forward looking statements that involve a number of risk factors.

Operator

These risk factors could cause the company's actual results to be materially different from those projected in such statements. Forward looking statements should also be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's earnings press release. Investors are cautioned not to place undue reliance on those forward looking statements, which speak only as of today's date. The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward looking statements discussed on today's conference call or contained and today's press release to reflect future events or developments. I'll now turn the conference over to Mr.

Operator

Mark Warden, President and CEO of Shoe Carnival for opening remarks.

Speaker 1

Good morning, everyone, Thank you for joining us today for Shoe Carnival's Q2 2023 earnings conference call. Joining me on today's call are Carl Chiavetta, Chief Merchandising Officer, Eric Gast, Chief Financial Officer and Steve Alexander, supporting Investor Relations. Let me start today by saying that conditions impacting customer trends improved in Q2. As the quarter progressed, we saw encouraging signs that the impact of inflation on our customers was starting to moderate. Customer engagement in store and online picked up, average transactions climbed to a new second quarter high, Product margins were robust and customer conversion remains strong.

Speaker 1

Based on these improving conditions, We see an opportunity to invest to increase our market share, to accelerate sales growth and to grow earnings per share results compared to the soft market and results in Q1 of this year. As such, we accelerated investments to fuel profitable brand building activities and drive our excellent customer experience. We continued to roll out our store modernization plans And drive customer engagement with new stores in new markets that capitalize on improving conditions. Sales in Q2 Grew approximately 5% versus Q1 2023 to $294,600,000 Earnings per share increased at an even faster rate of 18% growth versus Q1 to $0.71 demonstrating the success of our investments to accelerate profitable growth as the year has progressed. While the back to school season is not yet complete, August results provide further signs that inflationary conditions have moderated during the year.

Speaker 1

In Q3, while we are not seeing growth versus prior year yet, We continue to see modest improvement versus Q2 in sales, margins, transaction size and strong conversion. Competitive intensity has been high in both Q2 and the Q3 back to school season with many competitors deep discounting products Running profit losing promotions. We remain committed to our profit transformation and targeted promotional strategies that are based on customer analytics and deep knowledge of our loyal customers. That strategy is working. For example, the August back to school shopping period accounts for half of the company's 3rd quarter gross profit.

Speaker 1

August sales and product margin results were among the highest of any month in the company's 45 year history. With strong profit results achieved Q3 to date, the company is on track to deliver its full year gross profit margin guidance Of 36% to 37%. Given the inflationary environment our customers face, we are very pleased with this result, including our ability to gain market share and our customers' response to investments in brand building and customer experience. As such, we plan to continue to invest in those areas in the remainder of Q3. Eric will provide more detailed guidance in his section.

Speaker 1

Although customer trends and results have improved, it would be premature to declare that the inflationary and economic headwinds are no longer Significantly impacting our customers. While gross margin remains strong for Q2 and results accelerated versus earlier in the year, Total sales declined 5.7% versus the year ago period and comparable store sales declined 6.5%. Store traffic performance improved in Q2 versus Q1, but still declined versus prior year. We continue to see softness in the segment of our customers With household income under $30,000 including our urban lower income customers. We see this headwind as an ongoing challenge throughout the remainder of the year.

Speaker 1

We are also seeing a favorable mix shift to higher income, more profitable customers, led by our Shoe Station banner and our online transactions. For some perspective, historically, over 50% of our customers were from households With income under $50,000 This year, we're seeing a meaningful shift with over half of our customers Now in households with income over $50,000 including a significant percentage increase in households with income over $75,000 As part of our long term strategy, we continue to invest to build our brand and acquire these higher income, more affluent customers to expand our customer base. At the same time, we also continue to invest in our very important value customer base. The broader inflationary environment continues to make it more expensive to compete for share growth, to attract and retain talent and to capture new customers. With unemployment levels remaining near 50 year lows, hiring and retaining employees in the retail space requires continual innovation to ensure a great place to work as well as higher investments in wages, health care and benefits.

