One Stop Systems Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 21, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to Schuh Carnival's 4th Quarter 2023 Earnings Conference Call. Today's conference call is being recorded and is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. I would now like to introduce Mr. Steve Alexander with Schuh Carnival Investor Relations.

Operator

Mr. Alexander, please go ahead.

Speaker 1

Thank you, and good morning. Thanks for joining us today. Earlier this morning, we issued our earnings press release for the Q4 of 2023. If you need a copy of the release, it is available on our website in the Investors section. Joining me on today's call are Mark Warden, President and Chief Executive Officer of Shoe Carnival Carl Shabaddha, Chief Merchandising Officer and Patrick Edwards, Chief Financial Officer.

Speaker 1

Management's remarks today may contain forward looking statements that involve a number of risk factors. 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 these 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 in today's press release to reflect future events or developments.

Speaker 1

Today's call will reference non GAAP measures. The non GAAP or adjusted results referenced exclude the purchase accounting, merger, integration and transaction costs related to the acquisition of Rogan's Shoes. A reconciliation of GAAP to non GAAP results is included in this morning's release. And with that, I'll hand the call over to Mark.

Speaker 2

Thank you, Steve, and good morning, everyone. I'd like to start today by thanking our 5,000 team members and vendor partners for their support in driving sales growth during the December holiday period and setting us up for accelerated sales growth in fiscal 2024. Let me also take this opportunity to welcome all our new team members from the Rogan Shoes acquisition announced last month. 1 month after the acquisition, it's abundantly clear to me why Rogan's is the market leader in the state of Wisconsin. Their assortment is compelling, brands are spot on for the target customer and the long tenured team has a deep commitment to their customers.

Speaker 2

This combination sets us up for significant profit growth and sales expansion ahead. Welcome team. Before turning to 2024 growth expectations and guidance, I'll start with highlighting Q4 2023 results. First, our results were consistent with the preliminary financials announced in mid February. We delivered net sales at the high end of our expectation with $280,200,000 in the 4th quarter and $1,176,000,000 for the year.

Speaker 2

Excluding the transaction costs incurred in the 4th quarter related to the Rosings acquisition, adjusted EPS totaled $0.59 and was in the mid range of our expectation and adjusted EPS for the full year totaled $2.70 Sales during the December holiday period exceeded our expectations with strong gross profit delivery again sustaining above 35% for the 12th consecutive quarter. We posted mid single digit sales growth during the holiday period with balanced growth across both banners. Our growth was driven by: number 1, our new holiday marketing campaign, which surrounded customers during the 2 peak holiday weeks with a new slate of social, digital and influencer marketing. The message resonated with our core customer immediately. And number 2, Carl's buying team rolled out a compelling holiday assortment with robust margins our customers wanted for their holiday gifting list.

Speaker 2

Between the new campaign and right brands, right depth, we found the perfect combination to capture customers share of wallet when they were ready to shop for the holiday. The wins from the December holiday season were built from the early learnings we captured during our back to school campaign, where we grew our children's category sales during the most important season of our year. 2023 was a challenging year overall with net sales declining versus the prior year. Customers were cautious during the year focused on event driven shopping occasions and essential footwear purchases. With that said, the team successfully grew market share once again this year within the family footwear industry and rapidly advanced our long term strategic plans.

Speaker 2

We delivered successful growth events during both back to school and holiday, establishing a compelling approach to incite customers to choose our banners when they are ready to purchase in 2024. We have applied learnings from our go to market approach focused on social, digital marketing and compelling assortments for the 2024 tax refund and early spring season, which I will provide an update on shortly. Gross profit margin in the quarter was 35.6 percent, representing the 12th consecutive quarter of up 35%. Since fiscal 2019, our full year gross profit margin has expanded 5.70 basis points. Margin over the long term has been a key driver of our profit transformation, driven by our targeted promotional plans, smart buying strategies and growth of our Shoe Perks CRM membership, which grew to over 34,000,000 members at the end of fiscal 2023.

Speaker 2

4th quarter net income was $15,500,000 or $0.57 per diluted share compared to 4th quarter 2022 net income of $21,600,000 or $0.79 per diluted share. Excluding the Rogan's transaction costs in the 4th quarter, adjusted net income was $0.59 per diluted share and $2.70 per diluted share for fiscal 2023. We continued to execute our inventory optimization improvement plan in the quarter and delivered ahead of expectations for the 1st year of this plan. We reduced inventory levels while sustaining robust gross profit margins and providing a fresh assortment of branded products for our customers. Our inventory coming out of the year is in a good position and we expect to continue driving additional efficiencies in 2024.

Speaker 2

Carl will lay out our 2024 inventory optimization targets in a moment. We're at an all time high of 4 29 stores, including the 28 acquired Rodan store locations. By the end of fiscal 2024, we expect to operate 430 to 4 32 stores, resulting in an increase of 30 to 32 stores this year. The new stores that are expected to open in 2024 will be part of our Shoe Station Growth banner, contributing to our expectation of sales growth this year. We also continue to modernize our Shoe Carnival fleet with approximately 60% now complete and additional stores being modernized during 20 24.

