Good morning, and welcome to Shoe Carnival's Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. It is also being broadcast via the webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. Management's remarks may contain forward-looking statements that involve a number of risk factors. 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. I will now turn the conference over to Mr. Chris Sifford, Vice Chairman and CEO of Shoe Carnival, for opening comments. Mr. Sifford, you may now begin.

Thank you, and welcome to Shoe Carnival's 2021 Second Quarter Earnings Conference Call. Joining me on the call today are Mark Worden, President and incoming Chief Executive Officer; Carl Scibetta, Senior Executive Vice President, Chief Merchandising Officer; and Kerry Jackson, Senior Executive Vice President, Chief Financial and Administrative Officer. As many of you know, today is my final earnings conference call as Shoe Carnival's CEO. This management team has worked tirelessly to deliver consistent growth and value to our shareholders. I am extremely proud of our record performance, and I am convinced we have not come close to realizing our full potential. I am so excited to watch this terrific management team continue to build on successes we have enjoyed during my tenure as CEO. I will let Mark, Carl and Kerry get to the specifics of the quarter. But first, I'd like to take a few minutes to reflect on the last several years. The strategic initiatives we have implemented thus far and the strategies we have in place for long-term growth have been a critical driver of our strong performance, and I believe, have set Shoe Carnival up for further successes well into the future. Customer centricity is not just a catch phrase us. It's a core principle to every decision we make. The customer is and will continue to be at the center of everything we do at Shoe Carnival. Our stores are easy to shop, with all products in an open-sell environment. However, we are not a self-service shoe store. Our stores are well staffed with knowledgeable associates who offer as much service as a customer desires. Our merchandising team is made up of well-tenured professionals who have the vast understanding of our customers and our stores down to the specific market. This deep understanding of…

Thank you, Cliff, and good morning, everyone. Footwear customers have resoundingly returned to shopping at Shoe Carnival stores all across the country. Sales and profit results are far exceeding our expectations for fiscal 2021. And as such, we are significantly raising our annual guidance today. Before we get into the details, let me provide some context for the comparisons that I will refer to during my comments. Given the impact of the COVID-19 pandemic on our second quarter of fiscal 2020, we believe our current performance is best viewed relative to the same period 2 years ago. In our view, this provides a more transparent picture of the sustainability of the growth we are experiencing as well as the underlying strength of our business. As such, comparisons that I'll provide will be relative to the second quarter of fiscal 2019, unless indicated otherwise. Kerry will provide further comparisons versus 2020. The Shoe Carnival team once again rapidly accelerated growth, posting record sales and record earnings per share during Q2. Merchandise margins expanded substantially, and we achieved our highest operating profit on record during the quarter, which was nearly 4x what we reported in the second quarter of fiscal 2019. We also achieved overall comparable store growth of 25.5% in the quarter compared to Q2 2019. These growth results included a mid-teen increase in customer conversion within our brick-and-mortar stores, fueling double-digit comp store sales increases across all geographic divisions over the same period 2 years prior. Importantly, our long-term e-commerce growth strategies continue to deliver on our customer shopping needs. For the second quarter, e-commerce sales grew 140% versus the second quarter of fiscal 2019, driven by customer traffic up high double digits. Further, product margin associated with e-commerce sales was up over 1,500 basis points compared to the fiscal…

