Shoe Carnival Q4 2025 Earnings Call Transcript

Quartr
Provided by Quartr
March 20, 2025

There are 6 speakers on the call.

Operator

Good morning, and welcome to Shoe Carnival's Fourth Quarter twenty twenty four 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. 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.

Operator

Forward looking statements should also be considered in conjunction with a 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. 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 Rogen Shoes.

Operator

A reconciliation of GAAP to non GAAP results is included in today's earnings press release. I will now turn the conference over to Mr. Mark Wharton, President and CEO of Shoe Carnival for opening remarks. Mr. Worden, you may begin.

Speaker 1

Good morning, everyone, and thank you for joining us today for Shoe Carnival's fourth quarter twenty twenty four earnings conference call. Joining me on today's call are Carl Chabetta, Chief Merchandising Officer and Patrick Edwards, Chief Financial Officer. We're excited to share our fiscal twenty twenty four growth results with you today and discuss the transformational news announced this morning about our shoe station growth strategy. First, I'll start with a brief overview of 2024 trends and results. Over the past few years, our industry has faced a challenging landscape with inflationary pressures constraining purchases among lower income households and urban consumers.

Speaker 1

We've seen footwear customers shop at high engagement levels during key event periods, such as back to school and holiday, and then pull back spending and engagement during non key periods. Despite the many headwinds our customers and industry faced last year, our long term strategies set our results apart from the competitive set and enabled us to deliver industry leading sales growth during fiscal twenty twenty four and achieve net income growth. We remain disciplined throughout the year, relentlessly focused on maximizing margin delivery, cost controls, synergy capture, profitably engaging customers and bringing the nation's best brands to market. We gained market share again in 2024. We entered new geographies, expanded our customer base and acquired a regional leader in the Midwest.

Speaker 1

Our balance sheet started fiscal twenty twenty four strong and got even stronger by year end. We expanded our cash flow generation and built up higher year end cash balances during a year where we also acquired a chain from 100% cash on hand. We provided shareholders our fifty second consecutive dividend and for the twentieth consecutive year, we started a year with zero debt and ended a year with zero debt. Ultimately, our strategies resulted in net income growth and EPS results at the very high end of our profit guidance range. I'd like to thank our exceptional vendor partners and team members for all their efforts to achieve these results during a tough year.

Speaker 1

Turning to a few highlights of fiscal twenty twenty four results. Net sales were $1,200,000,000 this year, growth of 2.3%. This contrasts to the industry contracting mid singles for the year and reflects solid growth, particularly given this was a fifty two week year compared to a fifty three week in the prior year comparison. Our Shoe Station growth banner grew an industry leading 5.7%, successfully entered new markets, captured new customers and achieved comparable growth for the year. Rogan's achieved profitable results beyond our expectations.

Speaker 1

With integrations completed well ahead of target and full synergies captured. The contributions from these two acquisitions drove our overall sales growth and led to achieving the high end of our EPS guidance for the year. Our digital first marketing approach continued to drive highly profitable growth and efficiencies, particularly during event periods where we achieved sales growth during both the Thanksgiving and Christmas holiday period, similar to growth achieved earlier in the year during back to school and spring events. During non event periods, customer trends remain unchanged with the lower income customer at our Carnival banner. We continue to see customers pull back on spending in the industry in these non event periods.

Speaker 1

Issu Carnival contracted at similar levels as the broader industry declines during fiscal twenty twenty four. Looking at these first months of twenty twenty five, which are non event shopping months, I can share the trends have not changed and we expect this downtrend persists this year with lower income customers in non event months. Additionally, the 2024 boot season was a disappointment with unseasonably warm weather in Q3 lingering late into Q4 and then an average customer response for the balance of the year. Food inventory dollars are down around double digit currently versus last year with smart inventory management. We achieved gross profits over 35% for the fourth consecutive year with a steady focus on targeted smart promotions and buys that maximize margins and conversion.

Speaker 1

Adjusted net income grew to $75,000,000 or $2.72 versus $74,000,000 or $2.7 in fiscal twenty twenty three. Patrick will provide additional commentary on fiscal twenty twenty four results. I'd now like to turn to what I believe could be the most transformational strategy in our company's forty six year history. This morning, we announced a new strategic plan to scale up Shoe Station from a regional retailer to a national footwear and accessories leader. Today, we will review the first phase of this plan, the investments, the expected payback period, financial leverage and thoughts on following phases.