Speaker 2

The annual capital required for the modernization program decreases starting this year as the program nears completion. We continue to have a strategic roadmap in place to surpass 500 stores in our fleet in 2028. We plan to achieve the store growth objective through organic new store growth and by pursuing additional M and A targets as profitable opportunities arise. Our balance sheet is strong with over $110,000,000 in cash and marketable securities on hand at the end of the year. As compared to the prior year, cash and marketable securities increased nearly $50,000,000 and cash flow from operations increased over $70,000,000 We continue to fund our strategic investments in the business from operating cash flows, carry no debt and we funded the acquisition of Rogan's with cash flow entirely generated in fiscal 2023.

Speaker 2

Given the current high interest rate environment, our no debt position puts us in a great place to continue to fund future growth opportunities with cash generated by the business. In March, we raised our quarterly dividend by 12.5% per share. With this recent increase, we have now grown our shareholder dividend by 2 38% since the Q1 of 2019 and provided 48 consecutive quarterly dividends. And in the last 12 months, we've increased the dividend 35%, demonstrating our confidence in delivering growth and further enhancing shareholder returns over the long term. In February, we acquired Rogan's, the 2nd acquisition in Shoe Carnival's history for a purchase price of $45,000,000 Founded in 1971, Robins is a 53 year old work and family footwear company with 28 stores in Wisconsin, Minnesota and Illinois.

Speaker 2

Importantly, this acquisition provides us market leadership in Wisconsin and expands our presence into Minnesota, our 36th state. Rogan's carries over 100 name brands and thousands of styles of footwear for men, women and children and has a customer base that is complementary with our shoe station banner. As previously announced, we have an 18 month plan to integrate Rogan's into our Shoe Station growth banner, which is well underway and I'm pleased with the progress to date. Rogan's will be immediately accretive to our 2024 results and we now expect the level of accretion will increase meaningfully in 2025. We had initially planned to realize full synergies of approximately $1,500,000 at a level that was relatively balanced over the course of fiscal 2025 fiscal 2026.

Speaker 2

But as we announced in our press release this morning, we've now increased the full synergy expectation to $2,500,000 Additionally, we now expect to realize the full synergy amount in fiscal 2025 based on the early smooth progress of the integration process to date, the strength of the Rogan's business and the opportunities for future growth. Moving now to our full year 2024 outlook. We expect to drive significant top line growth in 2024, sustain strong gross profit margins, expand our customer base and begin to strategically integrate the Robins business. From a net sales perspective, the outlook includes the expectation of net sales growth in 2024 led by the Robins acquisition, continued strength in our Shoe Station growth banner, growth in e commerce and significantly improving sales trends in our Shoe Carnival banner. Net sales for 2024 are expected to be in a range of $1,210,000,000 to 1,250,000,000 dollars representing growth of approximately 4% to 6%.

Speaker 2

Worth noting, fiscal 2024 includes 52 weeks as compared to 53 weeks in fiscal 2023, representing an approximate 1% headwind to growth in 2024 versus 2023. Comparable store sales are expected to be in a range of down 3% to up 1% versus 2023, representing a significantly improved trend versus prior year, primarily in our Shoe Carnival banner. Gross profit margin is expected to be approximately even with prior year, reflecting our long term profit transformation strategy and our sustained gross profit margin performance. SG and A as a percent of net sales is expected to be approximately 40 basis points higher than fiscal 2023. The increase versus prior year is led by 2 primary factors that are important to understand as part of our 2024 outlook.

Speaker 2

Approximately 20 basis points of the SG and A increase is due to expected purchase accounting, merger and integration costs related to the Rogan's acquisition. Patrick will elaborate shortly. The balance of the increase versus prior year is driven by Rogan's operating expenses that are expected to be synergized in fiscal 2025 as part of the accelerated integration plan. We do not expect to begin realizing synergies on the Robins operating expenses until late 2024. The income tax rate for fiscal 2024 is expected to be approximately 26%, representing an increase of 2 30 basis points versus prior year and a negative impact to EPS of approximately $0.08 Patrick will provide more details in a few moments.

Speaker 2

In summary, our 2024 expectation is for sales growth, gross profit margin that is approximately flat to prior year, increased SG and A in the near term and a tax headwind of approximately $0.08 This translates into adjusted EPS in fiscal 2024 of $2.65 at the midpoint of guidance. Metro will provide additional details on the 2024 outlook, but in terms of year to date performance in early 2024, we are seeing encouraging trends. As I discussed earlier, we're applying the learnings from our successful August back to school campaign and December holiday season to win customers business when they're ready to purchase in 2024. Using our go to market approach focused on social and digital marketing and compelling products, we are achieving success during the tax refund and early spring season. Rogan's, Shoe Station and e commerce sales are growing as expected and Shoe Carnival trends are improving.