Thank you, Mark. We continue to execute on our focused promotional strategy, using data intelligence to drive customers in store with more personalized recommendations. This strategy has served us well since implementing it over 10 months ago, driving record sales and gross margins. We continue to monitor key metrics that provide valuable insight into customer behavior. We then flex our promotional and merchandising strategies to allow any changes in customer shopping preferences. This flexibility allows us to gain additional insight into our customer, which further enhances targeting to drive more customer acquisition growth. One of our key strengths as an organization is our ability to react quickly to a changing market. The merchant team continues to work closely with our vendor partners to reduce negative impacts from industry-wide supply chain disruptions. We made a purposeful decision to buy for growth in the second quarter as we anticipated a return to more normalized consumer demand for the period. For example, we increased our inventory position for dress shoes to be in line with pre-COVID levels in anticipation of the surge of events like weddings and graduation parties which typically occur in the second quarter. This was another great example of Shoe Carnival being on trend early. Our stores were stocked with the styles and quantities of dress shoes that customers wanted, giving us an edge over our competition and driving a significant increase in new customers in the quarter. Our ability to lean in continues to set us apart from others in the industry. Before I get into the results for the quarter, as Mark noted, I will be including comparisons to the second quarter of fiscal 2019 in my comments. The second quarter of fiscal 2021 comparable store sales increased 11.4% over 2020 and 25.5% over 2019. Product margins for…

Thank you, Carl. As Mark mentioned, given the impact of the COVID-19 pandemic during the second quarter of fiscal 2020, we believe our performance is best viewed relative to the same period in 2019 as this will provide a more accurate depiction of our outstanding results we achieved during the period. I will provide comparisons relative to 2020. We will place added emphasis on some of our results compared to the second quarter of fiscal 2019. We achieved record net sales of $332.2 million for the fiscal 2021 second quarter, an increase of $31.4 million or 10.5% compared to the second quarter of fiscal 2020. Comparable store sales increased 11.4% for the second quarter of 2021 compared to the prior year and 25.5% compared to the second quarter of 2019. Our brick-and-mortar comparable store sales were up 25.8% in the second quarter 2021 compared to the second quarter of 2020 and up 19% compared to the second quarter 2019. E-commerce sales were up 140% in the second quarter 2021 compared to second quarter 2019, but down in line with expectations against the second quarter of 2020. Second quarter 2021 gross profit margin was 40.9%, a record high for Shoe Carnival and up more than 1,300 basis points compared to the second quarter of 2020, driven primarily by our tremendous merchandise margins in the quarter. Buying, distribution and occupancy expenses decreased slightly as a percentage of sales when compared to second quarter of 2020. To put a finer point on our incredible growth, when compared to 2019, second quarter 2021 gross profit margin grew by more than 1,000 basis points, driven by a 960 basis point improvement in merchandise margin and a 60 basis point improvement in buying, distribution and occupancy expenses as a percentage of sales. These results clearly underscore…

Thank you, Kerry. Before we open the call for Q&A, I'd like to take a moment to recognize Cliff, given this will be his last earnings call. First and foremost, I would like to express my personal gratitude to Cliff for his innumerable contributions to the Shoe Carnival organization and the broader family footwear industry for more than 2 decades. I appreciate the strategic partnership and the great friendship we have developed working closely together over the last 3 years. Cliff has built an incredible company culture. His vision, combined with our collective strategic investments to build our brand and consumer experience provides us the springboard to drive long-term success for Shoe Carnival. And I am honored to be following his lead. Cliff has also pioneered bill and profit efforts on both a personal level and at the company. In fact, it was recently announced that he would be awarded the T. Kenyon Holly Memorial Award by the Two Ten Footwear Foundation in December, the foundation's highest honor for exceptional humanitarian achievement. We are so proud of this well-deserved recognition as it perfectly sums up who Cliff is as a person. Cliff, from all of us at Shoe Carnival, it's been an honor and a privilege to work with you. We wish you nothing but the best as you transition into your new role. So I'd now like to open up the call for questions and answers.

[Operator Instructions] And your first question comes from Mitch Kummetz with Pivotal Research.

Cliff, yes, a pretty good quarter. I should probably add my congratulations. So I'll reluctantly do that, just for you.

Thank you for that.

Of course. I've got a handful of questions. So first off, obviously, business had a great quarter. You're having a strong start to Q3. When you reflect on that, how much do you think that's the macro stimulus, pent-up demand, things like that, versus some of your company-specific strategies around consumer acquisition and engagement, or even just the fact that you may have better product availability than some of your competition? Can you maybe just talk a little bit about that?