Speaker 1

Shoe Station is our premium retail banner, attracting higher income households, providing customers the top branded assortments for both non athletic and athletic branded footwear, high levels of service and a welcoming contemporary shopping environment. Since we acquired Shoe Station in 2021, we've been evaluating customer analytics, market data and developing strategies to expand the chain beyond its roots in the Gulf Region Of America. Over the past two years, we've been expanding Station into new markets and it has become the industry's fastest growing retailer and solid market leader in the Southeast where it competes. As discussed in prior calls, we conducted an extensive in market test to validate what our customer and market data indicated that Shoe Station would better meet customer needs than Shoe Carnival in many markets we operate. We methodically went about testing this, including closing 10 underperforming Shoe Carnival stores across multiple markets and opening 10 new Shoe Station stores.

Speaker 1

After a full year of testing and analysis, I can share the test is now complete and it is clear that Shoe Station was preferred by customers to Carnival. This creates a transformational business opportunity to invest now to accelerate our future earnings potential. The overall results from the 10 Rebannered stores exceeded our success criteria. Combined, they generated sales over 10% higher than Chute Carnival, expanded margins, attracted higher income households, converted new customers and ultimately delivered a double digit increase in profits, excluding closing and opening costs. Petrarch will unpack the payback model for this strategy, but I will share that the return on investment is high, fast and currently is our best usage of our solid cash flow to drive organic growth.

Speaker 1

We originally planned for 25 re banners this year and then a gradual expansion over many years. We now believe that is too conservative an approach based on the customer response, financial accretion and the continued headwinds we anticipate the lower income households face this year. We will move swiftly with executing our transformation plan in order to capture future earnings and market share. Within twenty four months, fifty one percent of our current store fleet will be operated under the Shoe Station banner. Let me break out the specifics in a little more depth.

Speaker 1

During this fiscal year, we have increased the Rebanner store count to 50 to 75 from the 25 originally planned. Growth this year will include markets where stations already well known to customers in the South, as well as entering new markets where we operate a Shoe Carnival. This will result in station representing between 22% to 27% of the company's total store count by fiscal end versus a little under 10% at the start of this year. We will rebound our 100 or more stores between the start of fiscal twenty twenty six and April 2027, resulting in two eighteen Shoe Station stores in twenty four months. At that point, we believe our growth banner has the scale needed to offset the negative trends of the Carnival banner and lower income customer headwinds.

Speaker 1

During twenty twenty six-twenty twenty seven, we will begin testing Shoe Station in regions the company does not compete meaningfully or not at all. We will be evaluating these markets over the year ahead and expect to have information to share on these expansion markets as we get into 2026. To be clear, we see this twenty four month plan as just the first phase of Shoe Station scaling up. Based on our customer data, industry leading growth achieved the past two years, enthusiastic vendor partners and profit potential, we intend to scale Shoe Station nationally over the long term horizon. The profit leverage of this plan is substantial for long term earnings accretion and will receive our prioritized investments in 2025.

Speaker 1

Patrick will provide the details, but the headline is the year one investments that scale this plan up totaled to approximately $0.65 reduction in EPS this year and the downtime for the 50 to 75 store closures and reopening amounts to approximately 1% sales reduction during the year. That near term investment is expected to pay back fully in a two to three year horizon and increase our annual profit contribution to these stores by over 20% in 2027. Said differently, in the second full year after revantering, we expect store profits to increase over 20%. In addition to our organic growth strategy, we remain committed to pursuing M and A to achieve our long term vision to be the nation's leading footwear retailer for families. We start this fiscal year in a competitive position of strength with a strong balance sheet and robust cash flow generation.

Speaker 1

Our two prior acquisitions have integrated smoothly, full synergies captured and built our readiness for further acquisitions when the right opportunity at an attractive valuation becomes available. Our M and A targeting focus is on market leading footwear retailers with scale, providing geographic expansion and or diversifying to a higher income customer base. Before handing it over to Carl, I'll summarize with a few closing thoughts. Fiscal twenty twenty four was a very profitable year and EPS was at the top end of our guidance, led by the success of our acquisitions, relentless focus on margin delivery, cost controls and continued efficiencies in our successful digital first marketing approach. Our Shoe Carnival comps remain under pressure during non event periods.

Speaker 1

We anticipate that pressure continues this year with a lower income customer, uncertainty of tariffs and increased volatility with Hispanic customers. Shoe stations was the fastest growing footwear chain in our industry again and our rebanter in market test exceeded our success criteria. We rolled out today our new strategy, the scale up shoe station from a regional to a national footwear leader. The first phase will be complete in twenty four months with 51% of our current store fleet operated under our station growth banner. It is a significant near term investment that pays back quickly and is expected to drive over a 20% increase in profitability at the rebanner stores.

