Good morning, and welcome to Shoe Carnival's Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. It is also being broadcasted via 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 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'll now turn the conference over to Mr. Mark Worden, President and CEO of Shoe Carnival for opening remarks. Mr. Worden, you may begin.

Good morning, and welcome to Shoe Carnival's Second Quarter 2022 Earnings Conference Call. Joining me on today's call are Kerry Jackson, Chief Financial and Administrative Officer and Carl Scibetta, Chief Merchandising Officer. As announced in this morning's press release, Shoe Carnival delivered earnings per share during the first 6 months of the fiscal year that already surpassed any full year of earnings in our 44 years of operation, except for 2021. I'm so proud of our nearly 6,000 team members for this accomplishment and thankful for their commitment to our customers, our communities and our shareholders. Throughout the quarter, American households faced a challenging inflationary environment, putting pressure on disposable incomes and on our traffic counts. We also experienced an increase in supply chain disruption during the back half of the quarter. Despite these external headwinds, the company's strategic plans to double operating profit margins versus historical levels continue to work. Furthermore, profitability growth has accelerated as 2022 progressed. Our merchant organization has worked in close partnership with our strategic vendors throughout the year. Together, they delivered the freshest product assortments from our customers' favorite brands and applied customer analytics to unlock highly profitable promotions. This resulted in Q2 operating profit margins of 12.4% and marked the sixth consecutive quarter in double digits. We were most encouraged that operating profit delivered sequential growth in Q2, above the 11.1% operating margin achieved during Q1. To further illustrate the profit transformation the company has achieved, operating profit margin was 5.9% for the prior 10-year period. Throughout 2022, we've been lapping the stimulus impact in 2021 quarters. The more normalized quarters with no stimulus benefits in 2022 have helped provide clear visibility into the sustainability of our operating profit levels. As such, today, we are increasing our operating profit margin expectations for 2022…

Thank you, Mark. As Mark highlighted, today's results are a strong evidence that our strategy is working. However, during the second quarter, we experienced a shift away from our normal 50-50 athletic-nonathletic sales balance. We anticipated this move in consumer demand to nonathletic product and positioned inventories to take advantage of this fashion change. Supply chain issues impacted athletic inventory availability. Despite our unparalleled vendor relations, we were simply unable to deliver new athletic receipts to meet demand within our athletic product categories. Athletic inventories ended the quarter down high teens versus 2019. Our team continues diligently to manage the supply chain and looking ahead, we believe athletic inventories will replenish as we move through the third quarter. In addition, deliveries of new fall nonathletic product are flowing much better than 2021, and we are well positioned from an inventory perspective to deliver on the sales and profit guidance for the remainder of the fiscal year. At quarter end, our inventory forward weeks of supply was down 6% versus 2019. Importantly, both aged inventory and seasonal carryover inventories are in line. As a result, we do not have a glut of inventory and see no need for deep discounts or dump goods in the second half of the year. Turning to results. Mark mentioned the challenges we saw within the athletic area. The quarter started off strong and sales weakened as athletic inventory levels slipped by quarter's end due to late deliveries. The quarter finished with men's, women's and children's athletic comparable store sales down low teens compared to 2019. Versus last year, these categories were down in the mid-20s. However, as I previously highlighted, we saw continued strength in nonathletic shoes. Women's nonathletic was up in the high 20s versus 2019. Sales were driven by dress, up over 50%;…

Thank you, Carl. I'm excited to share with you the financial highlights from another successful quarter, which again demonstrated a transformed and sustainable profitability profile for the company. Similar to previous quarters, we are comparing results versus 2019 as we see as the most relevant and normalized period prior to the start of the pandemic. Net sales in Q2 were $312.3 million and were the second highest Q2 sales in our history, surpassed only by Q2 last year. These sales increased $44.0 million or 16.4% compared to the pre-pandemic second quarter 2019 driven by sales from the Shoe Station banner and a comparable store sales increase of 8% from the Shoe Carnival banner. Year-to-date net sales have increased $107.8 million or 20.6% compared to 2019, with both store banners contributing nearly equally to the year-to-date increase. Sales from the Shoe Station banner stores acquired in December 2021 were opened in 2022, added net sales of $27.2 million for the quarter and $53.4 million year-to-date. Against last year's stimulus enhanced Q2, total sales in Q2 this year were down 6.0% and comparable store sales declined 13.8%. These results were against the comparable store sales increase of 11.4% in Q2 2021, which was on top of a 12.6% increase in Q2 2020. Our Q2 gross profit margin was 36.2%, a 560-basis point increase compared to second quarter of 2019. An increase in merchandise margin of 680 basis points was partially offset by 120 basis point increase in distribution costs due to the impact of inflation on transportation and fuel expenses. Excluding the impact of transportation and fuel costs, our merchandise margins increased over 800 basis points. We expect higher transportation and fuel costs persist for the remainder of the year. However, we feel the year-over-year increase will continue to moderate in the…

[Operator Instructions] We will take the first question from the line of Mitch Kummetz with Seaport Research.