Speaker 2

We're now halfway through Q1 and I can share that we achieved sales growth in the low to mid single digit range and sustained gross profit margin performance quarter to date. I'm most encouraged with customers' response to our tax refund and spring sandals season and marketing campaign and the fresh product assortment. Specifically, over the past 3 weeks of running our new digital first campaign, we've seen our sales accelerate to high single digit growth with a very strong customer response to our spring seasonal offering across our banners. In summary, we delivered net sales at the high end of our 4th quarter expectations, led by strong growth during the December holiday period. We delivered profitability in line with our expectations and our results were consistent with the preliminary results announced last month.

Speaker 2

Our new plans drove growth during the holiday period and are being activated again successfully in early 2024. We delivered on our inventory optimization improvement plan ahead of target with inventory levels down, product assortment in a good position with additional efficiencies expected in 2024. Our balance sheet is strong with no debt for the 19th consecutive year end. We continue to generate solid cash flow and we have the capacity to fund increased shareholder value and future growth opportunities with cash generated by the business. In February, we completed the Rogan's acquisition and funded the deal with cash flow generated in 2023.

Speaker 2

We have increased the expected synergy realization of $2,500,000 and accelerated the integration plan with the expectation of realizing the full synergies in fiscal 2025. Robins will be accretive to our results in 2024 and the level of accretion is now expected to increase significantly in 2025 as the expected synergies are realized. Our 2024 outlook demonstrates our expectation for net sales growth and sustained profitability performance with the top line growth led by Rogan's, the strength of our Shoe Station banner, growth in e commerce sales and significantly improving trends in our Shoe Carnival banner. Before handing it over to Carl, I would like to close with some perspective on our long term performance. We've experienced solid net sales growth and transformational profitability growth since 2019 led by our acquisition strategy, our investments in CRM e commerce modernization as well as our targeted promotional strategies.

Speaker 2

Since 2019, earnings per share have increased 84%, representing an EPS CAGR of 16%. Over the same period, gross profit margin has expanded 5.70 basis points and sales has grown 13%. Our strategy to grow sales and increase profitability over the long term have put us in a strong competitive position to continue growing market share in 2024 and beyond. Our long term vision is clear, to be the nation's leading family footwear retailer. And I believe we are well positioned to continue advancing toward that ambition in 2024.

Speaker 2

And now I'll hand it over to Carl to provide further color on the quarter and our categories performance. Carl?

Speaker 3

Thank you, Mark. I would like to begin by setting up the customer backdrop during the quarter. Similar to previous quarters, the Family Store customer continues to be cautious with their purchases. Our customers continue to focus on value, and they are making more of their footwear purchases during event driven periods such as the December holiday season this quarter. We saw this customer behavior play out in our results for Q4 and more specifically in our strong performance during the December holiday season.

Speaker 3

I'll provide more details on our category performance for the quarter later. But first, I would like to highlight our performance during the holiday season. As Mark discussed, our performance was strong as we built on the learnings from our successful back to school performance earlier in the year. Our strategy included a new holiday marketing campaign, which included social, digital and influencer messaging. We rolled out compelling holiday assortment providing exceptional value on key products and items that our customers wanted for their holiday gift list and our in store execution was outstanding.

Speaker 3

All strategies that we are replicating successfully during tax refund season and early spring. And we will build on these strategies even further for Easter and back to school 2024. Our comp sales for the 2 week holiday period increased mid single digits led by total athletics, which were up low teens. Non athletics also performed well down only low single digits. Continuing with the December holiday season, we grew total children's low single digit.

Speaker 3

Our total men's category was flat to slightly up during the holiday period and total women's was down low single digit. Our marketing strategies drove demand. Our merchandise assortment, modernized fully staffed stores and easy to shop e commerce platforms provided the right backdrop for our customers to purchase during the holidays. Now moving to the quarter. Competitive intensity continued to be high with aggressive promotional activity on seasonal merchandise all the way through January.

Speaker 3

We delivered gross profit margin above 35% for the 12th consecutive quarter. We remain committed to our profit transformation and targeted CRM strategy to continue delivering sustained gross profit margin performance. Our merchandise margin for the quarter decreased by 170 basis points versus prior year, primarily due to increased promotional activity on seasonal merchandise.

Speaker 4

For a

Speaker 3

long term perspective, compared to 4 years ago, in Q4 2019, our merchandise margin has significantly expanded by approximately 7.50 basis points in the quarter, demonstrating the success of our long term profit transformation strategy and the ability to leverage our advanced CRM capabilities and analytics to inform our promotional strategies. During the Q4, we continued to further optimize our inventory levels and we finished the year ahead of our target. Inventory at the end of the year was lowered by approximately 11% on a dollar basis than prior year. And on a unit basis, total inventory was down 15% versus prior year. Our inventory content is clean and we continue to manage inventory flow to ensure our stores are stocked with the product offerings that our customers want.

Speaker 3

As we continue to execute our inventory strategy in 2024, we expect to generate additional efficiencies and further optimize our inventory. Excluding the impact of Robins, we expect fiscal 20 24 year end inventory to be approximately $20,000,000 or 5% lower than fiscal 2023 year end, while maintaining the freshest product assortment for our customers. Now moving to sales and categories for the quarter. Total Q4 comp sales were down 9.4%, which reflected event driven shopping with lower traffic prior to the December holiday period and disruptions due to weather in January. As I discussed earlier, our December holiday performance was very successful with strong growth in adult athletics as well as children and demonstrates our ability to meet customers' needs when they are ready to purchase.