Speaker 1

Despite a volatile landscape in the industry, our team strengthened our competitive and financial position during 2024 and achieved our expectations. The early twenty twenty five industry landscape is shaping up like 2024 and as such, we expect continued mid to high singles declines from the lower income household at our Carnival banner. We also have the added unknown of tariffs yet to play out with the customer, vendors and industry pricing. Yet despite the market volatility expected in 2025, we are well positioned with our strong balance sheet to advance our strategies and invest during this down cycle to prepare for long term profit growth in 2027. Finally, as we announced previously, Carl Schiavetta is retiring April fourth after over fifty years in the retail industry and over a decade of service to Chute Carnival.

Speaker 1

Thank you so much, Carl, for your outstanding partnership and leadership. We also recently announced that Tanya Gordon has been appointed to succeed Carl as our next Chief Merchandising Officer. I've worked with Tanya for many years and can share she is passionate about brands, growth, prioritizes vendor relationships and will work tirelessly to drive our vision into reality. On behalf of the Board of Directors, I would like to congratulate Tanya. And now for one last time, I'd like to hand it over to Carl.

Speaker 2

Carl? Thank you, Mark. For full year fiscal twenty twenty four, we achieved a net sales increase in line with our expectations and delivered $2.68 earnings per share, which was at the very high end of our guidance. The sales trends we have been experiencing through 2024 continued during the fourth quarter. We performed well during the peak event times of Thanksgiving and Christmas.

Speaker 2

During off peak times, we saw traffic and comp sales declines at our carnival banner. I am very proud of our team as they managed to weigh through the changes in customer behavior. Utilizing well thought out targeted promotions and strong vendor partnerships, we achieved our product margin expectations. We increased our receipts in January to prepare for the first quarter rebad our stores as well as deliver product early to avoid the effect of potential supply chain disruptions and additional tariffs. Ending inventory was flat versus year end 2023, excluding the inventory of Rogan shoes that was acquired during 2024.

Speaker 2

Patrick will take you through the individual product category performances for Q4. As I prepare for my retirement next month, I would like to congratulate Chief Merchandising Officer and Executive Vice President, Tanya Gordon on her new role. Tanya brings extensive retail experience to the position and has played a key role within the Chute Carnival Merchant Organization for ten plus years. She has worked closely with Mark in the officer team and is a cultural leader within the company. Tanya has established excellent vendor relationships while the Chief Carnival and have contributed greatly to the success of the company.

Speaker 2

I am very confident I lead the team in good hands. Being part of this industry for many years, I've had the pleasure to work with countless individuals. I would personally like to thank the vendor community for the support they have given me year after year. Especially thankful for your support for Shoe Carnival over the past twelve plus years. We together have achieved much success.

Speaker 2

I am most proud to have been part of this great company. I would like to thank Mark Wharton, Cliff Sifford and the Board of Directors for giving me this amazing opportunity. Thank you to the management team here at Shoe Carnival for their unwavering support, as well as our over 6,000 employees. A special thanks to the Shoe Carnival amazing and talented merchant team. It has been my privilege to be a part of this team for over twelve years.

Speaker 2

We have seen a great deal of change and at times unheard of disruptions. You have performed brilliantly through it all. You truly are best in class and I know you will achieve great success in the future. With that, I would like to thank our investors and analysts. I have enjoyed working with you over the years.

Speaker 2

I will now turn the call over to Patrick for a review of our financials. Patrick?

Speaker 3

Carl, I would like to thank you for your guidance and leadership. Now moving on to our financial results. We delivered EPS at the high end of our guidance for the quarter at $0.54 per share on an adjusted basis and $0.53 per share on a GAAP basis and grew our annual top line and adjusted EPS compared to the prior year. Comparisons between our quarterly and annual results in fiscal twenty twenty four compared to fiscal twenty twenty three were impacted by a one week shift in the retail calendar, which benefited net sales approximately $20,000,000 in fiscal twenty twenty three's '14 week fourth quarter and $15,000,000 in fiscal twenty twenty three's '50 '3 week year. We estimate the retail calendar shift contributed EPS of approximately $0.1 in the fourth quarter last year when we are in GAAP EPS of $0.57 and adjusted EPS of $0.59 Taking into account this $0.1 headwind, we otherwise grew our fourth quarter results led by our Rogan's acquisition inclusive of Synergy Capture and Shoe Station's industry leading performance.

Speaker 3

Now going into more detail starting with net sales. In the fourth quarter, net sales totaled $262,900,000 consistent with expectations compared to $280,200,000 last year. As noted, sales in Q4 twenty twenty three benefited from the calendar shift by approximately $20,000,000 So net sales otherwise increased approximately $2,000,000 Net sales in the comparable fifty two weeks last year were led by growth from Shoe Station, which outpaced the industry and the Rogan's acquisition adding revenues of $16,500,000 On a comparable store basis, which excludes the impact of the calendar shift, Rogan sales and other new store growth, net sales for fourth quarter declined 6.3% primarily due to Shoe Carnival sales in non event periods. From a category perspective in the quarter, adult athletic sales decreased mid singles, while athletic performance at our shoe station banner delivered a high single increase led by running in court. Children's sales were down low teens, primarily due to softness in boots, while children's athletics grew at our shoe station stores as we continue to increase children's penetration with our shoe station customer.