Yes. Carl, I just want to better understand the athletic business and the inventory there. I think you made the comment in your prepared remarks that going into the quarter that you positioned the inventory more towards nonathletic. So I guess I'm trying to understand how much of the athletic maybe shortfall, I don't know shortfall is the right word, was due to kind of how you position the inventory going in versus some of the supply chain challenges that occurred during the quarter or late in the quarter. Can you just maybe go through that a little bit?

Sure, Mitch. We play in the athletic business for the quarter to be relatively flat. And it was hurt obviously by delay in athletic receipts of fresh new back-to-school products. So at the beginning of the quarter, we were in good shape, sold through the product and the deliveries were pushed back, and that really affected the sales on the athletic side. On the nonathletic side, we've been aggressively going after that business, frankly, over a year, as we saw consumers move to the more fashion categories based on multiple years of taking that off and really focusing on athletic and products that were really were more tied into staying at home in outdoor physical activity.

Okay. And then in the press release, you mentioned that based on the weekly averages in the quarter, athletic inventory was down like 26% year-over-year. So where does that stand now? And where do you see that kind of moving through the third quarter?

Athletic inventory, Mitch?

Yes, yes.

We see it improving. Information we're getting from our athletic resources shows an improvement in deliveries as we move through the quarter. And we anticipate by the end of the quarter for our inventory to be in the position that we want it to be in.

Okay. And then I'm trying to reconcile the sales guide a little bit. I think you guys said Q3 down low to mid-singles. If I take down mid-singles, I think that implies that the 3-year sales growth is up kind of low to mid-20s, again, on a 3-year. That sounds like your August-to-date sales are up 15% on a 3-year. So help me understand how we get from kind of mid-teens to low to mid-20s on a 3-year? Or is that just, again, based on the improvement of the inventory situation?

Mitch, it's Mark. It's twofold. It's one, continued improvement with the athletic inventory situation, as Carl already addressed. But second, it's also traffic improvement. We've seen a direct correlation to the price of gas and the inflation spiking in the mid-June and July time of gas surpass $5 across the markets we operate in. There's a direct correlation to traffic declining from what was positive traffic in the beginning of the quarter. It turned to low double-digit negative in the middle of the quarter and as gas prices receded as we got towards the end of July and August, traffic has rebounded back to a low single-digit decline to low positive increases day by day. So in summary, we see the traffic impact tied to inflation, combined with the shortfall of unexpected athletics in Q2 being an anomaly to the year. And we'll see that improving sequentially. We believe we're already seeing it in Q3, as we shared with very strong results.

Okay. And then lastly, maybe could you speak to the difference in performance between Shoe Station and the Shoe Carnival businesses. I know the consumers are a little bit different. The merchandise mix is a little bit different. Just wondering if -- as you think about the consumer and the health of the consumer, the impact of inflation, Mark, you talked about gas prices. Are you seeing much difference in how those two consumer groups are behaving or the kind of merchandise that you're selling or maybe the price points that you're selling in Shoe station versus Carnival? I know it's kind of a different price point structure. So maybe just discuss that a little bit, and that's it for me.

Yes. We're seeing Shoe Stations far outperform what we thought. Our hypothesis was the Shoe Station banner had a complementary consumer that was higher household incomes above $50,000 to $70,000 range. And our belief would be that during inflationary time frames, that would help balance out the business. What we're seeing is absolutely true. The Shoes Station business is continuing to show resilience. The consumer is healthy, the sales continue to far outpace our expectations. There's no inventory concerns or back up. And in fact, profitability from early synergies is far outpacing as we've guided higher sales, higher profitability for this first year. So as the consumer is healthy a Shoe Station, it is acting differently than the lower demographic segment of the Shoe Carnival banner, particularly the urban consumer that has really been pressured as inflation spiked in Q2. We're very, very pleased with what we've purchased. I think our message is this growth engine is ready for rapidly expand, and we're going to be doing so in the next years.

Your next question comes from the line of Sam Poser with Williams Trading.

Just can you give us a view on -- I mean you talked about Shoe Station. When we look at -- I mean, -- are you being conservative with the $110 million now based on the trends and normally is Shoe Station's back half revenue better than first half revenue? I mean, can you give us some historics? And secondly, based on, my math is terrible, as you all know. So based on your numbers, what is the EPS accretion of Shoe Station?