Speaker 1

With our team of nearly 6,000 talented Customer focused members, we pride ourselves on delivering the best customer experience. By investing in our team, We are driving continued new customer engagement, strong conversion levels and customer loyalty. With increased strategic investments in our brand and customer experience and the slower economic recovery, We have decided to lower our expectation for new store openings this year. We now plan to open 6 to 10 new stores in 2023, likely on the lower end of the range unless economic conditions improve rapidly during Q3. Importantly, there is no change For our long term plan to operate over 500 stores in 2028, we're taking a more measured approach to near term organic growth until market conditions improve further.

Speaker 1

Economic and inflationary conditions Are not improving as quickly as we had projected, and we expect that they will remain challenging as we navigate the remainder of 2023, particularly with urban customers. Given that and reflecting our updated new store plans, we are updating our full year 2023 sales guidance to $1,190,000,000 to $1,210,000,000 Eric will discuss detailed guidance in a few moments as part of his commentary on the quarter. Now I'd like to discuss how our continued strategic investments are positioning us for profitable growth when the economy improves. Our store modernization program and in store experience investments continue to drive fleet profitability and productivity. A little over 2 years into the program, we have 52% of the Shoe Carnival fleet remodel complete.

Speaker 1

We are on track for approximately 2 thirds of the fleet to be completed by summer of 2024. I'm also very excited We opened our 4 hundredth store since our last earnings call. The last time we operated 400 stores was back in 2018 when we are at the very early stages of our multi year productivity improvement and store rationalization program. Since that time, our fleet productivity and profitability has dramatically improved. For comparison, Sales now for our 400 stores per door has increased 15%.

Speaker 1

With the productivity increases in revenue per door, Combined with our targeted promotional strategy, profit per 400 doors this year has increased more than 40% versus 2018. As shared in preceding quarters, our highly profitable fleet of stores has us in a solid position to self fund our investments in the Additionally, the investment in our CRM platform continues to drive customer membership growth, reaching 33,300,000 members, an increase of 12% over prior year. Sales from loyalty members now represent over 70% of the company's net sales And our most profitable Gold Seer membership grew over 25% in Q2. Transaction size for Gold members With over 15% higher than non members, one of the brand building areas we invested in was to reactivate last athletic shoppers. Specifically, those members did not purchase a top global athletic brand with us in 2022 during our period Where the supply chain disrupted our assortment and availability.

Speaker 1

With this year's solid assortment in stores, we utilize our CRM assets to reengage many of those shoppers and get them to retry Shoe Carnival. This among other targeted campaigns That's a significant number of customers reactivated into active buyers during Q2. We're very encouraged by these results and continue to invest in targeted brand building and customer programs. As I discussed earlier, we're seeing a shift to more affluent customers, which in part is being driven by our e com and CRM capabilities. In short, our always on digital marketing strategy is working very well, Capturing and converting customers and it's partially offsetting the traffic softness we are seeing in some of our urban customers.

Speaker 1

We have significantly more untapped customers to reengage in the years ahead, making CRM a core continued driver of profitable customer engagement. As I mentioned earlier, conditions are improving with our more affluent customer base across the business and this improvement is particularly evident In the performance of Shoe Station, Q2 sales for Shoe Station increased low single digits and Q3 sales to date grew mid teens versus prior year, outperforming the overall company each quarter and driving profitable growth. Our investments to harmonize Our online and CRM platforms for customers are working, enabling Shoe Station to build top line sales and margin momentum. We continue to advance value capture programs and gain synergies across the Shoe Carnival and Shoe Station banners to drive further efficiencies and margin expansion. Given the challenging economic landscape, We continue to prioritize reducing inventory levels, sustaining strong margins and providing the right mix of branded products for our customers.

Speaker 1

We started this year with inventory approximately $105,000,000 higher than prior year with plans in place To rapidly right size our inventory position by back to school, we ended the 2nd quarter with inventory up only $24,000,000 versus prior year, Continuing to reduce inventory levels versus year ago. And importantly, as I mentioned earlier, we are maintaining strong margins. Carl will cover more details in a few moments, but our inventory is on track to be below prior year levels in the coming weeks And to achieve the annual guidance for inventory to be approximately $40,000,000 lower by year end 2023 compared to year end 2022. Our balance sheet is building to an even stronger position with over $90,000,000 in cash And marketable securities on hand as of yesterday and equally as important, we continue to operate with 0 debt. As we have in the past, We're funding our significant investments to grow the business profitably from the strong operating cash flows generated by the business.

