Shoe Carnival Is A Good Fit For Dividend Growth Portfolios

A New Age Has Come For Shoe Carnival

Shoe Carnival NASDAQ: SCVL has been on our radar for the past year for several reasons. The company’s focus on eCommerce, its efforts to reposition in the face of changing trends, and secular tailwinds had the company set up for robust growth. Along with that, the fundamentals supported a healthy outlook for dividend payments and dividend growth if not with a great yield. The fiscal second-quarter results confirmed our suspicions but in a way that took the market by surprise. Shoe Carnival's fiscal second quarter of 2021 was so mind-bendingly strong it has altered the entire outlook for this business and stock.

No Wonder The Board Approved Shoe Carnival's Stock Split

Investors were right to take Shoe Carnival's decision to split the stock as a bullish signal. The company's second-quarter revenue of $332.20 not only beat the consensus estimate by more than 1,000 basis points but is also a company record and up 10.4% from last year. Now, we know that the two-year comparison has been a very important factor this earnings cycle so we are going to provide that here The difference is that while most of the successful pandemic winners are reporting growth in the 2-year stack, Shoe Carnival's year-to-date results (6 months) are greater than all of the previous two years combined. Take a minute to let that sink in.

On a comp-store basis, sales are up 11.4% but offset by repositioning efforts. Strength at the store level is being driven by the loyalty program which is 1) attracting new customers and 2) providing valuable CRM information the company is using to engage with and attract new customers. As for the Loyalty program, Shoe Perks membership is up 10% on a YoY basis.

Moving down the report, the company also reported a record gross margin of 40.9%. This drove record GAAP EPS of $1.54 or up nearly 300% from 2019 and more than double the consensus estimate. The strength in revenue and earnings led the company to guide the third quarter and the full year higher and both to record levels as well. The third quarter is expected to produce $307 million to $315 million in net revenue compared to the consensus of $290.50 million with the low end of the full-year range at $1.21 billion compared to the $1.17 consensus.

Shoe Carnival Is A Safe Dividend With Growth In The Outlook

Shoe Carnival was a safe dividend before it reported such a stunning Improvement in the business. Now it’s even safer. The company has no debt and its cash levels are holding steady despite aggressive efforts to expand the business, the stock split, and the recently increased dividend payment. At present levels, the dividend yields about 0.75% but it's got a super low 6% payout ratio and a double-digit CAGR. Based on the fundamentals, the business outlook, and the 40% dividend increase delivered two quarters ago we think the next dividend increase is going to be in the high double digits as well. We expect another dividend increase at the end of the fiscal year and Shoe Carnival still has $46 million left in its repurchase allotment, don’t forget about that. 

The technical Outlook: Shoe Carnival Is In Consolidation

Shares of Shoe Carnival rocketed higher in the wake of the earnings report but met resistance that turned the day into a rout for the bulls. The mitigating factor here is that the high 13% short interest indicated by Marketbeat’s short-interest data played a major role in the day's action. We have no doubt that short-covering had a lot to do with the sharp spike in prices and that most of the action throughout the day related to it and profit-taking among the bulls. Now, the market will have to work through a little near-term turbulence that may keep price action moving sideways for the near term. Longer-term, we expect to see this stock move up into the new all-time high territory and then move sharply higher. It's only trading at 8.6X times its earnings and that is ridiculously cheap.