Speaker 3

From a categories perspective for the quarter, children's comp sales were down mid single digit with athletics flat and non athletic down mid teens. The strong performance in children's athletics was led by basketball and court. High singles with better performance in November December, offset by slower performance in January. 4th quarter comp sales in women's non athletic footwear were down low double digit with boots and dress down mid teens. Dendles were down low teens and sport was down low single digit and casuals were down mid teens in the quarter.

Speaker 3

Men's non athletic comp sales were down low double digits. Dress was down high teens, boot was down high singles and casuals down low double digits. In casuals, the decline in canvas was partially offset by growth in slip ons. To summarize, our business performed well during the December holiday season growing sales mid single digits. Totalist leds grew low teens for the holiday period led by strong performance in adult.

Speaker 3

During non event periods, top line performance softened as price conscious consumers continue to focus their footwear purchasing towards event driven periods. Turning now to thoughts on 2024. Our boot inventory is in a good position going into the year, down high 20s on a unit basis compared to prior year. As discussed last quarter, with our best in class vendor relationships, we are in a good position to be flexible with our good inventory and manage it effectively within the backdrop of a challenging weather and demand environment. In the quarter, we continued optimizing our inventory and delivered ahead of target.

Speaker 3

Our inventory content and mix are both in a good position and we will continue to further execute our inventory optimization improvement plan in 2024. We remain committed to our profit transformation and targeted CRM strategies. We are excited about the fresh new products that are coming into our stores in early 2024. The flow of seasonal products is much better than prior year and the newness in athletics is performing well. We're also very excited about our Rogan's acquisition and opportunities to grow the business as we have successfully done with our shoe station banner over the last couple of years.

Speaker 3

We look forward to pursuing growth in the upper Midwest with Rogan's and engaging with the customer base that is very complementary to our Shoe Station customer base. And with the learnings from our successful BTS and December holiday performances, we are building further on the marketing strategies to engage with our customers as we are seeing encouraging performance during the tax refund season at early spring. And with that, I will turn the call over to Patrick for a review of our financials. Patrick?

Speaker 5

Thanks, Karl. Moving on to our financial results. Starting with top line, our net sales in Q4 were $280,200,000 This was down 3.6% versus the prior year. Net sales in the quarter were at the high end of our expectation led by strong performance during the December holiday period and the benefit of the 53rd week in the quarter. On a banner basis, our Shoe Station banner total sales for Q4 came in at a low teen increase versus the prior year on the strength of new stores and e commerce sales and our Shoe Carnival banner total sales came in at a mid single digit decline for the quarter.

Speaker 5

On a comparable store basis, which excludes the impact of the extra week and new store growth, company wide sales were down 9.4% for 4th quarter and in line with our expectation. The lower sales were primarily driven by soft trends prior to the December holiday peak period and impacts from weather disruption resulting in store closures for a couple of weeks across multiple geographies in January. As Mark and Carl discussed, our results during the peak December holiday period were strong with mid single digit comparable sales growth led by athletics. Q4 gross profit margin was 35.6% marking the 12th consecutive quarter that our gross profit margin has exceeded 35%. Compared to Q4, 2022 gross profit margin was down 270 basis points with merchandise margins decreasing 170 basis points reflecting increased promotions on seasonal merchandise during the quarter.

Speaker 5

Buying, distribution and occupancy costs were higher in the quarter primarily due to increased rent associated with operating more stores, partially offset by lower freight and distribution costs. In the quarter BD and O deleveraged 100 basis points on the lower sales. SG and A expense in Q4 was $79,700,000 representing a decrease of $2,900,000 versus Q4 2022. Q4 SG and A included approximately $800,000 in transaction costs related to the Rogan's acquisition and otherwise declined on lower selling expenses in the quarter. On a GAAP basis, our net income for Q4 2023 was $15,500,000 or $0.57 per diluted share.

Speaker 5

On a non GAAP basis, excluding the Rogan's related transaction costs, adjusted net income for 4th quarter was 16,100,000 or $0.59 per diluted share. Net sales for full year 2023 were 1,176,000,000 dollars This was down 6.8% versus prior year and down 8.8% on a comparable store basis. For full year 2023, net income on a GAAP basis totaled $73,300,000 or $2.68 per diluted share and net income on a non GAAP basis totaled $74,000,000 or $2.70 per diluted share at the midpoint of our guidance. Taking a long term perspective, it's worth reemphasizing that over the last 4 years ending with fiscal 2023, we have delivered a 16% EPS CAGR led by gross profit margin expansion of 5 70 basis points and net sales growth of 13% since 2019. To further support shareholder value in March, we raised our dividend by 12.5 percent to $0.135 per share, representing an increased annualized dividend rate of $0.54 per share.