Mitch, I'd like to tell you that everything that we've done through the years have gotten us here. But to be perfectly honest with you, I'm going to let Mark answer this question because the things that he's put in place and to take the CRM to the next level is what's got us to where we are today. And I am so confident that what he's going to do, as I transition to Vice Chair, is going to take us to the next level. So Mark, why don't you take that?

Thank you, Cliff. Mitch, thank you for the congratulations. Mitch, we're thrilled with the business fundamentals that we are seeing throughout Q2. And even more encouraged by the way the plans have worked as we started out Q3. As I shared in my prepared remarks, Q3 is on pace to set a record back-to-school. We're so confident in the traffic, the conversion, the merchandise product that Carl and team have gotten are delighting customers that were already ready to share the record Q3 earnings. So in short, we believe our strategic plans are working well and set us up to maintain this momentum throughout the remainder of the year, on pace for the tremendous increase in earnings and sales Kerry just provided.

And then, Kerry, on the guidance, when I kind of look at sort of what's embedded over the balance of the quarter, it looks like you're expecting some moderation in the trend. I'm just curious, is that just some conservatism baked into the outlook? Or is there something that you're seeing as you think about the balance of the quarter? And again, I'm sort of really thinking about that on a 2-year basis. I know that back-to-school was funky last year, but I'm thinking about that in terms of 2 years ago?

Well, back-to-school, as we've said before, it's kind of a forced buying event. All kids go back-to-school with new shoes. And since the kids had gone back-to-school, physically in presence, we're seeing a nice surge, which we wouldn't expect to see outside of a peak demand like this. So yes, sequentially through the rest of the quarter, we are -- we expect to see it more normalized. We feel positive.

Okay. And then Carl, talk to me about boots. You made some comments on the quarter about the nonathletic business being good. People kind of getting back to events. I'm kind of curious how you think about that into the holiday season? I mean do you expect you have a good dress boot business? And maybe just broadly talk about kind of your outlook for boots.

Sure, Mitch. We plan boots up for the back half of the year mid-single digits. I'll tell you that early boot reads and the numbers are very small, so we have to keep that in mind. Early boot reads are outstanding so far, and it's multiple categories of boots that are performing. Some of the fashion that we saw in '19 that we expected to accelerate in '20 and then obviously got derailed because of COVID, we're seeing that happen in '21. So we're encouraged on the boot sales for fall of the year.

Okay. Just a couple of last ones. Any comments on the supply chain? It looks like you guys are doing a really good job in terms of having good product availability. But I'm just kind of curious how you -- what are you hearing on the supply chain? What are you seeing more broadly across the industry? And we've heard that people expect that the supply chain to remain challenged at least through the balance of this year into the first half of next year. And I'm kind of curious how you think about that relative to what you think channel inventory might look like and your ability to kind of, again, continue to hold off promotions if things stay pretty clean out there?

Sure. This is the all-consuming part of my day, trying to get our arms around the supply chain and trying to sort of move things around. We've been fortunate so far that we have been able to deliver inventory based on our inventory levels. I quoted in my prepared remarks, we're quite pleased where we are right now. We think we're positioned as we move through third quarter and into the first part of fourth quarter that we have products flowing. We have anticipated delays. And even with those delays, we feel pretty good about where we are. As we move into late fourth quarter end of spring, we do see this continuing, especially with the issues that we're having in -- that the industry is having in Vietnam right now and how that's going to play out. We don't have complete vision to that today. But I will say that our team has executed very well. So far, our vendor partners have really stepped up and supported us. And I expect that to continue here throughout fall, although I do see the possibility that the channel will be light on inventory, and we'll once again be able to hold off promotion based on our position of inventory in the season.