Speaker 1

Before I hand it over to Carl, I will summarize by saying that our Q2 results demonstrated the momentum of our strategy within the context of a challenging economic backdrop. We delivered improvement on net sales, earnings per share and increased investment in advertising, branding and customer experience during the quarter versus Q1. Our strategic investments drove growth in our customer loyalty program, High conversion and continued market share gains in the Family Footwear channel. We opened our 4 hundredth store As we continue to invest in the business with new stores, our CRM strategies, store modernization and best in class store experience for our customers. We saw improving conditions related to the impact of inflation on consumers in the Q2, but some of our highly valued Lower income urban customers remain challenged and we expect we'll continue to be cautious in the current economic environment.

Speaker 1

We're taking a measured approach to the balance of the year as we expect economic conditions likely will remain challenging. But importantly, our balance sheet is strong and our strategy to drive growth continues to be a priority. When the lower income consumer segment starts to improve, We'll be in a great position to drive profitable growth. And now, I'll hand it over to Carl to provide further color on the quarter and year ahead. Carl?

Speaker 2

Thank you, Mark. As you discussed, we saw some improving customer trends as the quarter progressed that the impact of inflation And our customers moderated. Customer engagement picked up meaningfully. Product margins remained healthy. Average transactions climbed to new 2nd quarter highs and customer conversion was strong.

Speaker 2

Back to school season is ongoing and our Atlantica Children's inventory is exactly where we want it. While competitive intensity has been high in Q2 and early Q3, We remain committed to our profit transformation and our targeted CRM strategies. We continue to focus on driving our strategic objectives, which include connecting with our consumers using our CRM program to maximize sales, continuing to reduce our inventory throughout the year And delivering strong product margin. We have many more untapped customers to reengage with going forward, making CRM a core driver of profitable customer engagement. Moving to the quarter.

Speaker 2

Total Q2 comp sales were down 6.5%, which was an improvement versus the low double digit decline We saw in Q1 2023. Including August BTS, we are seeing a trend of improved but down versus prior year continuing for the balance of 23%. From a category perspective, 2nd quarter comp sales in women's non athletic footwear We're down low teens with rest down over 25%. Boots and sandals were both down mid teens. Sport was down mid single digit with leisure down low singles.

Speaker 2

Casuals were up low single digits in the quarter led by Flats and Kaylard. Men's non athletic comp sales were down mid single digit. Casuals were up low single digit with strong performance In both Canvas and Slip ons, men's dress was down high teens and boots were down mid teens in the quarter. Children's comp sales were up low single digit led by children's athletic up low single digit driven by performance in court, partially offset by children's non athletic down low singles. The trend improvement during the quarter in children's, Led by athletic reflected our strong inventory position for back to school and we continue to see that improved trend in August.

Speaker 2

Comp sales in adult athletic improved to down low single digit with men's down slightly more than women's. As we optimize inventory levels, the improved trend of down low single digit continued in August as part of back to school and was led by court in basketball, but with continued softness in skate and running. As I mentioned earlier, competitive intensity was high in Q2. However, our merchandise margin decreased by only 20 basis points in the quarter versus the prior year, Improving sequentially versus Q1 performance and reflecting our disciplined strategy and investments in CRM, which are based on data, customer insights to drive strong product margin. We continue to prioritize inventory levels, providing the right mix of the freshest products for our customers and sustaining strong margins.

Speaker 2

We entered the Q1 with inventory up Approximately $105,000,000 or 37% versus the previous year with a strategy to right size our inventory. We ended the Q1 with inventory up approximately $44,000,000 or 13% versus 2022. And importantly, we ended Q2 with inventory only higher than the prior year by approximately $24,000,000 or 6%. Inventory at the end of Q2 'twenty three was higher than Q1, but with back to school in progress, We expect our inventory level to be lower than the prior year in September, and we continue to expect that our inventory level at the end of fiscal 2023 will be approximately $40,000,000 lower than the end of fiscal 2022. Currently, our inventory content is clean and we see no reason to change our strategy to achieve our goals.