Speaker 5

We have now provided a dividend for 48 consecutive quarters and this is the 10th consecutive year we have increased that dividend. During the quarter we didn't repurchase any shares and have $50,000,000 available under our current share repurchase program. At the end of 2023, we had total cash, cash equivalents and marketable securities of approximately $110,000,000 Cash and cash equivalents increased over $47,000,000 versus 2023 and full year 2023 cash flow from operations increased over $72,000,000 versus full year 2022. Now moving on to the 2024 outlook, which builds on our long term sales growth and profit transformation led by our acquisition strategy, higher e commerce sales and sustained gross profit margin performance. The outlook for fiscal 2024 net sales demonstrates our expectation for growth led by our recent Rogan's acquisition, continued strength in our Shoe Station banner, growth from e commerce sales combined with the expectation of improving trends at our Shoe Carnival banner.

Speaker 5

Net sales are expected to be in a range of $1,210,000,000 to $1,250,000,000 representing growth of 4% to 6%. Comparable store sales are expected to be in a range of down 3% to up 1% versus fiscal 2023, representing an improving trend versus the prior year primarily driven by our Shoe Carnival banner. Gross profit margin is expected to be approximately even with fiscal 2023, reflecting our advanced CRM capabilities and targeted promotional strategies that are expected to sustain gross profit margin performance. SG and A as a percent of net sales is expected to be approximately 40 basis points higher than fiscal 2023. Approximately 20 basis points of that increase is due to expected purchase accounting, transaction and integration costs related to the Rogan's acquisition and the remaining balance of the increase is primarily due to the approximate $2,500,000 of operating expenses that are expected to be synergized in fiscal 2025 as part of our integration of Rogan's.

Speaker 5

As Mark discussed, we are encouraged by the integration process to date and have increased the expected synergies related to Rogan's from $1,500,000 to $2,500,000 and expect them to be realized in full in fiscal 2025. We now see increased opportunities for synergies in such areas as e commerce operations as well as leveraging our scale and supply chain buying and in back office SG and A areas such as duplicative services, insurance, technology providers to capture those cost efficiencies. We do not expect to begin realizing any meaningful synergies until late 2024. As previously announced in fiscal 2024, we expect Rogan's to generate approximately $84,000,000 in net sales and it will be accretive to our results in 2024. After full synergies are realized, we now expect Rogan's to generate approximately $11,000,000 in operating income in 2025.

Speaker 5

Our tax rate for fiscal 2024 is expected to be approximately 26% representing an increase of 2 30 basis points versus fiscal 2023 and a negative impact to EPS of approximately $0.08 This higher rate primarily reflects the expectation of a lower benefit in fiscal 2024 from share settled equity awards and prior year state deferred tax benefits that are not expected to recur in fiscal 2024. For fiscal 2024, GAAP EPS is expected to be in a range of $2.50 to $2.70 per share inclusive of the $0.08 tax headwind, a standard 52 weeks of net sales, which is an approximately $15,000,000 negative impact in net sales and the expectation of approximately $2,000,000 of Rogan's related purchase accounting, transaction and integration costs. Non GAAP EPS, which excludes those expected purchase accounting, transaction and integration costs related to the Rogan's acquisition is expected to be in a range of $2.55 to $2.75 representing a midpoint of $2.65 As part of our continuing inventory optimization improvement plan, we expect inventory excluding the impacts from the Rogan's acquisition at the end of fiscal 2024 to be lower by approximately $20,000,000 or 5% versus fiscal 20 23 year end, which will put our Shoe Carnival banner inventory at the end of fiscal 2024 in line with inventory levels at the end of fiscal 2019 while maintaining the best assortment of products for our customers.

Speaker 5

Total capital expenditures are expected to be in a range of $25,000,000 to $35,000,000 in fiscal 2024 and lower than the prior year as our Shoe Carnival fleet modernization program nears completion. In our 2024 outlook, we have taken into consideration the dynamic customer purchasing trends and behaviors such as event driven shopping and the purchase of essential footwear. Current trends are encouraging as sandal merchandise is selling better than last year. We will gain additional insights about non peak consumer sentiment after Easter and before going into back to school. Also I would like to point out a couple of key phasing considerations in our fiscal 2024 versus the prior year.

Speaker 5

Fiscal 2023 included the 53rd week that will not recur in 2024 impacting 4th quarter net sales comparison to 2023 by approximately $15,000,000 And as a result of the 53rd week in fiscal 2023, the calendar weeks in each quarter will shift. This shift will be meaningful in the 2nd quarter and third quarters of 2024. Our highest volume back to school sales week will shift from Q3 in the prior year and will be included in our Q2 results for fiscal 2024. The impact of this shift will be approximately $25,000,000 and result in expected growth in Q2, 2024 and a decline versus the prior year in Q3, 2024. Despite the shift, the combined total of Q2 and Q3 sales growth in 2024 versus the prior year is expected to be in line with our full year outlook of 4% to 6% net sales growth.