Speaker 3

Fourth quarter sales in women's non athletic footwear were down high singles with boots, the key driver once again. Casual was up high singles and sandals continue to perform well with a low singles increase. Men's athletic comp sales were down low singles, dress was down mid teens and boots were down mid singles. Consistent with women's, men's casual was up low singles. On an annual basis, net sales in fiscal twenty twenty four totaled $1,203,000,000 and grew 2.3% compared to fiscal twenty twenty three that had an extra week of sales.

Speaker 3

Without the fifty third week benefiting last year, sales were up 3.7%. This increase was primarily due to our shoe station growth strategy, which increased sales 5.7% compared to the prior year fifty three week period. Our acquisition of Rogan's and growth during event period shopping. Comparable sales were down 3.9%. As Mark mentioned, our 2.3% sales increase was consistent with expectations and exceeded the competition.

Speaker 3

Q4 gross profit margin was 34.9% on a GAAP basis and 35% on an adjusted basis compared to Q4 twenty twenty four gross profit margin of 35.6%. On a GAAP basis, gross profit margin declined 70 basis points. The decrease was primarily due to BD and O cost, which increased on higher occupancy costs from operating more stores and deleverage as impacted by the retail calendar shift. Our merchandise margins were higher in the quarter by 35 basis points inclusive of higher product margins on boots. For the year, gross profit margin was 35.6% consistent with expectations and exceeded 35% for the fourth consecutive year.

Speaker 3

Overall, gross profit margin was down 20 basis points compared to last year with BD and O down 30 basis points on increased occupancy costs offset by merchandise margin up 10 basis points. SG and A in Q4 was $77,600,000 representing a decrease of $2,100,000 versus twenty twenty three's fourth quarter. The decrease was primarily related to lower selling costs at Shoe Carnival and Shoe Station stores given the extra week for store operations in last year's results. This combined with current year expense reductions and optimized advertising spend more than offset new costs associated with Rogan's in the quarter. As a percentage of net sales, SG and A in the quarter was 29.6% with deleverage reflecting the extra week of sales last year offset by the lower expenses.

Speaker 3

Now going into more detail on Rogan's. The Rogan's acquisition contributed solid results this year with net sales approximating $16,500,000 in the quarter and over $80,000,000 for the year as expected. When we purchased Rogan's, we guided that it would earn $10,000,000 of operating income and that operating income would increase after synergy capture was complete. In FY 2024, we beat that $10,000,000 original target by over 20% with the primary driver being synergy capture in advance of the original timeline. In the fourth quarter, we recorded $3,000,000 of tax credits and other income associated with Rogan's operations.

Speaker 3

And we recorded a benefit to income taxes related to Rogan's that favorably impacted our annual effective tax rate by approximately 80 basis points. Our ability to integrate the acquired business ahead of schedule and capture full synergies was a key driver of increased value for shareholders this year. Fourth quarter twenty twenty four net income was $14,700,000 or $0.53 per diluted share compared to fourth quarter twenty twenty three net income of $15,500,000 or $0.57 per diluted share. On an adjusted basis, excluding merger and integration expenses, fourth quarter twenty twenty four adjusted EPS was $0.54 compared to $0.59 in fourth quarter twenty twenty three. As previously noted, we estimate the retail calendar shift benefited fourth quarter twenty twenty three by approximately $0.1 For the full year, net income in fiscal twenty twenty four grew $73,800,000 or $2.68 per diluted share compared to net income of $73,300,000 or $2.68 per diluted share in fiscal twenty twenty three.

Speaker 3

Adjusted net income in fiscal twenty twenty four grew to $75,000,000 or $2.72 per diluted share compared to $74,000,000 or $2.7 per diluted share in fiscal twenty twenty three. Our growth strategies led by Shoe Station and Rogan's more than offset the impacts of sales at our Shoe Carnival banner declining mid singles for the year and the extra week last year. Our income tax rate in fiscal twenty twenty four was 24.3 resulting in a headwind to EPS of approximately $0.02 per share versus the prior year rate of 23.7%. This higher rate primarily reflected discrete benefits that favorably impacted the prior year and did not recur in fiscal twenty twenty four and a lower benefit from share based awards in fiscal twenty twenty four offset by the Rogan's benefit previously discussed. Merchandise inventories totaled $385,600,000 at the end of fiscal twenty twenty four, an increase of $39,200,000 compared to the end of fiscal twenty twenty three, primarily reflecting Rogan's acquired inventory.