Speaker 2

We will continue to optimize inventory levels And diligently manage inventory flow to ensure our stores are stocked with the most desired product offerings that are time appropriate as we move through the balance of fiscal 2023 and going forward. To be clear, our strategy to right size inventory, While maintaining the freshest product selection for our customers is ongoing and will continue even after we achieve our guidance For fiscal year end 2023 to be $40,000,000 lower than the prior year. And with that, I will turn the call over to Eric for a review of our financials. Eric?

Speaker 3

Thank you, Carl, and good morning, everyone. Moving to the financial results. In my remarks, I will be comparing our Q2 results With the Q2 of 2022, noting comparison to Q1 2023 year end 2022 if needed for context. Starting with top line. Our net sales in Q2 were $294,600,000 This was down 5.7% On a comp decline of 6.5% versus prior year.

Speaker 3

To offer some perspective on our performance, While net sales in the quarter were lower than the prior year, the Q2 performance represented an improvement of 5% as compared to Q1 2023. The comp decline was driven by approximately 7% reduction in traffic versus prior year, partially offset by a 5.4% increase in e commerce net sales. Some customer trends are improving, But inflationary and economic headwinds are still impacting traffic. Shoe Station banner sales for Q2 came in at a low single digit increase Versus prior year, Ann Shoe Carnival banner sales came in at a mid single digit decline. In August, We opened our 4 hundredth store with the fleet now comprised of 373 Shoe Carnival stores and 27 Shoe Station stores.

Speaker 3

Our store productivity and profitability have increased significantly since 2018, which was the last time we operated 400 stores. Q2 gross profit margin was 35.8%, reflecting the 10th consecutive quarter at or exceeding 35%. The margin reflects continued advancement of our CRM capabilities, resulting in high customer conversion and increased loyalty members in the quarter. Compared to prior year, merchandise margins decreased 20 basis points, reflecting an improvement versus Q1 2023, led by our CRM strategy, which is driving strong product margin. Buying, distribution and occupancy costs declined in the quarter.

Speaker 3

However, we're deleveraging by 20 basis points as a result of the sales decline. The buying, distribution and occupancy expense reductions were primarily the result Lower freight and distribution costs, partially offset by higher occupancy costs related to new stores and store modernization. SG and A expense in Q2 was $80,800,000 representing an increase of $6,500,000 over Q2 2022, driven by our investment decisions in brand building and customer experience during the quarter. We are pleased with the customer response to our investments and we plan to continue to invest in those areas in the remainder of Q3. As a percentage of net sales, SG and A expenses were 27.4% in the quarter as compared to 23.8 Q2 operating income was $24,700,000 or 8.4 percent of sales compared to 38,800,000 and 12.4 percent of sales in Q2 2022.

Speaker 3

Net income for the Q2 of 2023 was $19,400,000 or $0.71 in diluted earnings per share. While lower than Q222, earnings per diluted share in the current quarter reflected an 18% increase versus Q1 2023. We closed out the 2nd quarter with inventory of $409,000,000 which was Up approximately $24,000,000 compared to the prior year or 5.1% on a per store basis. This higher inventory level of $24,000,000 compares favorably to $44,000,000 higher than the prior year for Q1 2023 and $105,000,000 higher at year end 2022. With back to school shopping in progress, inventory is on track to be below prior year levels in September 2023, and we expect it to be approximately $40,000,000 lower by year end 2023 as compared to 2022.

Speaker 3

Importantly, our aged and seasonal carrier inventories are in line and we have no expectation of deep discounting to liquidate merchandise. Moving now to our strong balance sheet and liquidity position. At the end of Q2, we had total cash, cash equivalents and marketable securities of approximately 47,000,000 And as of yesterday, that total was over $90,000,000 with no outstanding debt. At the end of 2022, the company had maintained no debt for 18 consecutive years and has continued funding its operations without debt through the Q2. During the quarter, there were no share repurchases And we currently have the entire authorized amount of $50,000,000 available for the share repurchase program.