Speaker 5

With regard to the Q1 2024, as Mark discussed, we have achieved low to mid single digit net sales growth to date driven by our spring seasonal and tax refund marketing campaign. Our current campaign modernized stores and product assortment is currently driving and capturing demand. Overall for Q1, 2024, we expect sales growth to remain in that low to mid single digit range and consistent with our annual 2024 outlook, we expect sustained gross profit margin, higher operating expenses and a higher tax rate in the Q1 of 2024 compared to last year. Our top line growth is therefore expected to result in 1st quarter EPS that is approximately flat compared to the $0.60 per share earned in the Q1 of 2023. Our balance sheet is strong and our cash flow is steady, which positions us to fund internal growth, execute on M and A opportunities and most importantly the continued ability to deliver long term shareholder return.

Speaker 5

We also announced today that April 24, 2024 has been set as the shareholder of record date for our Annual Shareholders Meeting. That meeting will be held on June 25, 2024. This concludes our financial review. Now we would like to open the call up for questions. Operator?

Operator

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

Speaker 6

Yes. Thanks for taking my questions. My first question has to do with the first quarter. I appreciate all the commentary around quarter to date sales and 1Q sales guidance. But given the acquisition of Rogan's sales is apples to apples.

Speaker 6

Can you say what the comp is quarter to date and what comp is embedded in your Q1 guide? And then also on 1Q, can you talk a little bit about the impact of weather and kind of how you see that going forward to

Speaker 2

the extent that maybe there's

Speaker 6

a little bit more cold weather coming? And then I do have a follow-up.

Speaker 2

Hi, Mitch, it's Mark. Thanks for joining today. So let me start with sales growth for Q1 is achieved right in that low single digit range. We're very encouraged. We started the spring campaign and tax miss campaign 3 weeks ago, activating the learnings from holiday and VPS and it's working very well.

Speaker 2

Sales for the last 3 weeks for the company have accelerated quickly and specifically we're in the high single digit sales growth range for the 3 weeks since the campaign started and it's accelerating even faster as we look into March as that weather turns favorable for spring sandal season. We're not disaggregating comps at this point, but I can give you a broad comment. All banners are growing in March. We're very pleased with the strong growth acceleration in Shoe Station. Our e commerce is accelerating like we had expected in our guidance.

Speaker 2

Rogan's is delivering where we had hoped for our guidance. And I think everyone wants to hear what we're most pleased with. Shoe Carnival is accelerating rapidly. Shoe Carnival is also growing for the month of March and we're seeing strong results in the campaign. So while we're not going to break out comps per se on a banner level, I hope that helps give commentary.

Speaker 2

Every part of the business is responding fast favorably and in growth as we get into this campaign season. Regards to weather, we're confident in March. I mean, we can't predict if we get a crazy snowstorm in the upper Midwest, but our comps are easier in the March April timeframe versus a very challenging disappointing spring season last year. We expect March to be strong. As I said, we continue to accelerate sales in the high singles for the 3 weeks of the campaign and it's accelerated from there if I just look at the month of March.

Speaker 2

So we feel very confident in March. What will I think an important topic for all and I'll address it right now. What has given us a broad range in our comp from a down 3 to a +1. We're still not clear yet if the consumer is going to be cautious as we get past the Easter early spring holiday season and the event period and until we get to back to school. So we have a wide range there, particularly on the shoe carnival banner as to until we see how the consumer responds after this event, what will that look like.

Speaker 2

And that's really the 4 point range and that range is largely in Shoe Carnival.

Speaker 6

That's helpful, Mark. And my follow-up maybe for Karl. Could you speak to the product pipeline in 2024? I think you made the comment that you're seeing a nice improvement in the athletic business. It sounds like sandals are off to a good start again.

Speaker 6

I don't know how much of that is weather versus the assortment. And then maybe talk a little bit about how you're thinking about boots in the back half lapping some pretty poor performance this year. I don't know if you see that as an opportunity or if that's a category that you still want to be cautious around? Thanks.

Speaker 3

Good morning, Mitch. We are in the athletic world, we have a nice flow of product coming in. We're receiving goods, new fresh products on time, in fact early in some cases. And we're seeing some nice performance out of new categories or retro categories that our consumer is now latching on to. From a sandals standpoint, certainly weather has helped early, but several categories have emerged quite well in that area and we're pleased with what we're seeing there.

Speaker 3

And most definitely my flow of product into the stores on the sandal perspective is much better than it was a year ago. It was not a little choppy a year ago with supply chain issues where that's all cleaned up and products are coming in as expected or early and flowing out nicely. Regarding boots, we're still cautious on boots. We need to see some freshness there, enough freshness that we feel will drive incremental boot sales over a year ago. So we're taking a cautious approach to that like we have in the past.

Speaker 3

We'll partner with our major boot vendors to make sure that there's supply if needed. But then there's also we also have an ability to move if we need to if we're not seeing performance. So we'll play boots next year the way we play them this year.

Speaker 6

All right. Thanks guys. We'll get back in the queue.

Operator

Our next question comes from the line of Jim Chartier with Monness, Crespi and Hardt. Your line is open.