Okay. And then lastly, if I heard you guys correctly, I think you said that 8% operating margin is kind of where you think it being more of a sustainable level, which that would be down from kind of where you guys should land this year. So I'm kind of curious, what do you think you give back? Is it just that as the environment normalizes, just maybe the sales come down a little bit? Do you deleverage some? Or is it really on the merch margins aren't sustainable at this level? I know you've kind of moved away from BOGOs, I would expect that you would think that continues. But I mean the margin has been so good. You just think that you have to give some of that back. Can you just maybe talk through that?

Sure, Mitch. I'm going to compare versus 2019 in our historical pre-pandemic spend. We have put in place a transformational profit improvement plan to get to the 6% operating margin by 2023. As historically, pre-pandemic, we were running low 5s, high 4s and in that range for the 5 years leading into it. So we put a variety of plans in place that we've talked about in the last quarters, including our innovation, our new systems, our customer-first focus and, most importantly, our view to transformation. Those things are coming to bear faster than we thought. And by nature of that, we're giving guidance now that 8% is our new norm compared to 6% in 2023. So we're thrilled with that. The primary driver of it will be landing a promotional strategy that delivers margins significantly higher than pre-pandemic. And it's not that we've shifted at all from delighting our value-based customer. We're still talking to them, providing them the best product at a price for them, but we're doing it on more of a personalized one-on-one basis, leveraging our CRM, our marketing plans and our best-in-class merchandise buying on trend. So we are confident that we can come out there today, not ready to give guidance on revenue or other '22 items, but that we have step changed the profitability from low 5s pre-pandemic to 8% is the new perspective. There's a lot we need to learn about other cost structure, supply chain, revenue and leverage. And therefore, we're not giving guidance overall today, and we're not ready for that. We're very confident in the step change.

Okay. All right, guys. Good luck, Cliff. I know you're probably not going to miss these call but we're going to miss having you on them.

Thank you.

Next question is from Sam Poser with Williams Trading.

This was, by far, the most amazing, unbelievable spectacular quarter I've ever seen. And now I hope nobody ever says anything like that again. Now moving on.

But thank you, Sam.

Thank you, Sam, for that.

All right. So number one, I just want to dig into the post, early holiday inventory availability situation. I mean we are hearing all sorts of stuff: vendors pushing back orders, potential cancellations, lots of different stuff going on. So when we think about how much of those issues, let's say, in prime time holiday, let's say, December, January, are in that -- how is that impacting the guidance in the -- for the balance of the year? And what are you doing to make sure that you can be in position for spring '22 because that seems to be the wildcard right now. Holiday is big, but spring '22, it sounds like it could even be a bigger issue.

Sam, it's Mark. Thanks so much for the congratulations. We have baked in the supply chain concerns into our Q3 and Q4 guidance that Kerry has provided today. So we feel confident with the current situation and the landscape in the global supply chain. We are on track to achieve what we've just guided to. Let me ask Carl to build on the outlook past the holiday season and as we start to look to the uncertainty that still exists in '22.

Sam, we feel good, like we've mentioned, about getting into the holiday season, getting through the holiday season, meaning delivery of products in January, February of next year. That's still somewhat of an unknown. We are -- every day, we're getting more answers from our vendors regarding delivery moves and shifts. We're not seeing a large quantity of cancellations at this point, although we are seeing some delays in that supply chain. We'll know. And the majority of the noise we're getting is all about Vietnam products, and you know what those are. So it's hard to tell at this point where Q1 '22 is going to fall as far as beginning inventory. We feel good getting through fall, early fall and then holiday, and we're getting more updates every day on January, February, and it's really early in the game for me to give you more than that.

Okay. And then can you -- you said that e-commerce business was in -- versus last year was in line with your expectation. Can you -- since you've been giving all the other numbers, can you tell us what the e-comm was versus 2Q '20?