Speaker 3

We provided detailed updated guidance for fiscal In consumer trends that remain challenging, we are updating our sales guidance for fiscal 2023 to $1,190,000,000 to $1,210,000,000 Compared to the prior range of $1,230,000,000 to $1,250,000,000 we now expect comparable store sales of down 8% to down 6%. Given our increased strategic investments in brand and customer experience and the slower economic recovery, we now plan to open a total of 6 We continue to expect gross profit margin to be between 36% 37%. We now expect total SG and A expense to be between $321,000,000 $327,000,000 or approximately 27% of net sales as we continue to invest in brand building and store experience. For the year, including the extra week, we are lowering our diluted EPS guidance to $310,000,000 to $325,000,000 from our previous expectation of $360,000,000 to $385,000,000 As I discussed earlier, we continue to expect inventory at the end of fiscal 2023 to be approximately $40,000,000 lower than the prior year. To close, we are seeing some improving conditions, but we expect inflationary and economic headwinds will continue to significantly impact our lower income urban customers.

Speaker 3

We are taking a measured approach to the balance of the year. Our strategy to drive growth will remain a priority. Our balance sheet is strong with cash and we have no outstanding debt. This concludes our financial review. Now we would like to open the call up for questions.

Speaker 3

Thank you.

Operator

Your first question comes from the line of Mitch Kummetz of Seaport Research. Your line is open.

Speaker 4

Yes. Thanks for taking my questions. I've got maybe a handful. Mark, I was hoping you could start by just elaborating And what you're seeing with the lower income consumer, especially if you could maybe reconcile that with your prepared remarks that The inflation impact is starting to moderate. Maybe just start there.

Speaker 1

Hi, Mitch. Good morning. Thanks for joining us today. Yes. We're really pleased with the trends we started to see as Q2 began.

Speaker 1

In Q1, we saw significant Declines from traffic with the urban markets and the broader markets having challenge. As we got into the beginning part of Q2, We started to see meaningful improvements within the base and that led to us investing into that driving advertising, Building brand activity and we saw continued improvement as the quarter improved progressed through the quarter. If you unpack that a little, we're seeing 2 different situations. 1 in our more urban markets, Inner cities across the geographies, we're seeing traffic challenged. On the other side, we're seeing improvement conditions Where the inflationary impact is starting to show encouraging signs.

Speaker 1

So 2 different situations, But we're very pleased with what we started seeing as the quarter progressed and that continued through Q2 and continued to moderate as we went into Q3.

Speaker 4

Okay. That's helpful. Thank you. And then on the merch margin, it was down 20 bps year over year. Can you say what that is compared to 2Q of 2019?

Speaker 4

And then also I'd be curious to know I know you guys have really changed your BOGO strategy. Is there any way you can kind of provide us information on merch margin like BOGO's in this quarter versus maybe BOGO's 4

Speaker 2

years ago. Hi, Mitch. This is Carl. Good morning. From a BOGO Strategy, BOGO's 4 years ago, we would have run entire stock Our inventory for the most part on a buy one get one half off strategy, we no longer do that.

Speaker 2

When you see any buy one, get something from us, it's very curated product bought specifically For that particular event and those margins are tend to run About 1,000 basis points higher than they would have back in when we were running BOGO on the entire inventory.

Speaker 5

And Mitch, let me build

Speaker 1

on that for a sec. If you take that back to 2019, we've run a little over 5 50 basis points higher gross margin than we this Q2 compared to what we ran in 2019. 2019, we're at 30.1 gross margin, our end merch margin in front of us right this second 4 years back. We can follow-up with that. But on a gross margin perspective, we're still landing at over 500 basis points improvement versus 2019.

Speaker 4

Okay, good. And then, Eric, maybe just on the guide, we can kind of back into the second half But is there any color that you could provide 3Q versus 4Q, whether it's comp or margin, anything there?

Speaker 1

Hey Mitch, it's Mark. I'm going to grab that. So again, we've seen conditions improving throughout the year. Q1 was down double digit and that progressed as I shared in Q2 to down mid single digits. Q3 started off and we continued to see nice but moderate improvement versus Q2.

Speaker 1

So when we look at the whole year, we're taking in balance the perspective that the back half of the year continues With similar results as we're seeing right now. So take a measured approach, it says, we'll be in that minus 8% to minus 6%, So very similar to what we have just achieved in Q2, very similar to what we've just achieved in the month of August, But a measured conservative approach. However, if we start to see the economic conditions improve or sequentially get better as they have been each quarter, We have upside potential and we're going to continue to invest in the brand building and advertising to go after that should we see it.