Speaker 3

Merchandise inventory supporting Shoe Carnival and Shoe Station stores were slightly down on a unit basis at the end of fiscal twenty twenty four compared to the end of fiscal twenty twenty three. Additional inventory purchase were made near year end to support re bantering additional stores and to a lesser extent as a hedge against potential supply chain disruption from port worker strides and from tariffs. Fiscal twenty twenty four marked the twentieth consecutive year the company ended the year with no debt. At the end of the year, we had total cash, cash equivalents and marketable securities of approximately $123,000,000 an increase of $12,000,000 versus last year, including the Allcash acquisition of Rogan's earlier in fiscal twenty twenty four. Cash flow from operations in fiscal twenty twenty four was over $100,000,000 and capital expenditures were down $23,000,000 bringing up cash for increased dividends and further investment in growth strategies in fiscal twenty twenty five.

Speaker 3

To further support shareholder value, last week we increased our dividend by 11% to 0.15 per share, representing an increased annualized dividend rate of $0.6 per share. This new rate is a 238% increase compared to five years ago. We have now provided a dividend for fifty two consecutive quarters and increased our dividend for 11. Including newly rebranded stores at the end of fiscal twenty twenty four, we operated four thirty stores with three sixty shoe carnival stores, 42 shoe station stores and the 28 Rogan locations. Before discussing our outlook for 2025, I'm going to build on Mark's comments regarding our re banner growth strategy.

Speaker 3

Industry data supports Shoe Station is the fastest growing retailer in our industry and we aim to capitalize on that. From our 10 store end market test in aggregate, we have seen positive results with over a 10% top line lift and a more than 10% increase in store profitability. As Mark mentioned, we're going to re banner 50 to 75 stores in fiscal twenty twenty five. And in twenty four months, over half our present store fleet is expected to operate as a Shoe Station store. Over the long term, we see significant benefits of re bannering stores to Shoe Station stores.

Speaker 3

During fiscal twenty twenty five, we anticipate spending between $35,000,000 and $45,000,000 in capital expenditures for store growth, including re bantering the 50 to 75 stores. We forecast a 20,000,000 to $25,000,000 investment impacting the P and L. These P and L impacts include amortization of the CapEx investments, other new store opening costs and customer acquisition costs, sales reductions during the four to six week period while the Chute Carnival store is closed and the Chute Station store is grand open and write offs of existing assets. We expect this $20,000,000 to $25,000,000 P and L investment to decrease our operating income in fiscal twenty twenty five compared to fiscal twenty twenty four in a range around 0.65 per share. Our modeling and end market tests support a rapid payback for the reVaynerd stores.

Speaker 3

We expect this first year P and L investment will be recovered over a two to three year period following the store's grand opening. In 2027, we expect that net sales from these re bannered stores will be over 10% higher and profit contribution will increase over 20% compared to the stores before being re bannered. In fiscal twenty twenty six, our plan is to scale up further and complete 100 or more re banners with the first year P and L investment forecast between $22,000,000 and $27,000,000 and a similar path to payback for the investment of approximately two to three years. As we progress towards 51% of the present store fleet operating at the Shoe Station store, increased store profitability from the stores re banded in fiscal twenty twenty five is expected to largely offset the P and L investment in fiscal twenty twenty six. Moving on to our 2025 outlook.

Speaker 3

Our financial outlook in fiscal twenty twenty five contains a wider range, reflective of anticipated volatility and uncertainty surrounding tariffs, inflation and geopolitical topics and the impact these uncertainties might have on consumer confidence and spending for family footwear. This guidance is also impacted by variability of when each of the anticipated 50 to 75 rebranded stores will grand open. Net sales are expected to be in a range of $1,150,000,000 to $1,230,000,000 representing a range of down 4% to up 2%. For fiscal twenty twenty five, GAAP EPS is expected to be in a range of 1.6 to $2.1 Total capital expenditures are expected to be in a range of $45,000,000 to $60,000,000 with $35,000,000 to $45,000,000 targeted for re banners and other store growth. Compared to CapEx recorded in FY 2022 to FY 2024, the total $76,000,000 50 6 million dollars and $33,000,000 respectively.