Sure, Sam. Like I said, we are delighted with the new customers we've brought in through our acquisition of digital. It landed, as we said, 140% growth versus 2 years ago. Through now, it's down mid-double digits versus last year. And by now, I mean, through where we are 3 weeks into August. We're down low double-digit versus 2020, exactly in line with where we had planned the year. We are incredibly excited by how fast customers have returned to our bricks-and-mortar store. They've returned even faster. So the acquisition of customers that we've taken through CRM, both in digital and in our brick-and-mortar, is dramatically higher, as I said in the call, than 2 years ago and significantly higher than 1 year ago. But I do want to call out, our bricks sales are accelerated faster than we thought, and the e-comm sales held in line with the switching back that we had anticipated.

Okay. So I'm going to be a pain. Dick's Sporting Goods just reported earnings. They just said that their e-commerce business was down 28% year-over-year. They gave a number. They understand. We all -- everybody understands last year's e-commerce business was through the roof. So what is down versus last year? What's the number? You gave us the 240. Give us what the down is this year? I just -- I mean it's not -- we understand it. It's just the number is the number.

Sure, Sam. Yes. We're down approximately 18% year-to-date e-commerce sales.

And in the second quarter?

We do not have second quarter in front of us right now, Sam, but it's higher than that, slightly in line with our expectations.

And then are you -- what's the store opening/closing situation look like given the productivity of the stores are going up? How do you see about -- how -- what do you see for the balance of the year into next year right now for your store plans?

Right now, we are really excited about reigniting the store growth plans as well as all the energy we're putting in the modernization plans. Our current plans are to get to net new store growth as we approach 2023. 2022 is currently focused on finding those sites, really driving with acceleration, the modernization of our fleet and accelerating the profitability.

And for the balance of this year, what's the plan right now for stores?

Still no change. We still -- we just opened one store last quarter. And we have 2 to 3 we continue to expect to close this year on natural terms that are low performing.

All right. And Cliff, congratulations and enjoy your retirement/non-retirement.

Thank you, Sam.

Your next question is from Greg Pendy with Sidoti.

Just to, I guess, on the near-term outlook, August, is that typically -- I think in the past, you've mentioned that's around 70% athletic and just kind of, I guess, the context of the question would be, I mean, is that where you're winning most? Because earlier in the call, you kind of mentioned market share.

Greg, this is Carl. Typically, it's 70% athletic for the month of August. I can tell you right now we're running a little bit less than that percentage of athletic to the total. And that's not a reflection, I don't believe, of the athletic sales slowing. It's a reflection of other fashion categories accelerating like they were in the beginning for fall of 2019 before they got derailed. So slightly less than 70%, but still a giant number.

Okay. Understood. And then just considering your customer demographic, I know it's a little ways out. But the tax credit, can you kind of talk to on child care? Just how to think about that? And maybe even relative to 2019, if you can kind of remember what were -- what was the refund season like in the sense of anniversarying that now that people will probably they're getting their credits now and they won't be getting the refunds? How should we be thinking about that?

Look, we're seeing that our customers continue to be motivated to come into Shoe Carnival stores live following the trial tax credits that are coming out monthly. We've seen specifically traffic spike double-digit the weeks after the new tax credits have come out. Conversion has been exceptional, and comp sales have been continuously strong following each of the checks. Still a little early, but it's been consistent for both of the months so far and it seems to have been lasting for a good 1 to 2 weeks where we're getting a material bump. So we feel good into the remainder of the year forecast for the stated credits, similar expectations that we continue to fuel a part of that growth. It's too early to understand yet for 2022 what the impact will be, but we are clearly seeing it's resonating with our customer. They're choosing Shoe Carnival and conversions in traffic are exceptional.

Your next question is from Jim Chartier with Monness, Crespi, Hardt.

I just wanted to talk about the composition of the sales growth versus 2019. How much is being driven by the gains in your customer base in over the last 2 years? And how much is an increased spend by your existing customers?