Speaker 4

Okay. And then on the SG and A, just a little help here, because SG and A dollars were up $6,500,000 in the quarter and you talked about accelerated investment. If I back into the back half, Looks like SG and A dollars are actually down a little bit year over year. It sounded like you expect some investments to continue. So I guess maybe really two questions.

Speaker 4

One, were any investments accelerated into 2Q, which led to that big dollar increase? And why is SG and A down in the back half if you're continuing to invest? Are you finding some dollars to kind of pull out of the business in other areas?

Speaker 3

Sure, Mitch. Good morning. This is Eric. Good to speak with you. As I think about it, when we saw the market conditions improve, We did do some acceleration in our growth.

Speaker 3

And as you can see, the sales did improve. We were up 5%, EPS was up 18%. And Mark talked a little bit about where we invested and I'll just elaborate a little bit. For half of that was in the brand building and we did have pull forward investments particularly in advertising. You'll continue to have spend in new stores.

Speaker 3

We also talked a little bit about it, but we launched our shoe station Business in February of 'twenty three, so there is additional cost related to that expense. The other half of that increase was the in store experience. We had modernization costs for that strategy will continue. These investments are working and we will continue to invest. So when I think about the back half of the year, however, as I mentioned, we did pull forward some of those expenses.

Speaker 3

So we will moderate and continue to watch that expense And we'll see how that plays out. And as Mark talked about, we'll see how opportunistic we are.

Speaker 4

And then I guess last question for Karl. You talked about sequential improvement in the What it does, it sounds like you've got better inventory. I mean one of the things that I've just noticed online is that there's a lot of kind of promo Air Max product. And I'm just Curious, maybe just your broader thoughts on how you're positioned in athletic. I'm curious to know if Like a lot of that product was bought on closeout or are those promos margin dilutive?

Speaker 2

So Mitch, we're in much better position heading into back to school and coming out of back to school soon With our athletic inventories versus a year ago, really had to do with the delivery, on time delivery of Products from our key, key vendors. As far as promotional activity, as we've stated, since we're not in a Global promotion environment at since we have sort of remodeled our promotional strategy, We're able to take products that we need to move on, get very aggressive and clean them up, while we maintain price, The most valuable product that we have and that balance enables us to achieve our margin goals and continue to liquidate Distressed inventory and remain competitive in the marketplace with those frankly that are doing more global promotions.

Speaker 1

Okay. All right. Thanks guys. Good luck.

Operator

Your next question comes from the line of Sam Poser of William Trading.

Speaker 5

Good morning. Thank you for taking my questions. I want to talk about the inventory and how you're getting To $40,000,000 below at the end of the year. My math tells me and I know it includes other things that Your receipts in the back half of the year would probably have to be down almost 17%. And even if you get to that Number, the inventory is still going to be well above where it is.

Speaker 5

And my question is, if your receipts have to be down in that range, Then how do you bring enough newness in for both holiday and for spring early and keep things going or should you just be more aggressive with the inventory you have now To drive it down to open up more open to buy for Better goods and still achieve the inventory you want to at the end of the year?

Speaker 2

Sam, it's a the inventory reduction is an accumulation of several strategies. Receipts would be down to a year ago. If you remember a year ago, receipts ballooned significantly in the Q4 when the late inventories Due to supply chain issues came in at the same time as the early receipts due to improved supply Shane situation that caused a big blip in inventory will be down To that and more in line with the appropriate amount of receipts at that time frame, that's part 1. Part 2, we continue to work Very closely with our vendor partners to get creative on many ways to reduce inventory As we go through the back half of the year, as well as reevaluating model stocks, letter plays, everything Based on the sales trend that we're seeing. So we're very confident we're going to hit that number.

Speaker 2

And as we stated, It's something in progress. It will be ongoing as we move forward. We're being very careful here and to continue to deliver great product assortment to our stores And continue our strong margins, and we believe we have a formula to get there by the end of the year.

Speaker 5

Okay. And then thank you. And can you tell us what your store productivity was Year over year and also you had guided Shoe Station to be up low double digits Prior for the year, where does that stand now?