Speaker 3

For a little more color on our 2025 outlook, compared to GAAP EPS of $2.68 earned in fiscal twenty twenty four, the $0.65 Rebanner P and L investment and the Rogan's tax benefits in FY 2024 are the primary drivers to the $1.85 midpoint of our EPS guidance. Similarly, the midpoint of our net sales guidance of down approximately 1% is reflective of the downtime associated with re banners as stores are closed and reopened. During FY 2025, we anticipate minimal change to our store count with one to three stores opening and two to four stores closing. Our sales and EPS guidance contemplate modest price increases including from tariffs and or inflation and consistency in consumer confidence. As a result of the changes taking place in FY 2025, we are providing additional information on the first quarter.

Speaker 3

We do not expect first quarter comparable store sales trends to improve versus Q4 twenty twenty four as non event period buying resembles last year trends so far. We also expect a headwind to sales of approximately 1% associated with the re banner strategy. With respect to EPS, in Q1 twenty twenty five, the $0.65 annual re banner investment is expected to be generally ratable between the first half and back half of the year and between $0.15 and $0.2 per quarter. Before opening up for questions, I will summarize a few closing thoughts. In fiscal twenty twenty four, we grew our net sales and adjusted EPS with adjusted EPS at the high end of our guidance range exceeding the competition.

Speaker 3

We closed out FY 2024 with strong cash generation and our recent acquisition delivered operating 20% greater than expectations on full synergy capture. In FY 2025, we're going to re banner 50 to 75 stores and expect that associated P and L investment will be paid back in two to three years and to materially fund continued investment in FY 2026. Our water view of guidance for FY 2025 reflects impacts from our re banner strategy at the midpoint and assumes customer behavior in non event periods resembles similar downtrends last year. Today, we announced that 04/24/2025 has been set as the shareholder of record date for our annual meeting. And the annual meeting of shareholders will be held on 06/25/2025.

Speaker 3

This concludes our comments. I will now open up the call for questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Thank you. Thank you. Your first question comes from Mitch Kummetz with Seaport Research.

Operator

Please go ahead.

Speaker 4

Yes. Thanks for taking my questions. And Carl, I'd like to wish you all the best in retirement. Mark, let me start on the re bantering. So the 10 store test, if I understand it correctly, was all in market.

Speaker 4

The 50 to 75 stores that you guys are dealing in, twenty twenty five, are those also all in market are those also all in market or some of them out of market? And I mean, it sounds like over time, you know, some of these re banner stores are going to be out of market. What gives you the confidence that this is going to work as well out of market, where you really haven't, I guess, tested it so far? And I have other questions.

Speaker 1

Good morning, Mitch. Thank you for the question. We're very excited about the strategy. We've been mining this data for a few years now and it gives us great confidence that the higher income, non urban customer resonates with the Shoe Station banner. The premium assortment, the excellent service, the technical expertise we provide in this modern shopping experience.

Speaker 1

You're spot on, on the question. The 10 stores tested were all within existing markets and they performed very well. Again, to recap, sales in aggregate grew over 10% better than Shoe Carnival during that period of time and profits double digit with great growth in margin, customers in the higher income bracket and every core metric. As we march forward, this first tranche is focused on filling in gaps largely in the markets. Right now, we have multiple of these 50 to 75 stores rolling out already in existing markets where a shoe station is already known.

Speaker 1

And then the plan is to expand into new markets that are not covered within existing states. So for example, in the State of Florida, we have multiple re bannered stores going on right this minute where we have underperforming shoe carnival stores. The demographics looked far superior to be matching a shoe station. We're even in the process of re bantering those now. So that'd be an example of the expansion strategy in a state where the brand is known, but markets where carnival is underperforming.

Speaker 1

As the year progresses, we'll be broadening that to go where the demographics and data looks like it should work and will be methodically and slowly later the year expanding into new states, confirming that we have the strength of results that we've seen so far. It's not so really '26 that we see branching off into areas that are meaningfully different for Shoe Station and that's where we're going to be getting a lot of data and testing this year. So we're very confident when we do get into those newer markets further out of SEC, South, ACC kind of territories with March Madness on my mind as well, kind of that world will kind of branch out into Big 10 and Big East country as we get into further years.

Speaker 4

That's helpful, Mark. And then on the tariffs, I think in Patrick's prepared remarks, it was mentioned that you guys are the guidance, assumes some modest price increases. I was just hoping you could probably provide a little bit more color in terms of, you know, what you're seeing, with the vendors that you work with in terms of what they're doing on pricing. And then on the private label side, what are you seeing in terms of kind of costing there? Any sort of color would be helpful.

Speaker 2

Sure, Mitch. Hi, it's Carl. At this point, it's pretty unsettled right now. We're getting information from vendor to vendor that is different. In most cases, the vendors are able to assume some of those costs, negotiate with the factories.