Speaker 4

Hi, thanks for taking my question. The lower income consumer has been the struggle for you, I believe, for most of last year, given kind of quarter to date trends, can you just aggregate kind of the improvement in the lower income versus higher income consumer consumer consumer consumer consumer product development?

Speaker 2

Hi, Jim, it's Mark. For spring, we're seeing improvement across banners and across demographics. It's very encouraging. And the two things that are absolutely working across low income or high income urban and suburban are the new approach to our marketing campaign. It really surrounding people with social, digital and influencer and it's resonating quickly with Carl's fantastic slate of brands and new fresh value we're providing, working great across banners.

Speaker 2

The big question again and again the range for our guidance and we're still cautious is once we get past the spring season events that's going to be the big learning we're going to have as we get into April, May and we can provide more color when we get into reporting Q1 during May of what did it look like post event shopping for the lower income consumer. But right now, everything is resonating strong growth across all banners. We're feeling really good about winning share with our plans during event season. We're waiting to learn and we have caution on what it's going to look like for non event season still.

Speaker 4

And then within the marketing given the response you're seeing, is there opportunity to do more within marketing for back to school and holiday based on what you've seen so far?

Speaker 2

Absolutely. Yes, absolutely. We're planning to replicate and increase for back to school. We have good kids growth business in 2023. We plan to activate these plans and grow.

Speaker 2

Our ambition is not just kids growth, but we intend to grow back to school this year for the whole business is our goal. And holiday, we spoke at Lanes Linda, we had a very good holiday season this year. We can do more because we were still testing and learning what did work. And so we can invest more for this upcoming holiday if it continues to work in back to school. So again, we have high confidence our approach is working on event periods and will be replicated and activated aggressively.

Speaker 2

We'll learn if that approach works in non event seasons. And if that does work, then we'll be able to provide an update in May on that progress.

Speaker 4

Great. And then on inventory levels, you talked about reducing inventories further this year. Any specific categories where you feel like your inventory is still a little too high or which categories are you focused on reducing levels?

Speaker 3

Hi, Jim, it's Carl. We'll continue to drive inventory levels down at the end of the season on seasonal products to make sure we come out even cleaner than we have in the past. We're quite pleased where we came in this year in boots. Inventory is down about 30%. We think there's still some opportunity there to continue to drive that business down.

Speaker 3

I'm sorry, those endings down. And then really, we are looking at all areas and we anticipate inventory improvements across the board, not that we have any particular area that is has an extremely high inventory levels, pretty consistent across the company, but we think we can get efficiencies in all areas of the business.

Speaker 4

Great. Thank you.

Operator

Next question comes from the line of Sam Poser with Williams Trading. Your line is open.

Speaker 7

Good morning. Thank you for taking my questions. I'm just wondering if you could give me some color on the store traffic that you saw in the Q4, especially at Shoe Carnival? And then sort of how what you're seeing now versus what how all these sales are being driven and what you're doing to drive more people or if you need to, to the Shoe Carnival store specifically because it sounds like your Shoe Station traffic has been decent?

Speaker 5

Hey, Sam, it's Patrick. With respect to the Q4, it's not uncommon for our traffic pattern to match our comparable store sales, which were down 9.4%. Our overall traffic was in that same range of down 9% throughout the Q4. With respect to going forward now, similarly not surprising that our sales are up low to mid single digits. Our traffic is also sort of trending that same way.

Speaker 7

Okay. And then, Carl, can you talked about I've got like double question athletic being strong in that, I guess event period. And it sounds like athletic, you're still happy with it. Can you talk about what kind of things are working in athletic? And then separately, as you look at you're talking about inventory, can you talk about sort of how you think about like narrowing maybe narrowing the mix going deeper on key items?

Speaker 7

You've always done that. And so give us some idea how that might look versus 2023 sort of as we move through 2024?

Speaker 3

Sure, Sam. On the athletic side, we're starting to see the customer respond to newness and freshness today. Retro jogger kinds of products, the whole soccer category are really taking off with our consumer. Throughout the Q4 and until today, our business with court, our business with basketball and our business with performance running in our shoe station business continue to be very, very strong. But athletic is right now is about newness and freshness in new categories and our customers beginning to jump into those new sort of emerging new old categories that have come out.

Speaker 3

From a standpoint of inventory, sure, we most definitely will continue to edit assortments, drive key items. We have a reliable flow of product coming in right now And we feel that there's great opportunity to continue to drive key items. That's what we do very, very well. So we feel we're back to somewhat of a normal we are back to a normal cycle. Our vendors are back to a normal cycle and we will certainly move into what I believe an exciting time from a product standpoint, driving key important items and brands.

Speaker 7

Thanks. And then one last thing just about the all this timing shift. The it appears to me that you probably expect the comps to improve through the year. But because of the way you have the weeks comparing, again, back to this Q2, Q3 situation, can you give us sort of how this works by quarter, like what the you said $25,000,000 I think in Q3 was shifting to Q2, but you lose a small week at the beginning of Q2 and you gained a big week at the end. How does that affect Q1, Q2, Q3?