Speaker 1

Hi, Sam. Good morning. Store productivity has progressed dramatically. Like I said in my speech over the past 5 years, revenues Per tour are approaching the highest they've ever been. They won't touch the high watermark of the stimulus in Qs 'twenty one and 'twenty two, but they're up 15% From when we were in the midst of the last time we had 400 doors and more importantly, the profit has just been transformational.

Speaker 1

Now that we've completed the modernization in half of our fleet, conversion is strong and the response is outstanding. Profit per 400 doors now is up over 40%, as I said, compared to when we were in the midst of the program. Neither sales nor productivity are going to touch the high watermark near term of the stimulus years, but we're incredibly pleased with where it's grown over the long In terms of Shoe Station, it's accelerating. We couldn't be more pleased with the integration, with the Synergies with the margin capture and with the customer response to that incredibly fresh performance running portfolio, it's been spectacular. When you look at where it's been, as I said in my prepared remarks, we've started to see growth in Q2 meaningfully and it accelerated Throughout Q2 and climbed into the mid teens in Q3.

Speaker 1

We're not breaking out specific guidance, but we're expecting In this very difficult context, Shoe Station is going to grow this year and buck the trend in the challenging retail environment.

Speaker 5

So I just want to walk through something here. You feel great about everything. You've Cut your EPS guidance by 16%. You've cut your revenue guidance by 3% plus after cutting Last quarter as well. So you seem to feel, based on what you're saying, a lot better than the results are telling us right now.

Speaker 5

And I think everybody wants to sort of put that You'll balance that against your confidence what's really going on and what you need to do to fix The business right now rather than just saying it's macro stuff?

Speaker 1

Yes, Deb. So we do feel really good about our Underlying business and the improvements we're seeing through the year. As I said many times in my prepared remarks, we're having difficulty with store traffic And particularly in urban markets, we don't see that measurably improving in the balance of the year. And therefore, We are taking a measured approach on that dimension. When you look at the other side, as I talked about, we're encouraged Compared to Q1 or our fluent e commerce shopper showing signs of improving as the year goes Our transactions climbing to new highs.

Speaker 1

There are so many things that are moving forward positively, but the bottom line is, it's a challenging economic And we do not see it getting better to a point of getting into growth during Q3 Or Q4 as our guide implies. The underlying things that's happening.

Speaker 5

One last thing, What percent of your overall business historically or however you want to talk about it has been sort of the Moderate, more urban customer that seems mostly affected, what percent of your total revenue does that Business has that business represented?

Speaker 1

Yes. I was talking about it earlier that about historically over half of our customers And about half of the revenue comes from households under 50,000. There's a segment below that though, which we have about double digit percent From the households under 30,000 households, the $30,000 per year household income. It's that segment in particular in urban markets, The sub $30,000 household in urban markets across the country that represent double digit portion of our business, That's the portion that's struggling. That's the portion that's giving us some traffic headwinds.

Speaker 1

It's been moderating, as I said, Q1 double digit, Q2 mid singles, Q3 improving, but we don't see it improving fast enough to put optimism in the back half of the year. Simply put, until the household under $30,000 has better economic conditions, we're going to see a headwind in our urban markets, Offset by the things that are working in the non urban markets, which I wanted to reiterate again.

Speaker 5

Okay. Thank you very much.

Speaker 1

Thank you, Sam.

Operator

We have a follow-up question from Mitch Kummetz of Seaport Research. Your line is open.

Speaker 4

Yes, thank you. Yes, just to follow-up on that question from Sam. With that consumer, that below $30,000 household income consumer, do you think you're losing them right now to kind of the Targets and Walmarts of the world and as the macro gets Better that you can kind of regain them?

Speaker 1

They're still engaged simply put. We look at our Broad CRM database that's now over 33,000,000 which is over 12% growth. We can dissect that and understand who's still engaging with us. Now we're seeing strong engagement still in that under 50,000 and under 30,000 household income, but we're not seeing Them convert at the same levels as we did during 2021 2022. So we say I'm active, but not converting, which says We have an opportunity to continue to engage with them as we did in Q2, as we started to move back to school.