Speaker 2

We're not seeing across the board price increases for fall based on tariffs, but we might be seeing some price increases on individual items, newness, new items, but so far things have held with the big core items. We're seeing some price increases potentially in the mid single digit at the high. And certainly, we believe we'll be able to tolerate those, pass those along where we can. So we've not seen anything meaningful today. Again, the vendors are all over the board as they continue to negotiate with factories and transportation and agents.

Speaker 2

So it's a bit it is unsettled right now, but we don't we see some effect, but not the 20% that you hear about coming out of China right now.

Speaker 1

And if I could build on it, it's Mark. And that's what our guide assumes continues. That as Carl laid out what we're seeing today, if we see a volatile swing with double digit changes pass through from Vietnam in particular or major China implications, that is not implicit in our guidance we provided today and we would revisit that if that changes. But as Carl said, we've not experienced that sharp implications of yet.

Speaker 4

And then I guess maybe as a last question, just on the guide, so for the full year you're giving us sales and GAAP earnings. Is there any more you can say in terms of kind of what comp outlook is embedded in that as well as, maybe a margin breakout kind of any thoughts around gross margin, op margin? And then on the first quarter, is there sort of an EPS range that you're looking at in the first quarter? And I wasn't real clear what the rebranding impact, re bantering impact is in Q1. Is it I think you said something like $0.15 to $0.2 maybe just more clarity there?

Speaker 3

Hey Mitch, it's Patrick. Nice to talk to you. With respect to the first part on comp, we expect minimal store openings and closings next year. So the guide that we provided of up 2% to down 4% would be the same for both total sales and comp. On gross profit margin, our expectation is we both Mark and I touted the fourth year above 35%.

Speaker 3

Our expectation for next year based on where we sit today and as Carl mentioned and Mark mentioned with respect to the impact of tariffs on things that we think are happening in our guide. We think that above 35% is going to stick for next year. There's obviously a lot of play in that number given the uncertainty and unsettling in the market right now. On Q1, we're going to reiterate what we said before, which is what we've seen so far today on sales, which is that they're down in non event periods much like they were in Q4 last year and that we expect it to be a little bit worse than that because of the re banner strategy. So a sales forecast would be on would be outside of our guidance range for Q1 if you take both of those things into account.

Speaker 3

And then with respect to the re banner strategy, the 0.65 is obviously a range. It's not an exact number. We would love to be that good, but we are obviously not that good with the number of stores. And the guide for that is going to stick with the $0.15 to $0.2 impact for Q1. But they are duplicative, the non event sort of thing that we've seen thus far that Mark talked about and then the $0.15 to $0.2 on the re banner strategy.

Speaker 4

All right. Thanks and good luck.

Operator

Your next question comes from Sam Poser with Williams Trading. Please go ahead.

Speaker 5

Thank you. I'll save the best question for last. But, the I want to just follow-up on Mitch's question regarding the how many stores are you can you sort of give us the breakdown of how many stores you rebantering by quarter or something? Can you just say, okay, of these 50 to 75 x x percent will be at what time by what quarter or within which quarters? I know some will overlap quarters, but

Speaker 1

Hi, Sam. Good morning. It's Mark. Thanks for the question. We plan at half the guide range before back to school and half the guide range after back to school is the simplest way to say that.

Speaker 1

So

Speaker 5

with the majority with that in and you wouldn't be doing it during a holiday. So could we assume that and you want to be ready for back to school? Could we assume that Q1 and Q3 would be the most in our sorry Q1 and the end of Q3 into the beginning of Q4 be the most impacted periods of time from this? Is that the right way to think about it?

Speaker 1

It's not wrong. The back half is still not 100% firm, but you're absolutely right thinking about we'll be doing the work in downtime in non event periods is the approach for the most part. We don't want to impact customer and shopping behavior during BTS or holiday periods, so spot on with that. We're going right now with again, we don't have the exact point that we're guiding, but it wouldn't be wrong to think we get in that 35 to 40 ish of the stores before back to school gets going. That would be a nice ambition of us if everything goes smooth with construction and product and materials.

Speaker 1

So it wouldn't be wrong to think about it that way and then we'll pick back up after back to school with the maximum amount we can accomplish without distracting like the holiday period in sync with getting the great product in stores and construction flawless. So you could see some go into January if we feel it's too late to not impact DAT and holiday. But the way you described it is right overall.

Speaker 5

So then like your comps from just theoretically your comps in during the back to school season, which arguably is the end of Q2 into, you know, early September and then holiday comps given the event period and the timing of all of this should be the best comp periods of the year for both the event period situation and your these stores will be open and going and theoretically performing at a better rate than they did before.

Speaker 1

Yeah, absolutely. Yes, spot on. We go by holiday. We'll have between 2227% of the company under the Station banner compared to nine something as we started the year. So you're absolutely right.

