Shoe Carnival’s (SCVL) Bubble Bursts, Now It’s Time To Buy Some

Pride Cometh Before The Fall For Shoe Carnival

To look at the pre-market action you’d think Shoe Carnival (NASDAQ:SCVL) just died. The stock is down more than 12% putting it deep into correction territory and well on its way to a bear market. But that’s not what’s happening. The expectation for Shoe Carnival results was so astronomically high going into the report that its mind-blowing figures weren’t enough to impress the market. And the shorts took advantage of the fact. The short interest is nearly 30% on this stock, enough on its own to drive share prices lower.

Shoe Carnival Is A Deep Value, The Shorts Are Only Making It Better

Shoe Carnival’s 2nd quarter report is as good as it can be. If only the company reported at the beginning of the cycle and not the end it shares might have popped 15% and not shed it. The top-line revenue not only rebound from the prior quarter it grew 12.1% over the same period last year. The figure is a hair short of consensus but there are other numbers to consider as well.

On the bottom line, GAAP earnings came in at $0.71 to beat consensus by $0.13 and the whole quarter is underpinned by the eCommerce segment. And don’t forget. The quarter was heavily impacted by shut-downs and reduced traffic.

Regarding eCommerce, we know that eCommerce is a driving force of the rebound across all sectors and industries. Shoe Carnival itself reported a 350% increase in digital sales for the 1st quarter when most of the shut-downs were in place.  Sales in eCommerce slowed a bit from the 1st but remained quite strong with a 332% increase from the previous year and these gains are expected to stick. That's one of the hottest numbers reported for eCommerce of any business I've covered.

“Our strategic investments in technology-supported sustained triple-digit growth in e-commerce sales. The positive response by both our in-store and online customers led to record quarterly revenues and comparable same-store sales growth of 12.6 percent. We also achieved an important milestone surpassing 25 million Shoe Perks loyalty members,” says CEO Clif Sifford.

On a comp basis, same-store sales increase 12.3% revealing the only negative within the report. Margins tightened on higher merchandise cost and product/channel-mix shifts to adult athletic and eCommerce. The company refused to issue guidance but the outlook for the rest of the year is positive. Trends in place since the pandemic began are still driving consumer habits and that bodes well for this and all retailers going into the holiday season.

Shoe Carnival Is A Safe And Growing Dividend

Shoe Carnival doesn’t pay much in the way of yield but it is a safe and growing distribution. The company issued its 7th consecutive distribution increase in June and there is every expectation it will grow next year and the next. With the post-earnings drop, the stock is yielding about 1.15% but there is also the value to consider. The stock is trading at only 10X its next years earnings while other top-ranked dividend-paying pandemically-insulated retailers are trading at much higher valuations.

Regarding the balance sheet. The payout ratio on the distribution is high relative to this year’s consensus, about 55%, but the consensus is ridiculously low. Assuming the company only turns in flat YOY revenue and earnings growth in the next two quarters it will still double the consensus. The cash position could be better but it’s not a worry when earnings are good, total debt is low, and coverage is high.

Blame The Shorts For This Buying Opportunity In Shoe Carnival

It is clear from the chart that the market was expecting big things from Shoe Carnival. I blame today’s buying opportunity in part on over-zealous traders and in part on the shorts. Thanks for that. In the near-term, with price action opening with such a gap and at a key point of previous-resistance-now support, there is going to be some volatility. I’ll be looking for support to kick in at the $31 level or just below near the short-term moving average. Longer-term, this stock should continue its rebound to pre-COVID levels and beyond.