Thank you for the question. And we see the lion's share of the growth is being driven by new customer acquisition versus the pre-pandemic. The double-digit gains we're bringing in have been the primary fuel to our success, we believe. And the conversion, at that point of time, is a credit to what Carl and his organization have had the right products, the right trends and, importantly, in stock to convert on time during the supply chain disruption. So without a shadow of a doubt, new customer acquisition has been primary. Secondary though, our Shoe Perks loyalty program has also grown double digit. And we think that's the magic to the quarter that we've been able to bring double-digit customers in, but make our Shoe Perks loyalty members come to the highest it's ever been. They're really enjoying it. And we're bringing them through that value chain of awareness, trial -- trial in store, importantly, buying and then becoming loyalty members, which are our most profitable. So we're thrilled with the dynamics we're seeing for the underlying business fundamentals.

Great. And then in terms of the new customers that you acquired last year, are they behaving similar to earlier cohorts of new customers? And then is there a maturation period for new customers?

They're behaving differently and reacting incredibly positive to our new promotional strategy, in fact. If we look at 2019, the core new customer acquisition was coming in through lower promotion profitability activity. Now we're targeting new customer acquisitions specifically with brands, with styles, with communication, with experience, and it's taking our average basket size up to some of the highest levels we've seen and our profitability and margin to the highest levels we've ever seen. So they're acting quite positively to the CRM investments, I would say. And we're bringing in a customer that's still value-oriented, but not looking for cheap. And that's a big differentiator we're articulating internally. We will have the value for the best product, but we'll give it at the right price, not a cheap price. That is giving the right value for shareholders.

Great. And then on the store modernization plan, how do the Nike shops kind of play within that? And so with the 100 stores you plan to modernize by next spring, how many of those will include a Nike shop? And then just to kind of follow up, how are you thinking about benefits from Nike's distribution rationalization going forward?

Yes. As we said on the call, we are very pleased with how the store modernization is rolling out. We are on track to exceed the pace for the 3- to 5-year plan to have at least 2/3 of the store done. So we're very confident that's going well. Related to next year, we have contracts for that first 100 to be completed by spring. And even more exciting part I didn't share before, this quarter, the first 50 of those will be completed. And we're very proud with that despite COVID and all that's going on. Our teams have worked tirelessly to still refresh, and the first 50 will be completed this quarter. More specifically to your question, by spring of '22 when we have that first 100, approximately half of the company's fleet will have Nike shops in them. And our plan is right now for the lion's share for all of those to have Nike shops in them.

Great. And then just thoughts on kind of when you'll start to see the benefit from some of Nike's wholesale distribution narrowing?

This is Carl. We really don't get into individual brands on the call and how we're planning individual brands at this point. And I guess that's all I'm saying about that at this time.

You have a follow-up question from Mitch Kummetz with Pivotal Research.

I just have one quick follow-up. Kerry, obviously, great quarter, and then great start to Q3. I'm just curious, when you look at Q2 by month, on a 2-year basis. Could you maybe speak to the month? I don't know if you have any numbers on the month versus 2 years ago? And if you don't, could you, at least maybe kind of -- how consistent was the quarter? Or was it all lumpy? Anything there would be helpful.

Against the prior year, we had a very strong May and June in the 30-plus range. And then July was up and low to double digits. So we had a very strong quarter.

Do you have any sense as to how that was versus 2 years ago? Was it even more...

That was the 2-year.

That was the 2-year. Okay. I'm sorry. I thought you said prior to last year. Okay.

We have no further questions at this time. I will now turn the call back over to Mr. Sifford for closing remarks.

Thank you. I cannot fully express my gratitude to the Shoe Carnival family. That includes our customers, our employees, our vendor partners, our investors, everyone on this call and to the Shoe Carnival Board of Directors who believes in this team and goes us the latitude to win. It has truly been my honor to lead such an impressive organization for the past 9 years and be part of it for 24. I truly mean it when I say the Shoe Carnival family, this company has and will always feel like home. I look forward to working with Mark and the team as I join the Board full time. And I wish the team all the success in the world. I cannot wait to watch you continue to do such great customer-focused work. Thank you, all, once again. Mark and the team look forward to speaking to you with -- with you in November.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.