Speaker 1

I think

Speaker 5

the biggest thing we saw we were

Speaker 1

encouraged about was reengaging those customers during back to school with our broader athletic position Showed very encouraging results. They still have weakness in that segment, Mitch, but we continue to see improvement. Okay.

Speaker 4

And then with your upper income consumer where you seem to be doing better, I'm also curious, do you think that some of that strength is people trading down from maybe specialty retail or Department stores and if so, how do you retain that new customer as the macro improves?

Speaker 1

Yes. In our over $75,000 households, we saw the biggest growth in the past quarter. We're capturing As part of our strategy, the former department store shopper, through the brand assortments and the depth of products That Carl and his organization are bringing in, we're able to satisfy what the department store is used to, as well as some family footwear that are heavily private label. We're instead continuing to be focused on the best brands, the depth of assortment and they're liking what they see. That's the KPIs are working across the board for that higher end consumer.

Speaker 1

And I do think we retain them As the mall shopper, the department store shopper and private label focused family footwear retailers don't have the same assortments we have. Okay.

Speaker 4

And then maybe last one for Carl. When you were going through your kind of category performance in the Quarter, I thought I heard you say that boots weren't very good. I don't think of 2Q as being much of a boot quarter, but Are you getting any early reads on boots as you've gotten into kind of August and back to school? And kind of remind me how you're thinking about boots for the back half of the year?

Speaker 2

Mitch, we're not seeing a lot of Action right now in boots. During Q2 and early Q3, we did see an uptick in Western, Which typically happens at this time, especially with a lot of the festivals and the whole Taylor Swift Stadium concert thing, That typically is short lived. We are hearing, although experiencing in a very small way, Some early sales on Combat, which is frankly a little surprising to us, but that's about it. It's With the weather and the frankly the lack of some new fashion there, we're not seeing anything too much at this point.

Speaker 1

Okay. All right. Thanks again.

Operator

And we have another follow-up question from Sam Poser of Williams Trading, your line is open.

Speaker 5

Carl, you said that the adult athletic business was down low single digits. Your inventory had improved. Can you give us some idea Of like stock to sales ratio there, is the inventory down low single digits as well? Is it up Double digit, I mean, just some ratio

Speaker 1

of

Speaker 4

that relationship? Here's what I would say, Sab, as

Speaker 2

we came out of 2nd quarter, the inventory levels in athletic were higher than a year ago with sales down at a down low singles. That had to do all with the timing of deliveries last year And the fact that we didn't deliver a lot of athletic inventory until late August, early September. So a comparison really wouldn't be fair at this point. I'll say we feel real comfortable where our athletic inventory is going forward as we move through Q3 and the end of the year.

Speaker 5

And then to follow-up one more time, you mentioned that skate and running were soft And court and basketball were good. Can business really get that much better with skate and running soft? And do you see any light at the end of that tunnel?

Speaker 2

I would say that we're seeing some improvement. We certainly are performance running business where we have Access to the hot brands there has turned in is very strong. We're seeing small improvements beyond At this point, we don't see any improvement in skate. I will say At Shoe Carnival, a large percentage of our athletic business is done in basketball in court. The biggest percentage in the channel and that business is very strong and we'll continue to ride that Until the other businesses come back.

Speaker 5

And then lastly, Eric, what about given where the stock is and everything else, then where are you standing on share buyback and so on these days?

Speaker 3

Thanks, Sam. Our Priorities as you know, we invest in the business, then dividends. And then lastly, if there's an opportunistic position, We'll look at the stock buybacks. We still have the $50,000,000 that was authorized at the beginning of the year. So That's an opportunity for us.

Speaker 3

So we will be continuing to evaluate it.

Speaker 5

Thanks very much.

Operator

There are no further questions at this time. I would now like to turn the call back to the management team for closing remarks.

Speaker 1

Thank you all so much for joining today's call. I look forward to discussing Q3 results later this year. And as I mentioned at the top of the call, Steve Alexander has recently joined us to support our Investor Relations function. Please reach out to him with any questions or follow ups you might have.

Speaker 3

Thanks, Mark. Thanks again to everyone for joining the call today. I'm around all day. I look forward to speaking with you and hopefully meeting you in person going forward. Thanks very much again for joining the call.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Dealertrack Technologies Q2 2024
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