Speaker 7

And you lose, I guess, dollars 15,000,000 in Q4. But can you sort of walk through that and give us each quarter with how to think about just the dollar shift in and out of each quarter?

Speaker 5

Sam, thanks for the question. This is Patrick. You're correct. The meaningful impacts to be focused on is this large week that we have that moves out of Q3 and into Q2. That's the $25,000,000 net week, not a gross week, but that's the net amount that moves between the shifting of what moves in and what moves out.

Speaker 5

And then the $15,000,000 that we lose in Q4 compared to 2023. Those are the 2 meaningful elements of it in the quarterly shifts. Again, over both of those periods of time between Q2 and Q3, we would expect our sales growth to level out to that 4% to 6% growth rate that we have for the overall year. In Q4, that growth rate will be lower because we're losing that $15,000,000

Speaker 7

Right. I understand that. But what I'm saying is that in Q2, so you're gaining a week that's bigger than $25,000,000 and then you're losing a week that's much smaller than that. You're getting a you're netting that, but you're gaining like $30,000,000 and then losing $5,000,000 or whatever it is. Can you give us the plus and minus for each quarter?

Speaker 7

It would just really help being able to

Speaker 5

Sure. So I'll try it again in a different way. The impact on Q1 is not meaningful. The impact on Q2 will be plus $25,000,000 and the impact on Q3 will be minus 25,000,000 dollars And then Q4 is roughly down $15,000,000

Speaker 3

All right.

Speaker 7

Thank you very much. I appreciate it.

Operator

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

Speaker 6

Yes. Thanks for taking my additional questions. I want to ask Sam's last question maybe a little bit differently. I want to focus on the EBIT. So starting with the 53rd week, this in 2023, Patrick, you mentioned that was about $15,000,000 in sales.

Speaker 6

What was the impact on EBIT? And then that 2Q, 3Q $25,000,000 shift you're referencing, how does that sort of flow through to EBIT? Like how much EBIT is shifting from 3Q to 2Q?

Speaker 5

Hey, Mitch, it's a great question. Our point of view on that, generally speaking, is each one of those sales dollars is roughly about $10,000,000 excuse me, it's about 10% of operating income. So $15,000,000 $1,500,000 ish something like that on operating income. On a before you get sorry, before you get down to operating income, it's probably going to be bigger than that. It's probably somewhere around half that number.

Speaker 5

So the $15,000,000 is principally somewhere around half of that without any other effects.

Speaker 6

I guess I didn't quite follow that because you said $1,000,000 is about 10% and then you said something about half. I didn't

Speaker 5

Sorry, Mitch. Let me get your question again. It's down to an EBIT number. So it's 8% to 10% of the number, like I said before, on operating income. Whenever we're pulling down to from revenues down to EBIT, it's about 8% to 10%.

Speaker 6

Okay. Thanks. And then on 2024, you mentioned that gross margin will be sort of flattish year over year. How does that sort of break out between merch margin and BDO? I'm assuming maybe especially kind of given the comp level that those are probably sort of flattish as well.

Speaker 6

Is that how you're thinking about it?

Speaker 5

Mitch, that's another good question. I can start to give provide a little bit of color and then have Mark pull back in a little bit. But with respect to our overall gross profit margin, we do see the capabilities of keeping this above 35 percent thing running for the entire year. We still need a little bit more clarity on the Rogan's acquisition and whether or not those stores will have some bit of impact and as we move them into our process and our ability and into our distribution and supply chain. But overall, we see a margin that a gross profit margin that will stick and be even to the current year.

Speaker 5

I would say with respect to merchandise margin and our product margins associated with that, we still see strong product margins continuing into current year and those product margins is what drives our overall merchandise margin. So those will be flat. And then the concept of BD and O is expected to be flat, but hopefully improving a little bit as we leverage some stores over some sales growth.

Speaker 6

Okay. And then one last one for me. Just on the SG and A, it sounds like from a marketing standpoint, you guys seem to be seeing a lot of success with the new campaign. It sounds like you're not really for 2024, it doesn't sound like you're expecting to spend more from a percentage standpoint. You're just expecting to spend sort of better in terms of kind of how and when you're flowing those marketing dollars?

Speaker 6

Can you maybe just sort of elaborate on that?

Speaker 2

Yes, this is Mark. Spot on, Mitch. We tested and learned significant shift out of traditional marketing vehicles like television, like print during BTS and then again during holiday and into more effective targeted vehicles like digital, like social, like influencer. It works as we shared and we're going to do that again this year having a significantly reduced investment in those traditional mediums that frankly weren't giving us great return and weren't delivering great traffic for us last year and shifting our funding to far more efficient profitable tactics like I just mentioned. If we see it working in non peak seasons, we'll increase advertising investments and talk more about that in pursuant quarters if we decide to take SG and A higher, if it's getting a strong return on ad spend.

Speaker 2

But right now, we've got the events loaded effectively and I think we're in really good shape.

Speaker 1

Thanks again for joining today's call. This is Steve. I'm around all day. So if you'd like to talk, please reach out to me. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now

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Earnings Conference Call
One Stop Systems Q4 2024
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