Speaker 1

As that percent starts to become a meaningful scale, it will start offsetting what we anticipate mid to high single declines in Carnival and why we're moving as fast as possible because as we said, we had comp growth in Station last year and we're very pleased with where it's going. So bang on. By Back to School, it will be our strongest period of growth. We expect also, Station still have the scale to demonstratively move the needle. But as we flip forward to back to school '26, now we're starting to get to a point where we believe there's enough scale.

Speaker 1

We're getting very close to 51% with each quarter and that's where we believe we can start seeing positive trends. Certainly as we get to the holiday '26 and into '27, but you're spot on. It should get better with each passing quarter as we get towards holiday of this year at event periods.

Speaker 5

And within back to school, what percent of back to school selling in general happens in Q2 versus in Q3?

Speaker 1

It's about half, a rough estimate.

Speaker 5

And then lastly, this is for Carl, who I'm going to miss you Carl. But I've got to ask you and I'm going to follow-up with the same question for Mark. Who do you think is better? The current Chief Merchandising Officer or the incoming Chief Merchandising Officer?

Speaker 2

Well, Sam,

Speaker 5

I'll put it this way.

Speaker 2

Since the incoming Chief Merchandising Officer is somebody I recruited eleven years ago and have been working with closely all that time, I believe there's potential for growth in the future.

Speaker 5

Well, that's not an I mean, I'm going to have a conversation with Tanya because that's not an overwhelming there's potential on either or I mean, if you know that. All right. Well, and then Mark, same question.

Speaker 2

Sam, let me say this. We are very I'm very excited to turn the reins over to Tanya. We have worked very, very closely in the future and I think she's going to do a terrific job. And the team here really is excited and support her 100%.

Speaker 5

Well, when I met her, I thought she had more support than you, but now I'm not really sure. And Mark and Mark, I

Speaker 2

I ask you the same question.

Speaker 1

I love the question, Sam, because I've been so fortunate. I've had the best chief merchant in the industry and and so fortunate to work with Carl and like you, I'm gonna miss him. And April 6, I have the next best Chief Merchant in the industry. And I think the vendor community is talking to so many people is so supportive of where we've been and where Tanya is going to take it. Tanya is the absolute right person to bring this next vision to life as we transform the corporation.

Speaker 1

Tanya is going to be very aggressive about growth. She's going to be aggressive about building our relationship, taking it from strength to strength. But a new thing as we go after higher income customers with half of the corporation or more and go after getting the best brands at premium prices. Tanya is going to be we've got great confidence in her and so does our vendor community. So I've been fortunate, two great Chief merchants, one retiring after fifty years and one just about to start.

Speaker 5

All right. I'm just going to throw one more in for Patrick. Again, follow-up to Mitch's question on the gross margin. I mean how do we think about the gross margin from the BD and O and the merge because I mean I assume that Q1's gross margin is going to be down quite a bit reflective of Q4 again because of the mostly because of the BD and O. Is that the right way to think about it?

Speaker 3

Sam, with respect to our overall concept on just talking about the year and the full guide on margins. At the midpoint, we would expect some deleverage because our sales are expected down. There is a commitment in our process for what we see right now assuming that everything holds on tariffs and on consumer confidence and on the general basis of market conditions right now that we would expect a margin above 35% for the whole year with some deleverage on the BD and O and some stability in our merchandise margins. And in the quarter, the expectation would be the same, but there would be a little bit more deleverage because the sales are playing down a little bit more.

Speaker 5

And that would also be true at the end of Q3 going into Q4 because of the store because of the store redos but offset by the new store you get offset you get offset by the by the new stores being the stores that were converted earlier in the year which you don't get right now.

Speaker 3

Is that fair? That is correct. That is a fair assessment Sam.

Speaker 5

Okay. Well, thanks very much and good luck.

Speaker 3

Thank you, Sam.

Operator

There are no more questions. I will now turn the conference back over to Mark Gordon for closing remarks.

Speaker 1

Thank you all so much for joining us today. 2024 was a tough year in the market, but I want to thank our vendors, our team for achieving growth in sales, growth in profits and a bulletproof balance sheet where we started the year with no debt, ended the year with no debt and I really like where we start 2025. It's volatile without a doubt as we've talked through, but we have a strategic plan here to rapidly move from under 10% of our company with our growth banner to over half of our company, marketed and engaging with our customers with our growth banner in just 24. The profit accretion that comes from this investment and the payback are fast, they're high and we've got a great enthusiasm from the vendor community to help us continue to bring the most distinct family footwear brand to the market. So thank you so much and I really look forward to talking to you all again in Q1 about early insights from the rollout and how we're progressing.

Speaker 1

Best wishes to talk to you soon.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Shoe Carnival Q4 2025
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