Sam, it's Mark. With $54 million in the first half achieved in the Shoe Station, we're on track to surpass the $100 million original guidance by approximately 10%. We think the run rate takes us to that range of about 10% higher for the overall year. What was really pleasing though is with the integration efforts and the synergies coming across the entire back office, things like accounting and human resources, that's all been synergized now into the Shoe Carnival broader enterprise. Our original expectation have 10% op margin, now is pacing in the 11% to 12% and will be either in line with Shoe Carnival or has the potential to be slightly accretive if synergies progress even further.

And as far as the EPS associated with that, Kerry?

We should -- I don't have that with me right now, Sam. We'll have to get back to you on that.

Okay. And Carl, the -- when you break down the nonathletic trends, and I know you guys look at it a little bit differently than others or not everybody looks at the same way. Can you give us some of the categories within nonathletic that you're seeing, let's say, the best and -- where you're seeing the best improvements? And on dress, are you -- is that -- how sustainable do you believe to address the dress business is?

Sam, I think the dress business is very sustainable. We've been running really hot on dress shoes since April 2021. So I see that business continuing to be strong as consumers fill their closets back up with more current product. And we see that progressing in multiple categories of dress. Beyond that, the fashion elements that we started seeing emerge in fall of 2019 sort of took a hiatus for '20 and '21 based on the consumers' behavior change because of the pandemic. Those same trends, and I'll just say, the late '90s trends, in casual and in sports shoes, more aggressive bottoms, combat platforms, all of that business in the nonathletic area continues to emerge and gain traction, as well as the nonathletic canvas piece of the business.

And then lastly, can you talk about what you're seeing for product inflation on like-for-like product?

We saw an inflation rate on products that going into third quarter, that was probably, I would say, high single digits. We're seeing that temper now with the cost of freight and the cost of containers going down. We have not seen any resistance by our consumers to any price increases that we were forced into based on inflation. And we do see that leveling out as we move forward.

Okay. I'll just sneak in one more. The -- Carl, the amount -- what percent of your product would you call new at this time of year versus the same time pre-pandemic?

I would say it's pretty much as it was pre-pandemic. I don't see any major change from that from where we were. And like I said, in my remarks, deliveries of nonathletic product are coming in just fine much better than a year ago, much more in line with where they would have been in 2019. And boot inventory, we feel boot inventory will flow much better than a year ago, and we feel good about a good opportunity compared to a year ago with the disruptions we had in supply chain last year.

Yes, let me finish off the question you asked about the EPS. At the high end of our guidance, Shoe Station should be about $0.35 of EPS accretive.

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

Kerry, did you have any incremental costs related to the integration of Shoe Station in the first half of the year? And then any cost in the back half related to that either.

Not material and not that we weren't expecting.

Okay. And then at Shoe Station, how is the e-commerce launch coming there? Is it going to be ready for fourth quarter? What's the outlook for that?

Jim, it's Mark. We're launching our CRM platform this quarter. We're thrilled. We're bringing them on to the technologies that have been so successful here at Shoe Carnival. We're rolling out the Shoe Perks program across banners, again later this quarter, which will have us over 30 million consumers we can talk to on a daily basis. And our plan is after that's completely launched and up and running this quarter, we'll be able to roll out our shoestation.com by the holiday season this year is our plan.

Great. And then any thoughts on kind of the store opening pipeline for next year? I think you said 30 stores for Shoe Station by the end of next year. What's the outlook for the Shoe Carnival banner?

We're still aiming to open double-digit store counts annually starting in 2023 and accelerate as more real estate becomes available in '24 and out years. We're on track to grow to 400-store count, which is quite an important milestone for us. And as we said, we're so proud that we've completed that store productivity plans and the entire fleet now is remaining open with our current view with no store closures for the first time in 2 decades. As you said, specifically at Shoe Station, it was 21 stores when we acquired in December last year. We're on target to surpass 30 stores by the end of fiscal 2023, and we're looking for new sites as quick as they become available.

Your next question comes from the line of Mitch Kummetz with Seaport Research.

A couple of follow-ups. Carl, I think you just made the comment in response to one of Sam's questions that you feel good about your boot inventory, especially relative to last year. Can you remind us of some of the constraints around boots last year, kind of how that business played out in the fourth quarter, just so we have a better sense of the comparison. And then you also talked about some of the trends, I think you said kind of dress and lug sole things like that. So how do you feel about those trends? And how important are they to your boot business, particularly in the fourth quarter? And then I have one more.

Sure, Mitch. Boot deliveries, frankly, lagged throughout the entire time frame -- moved back anywhere from 30 to 60 days, which obviously put us into a pressure situation on inventory levels as we came through the month of October into November, December and then even into January. We see a more normalized flow of boots deliveries like we had in 2019, and we think that's opportunity as we go with a much more normalized inventory flow. As far as what we see in boots as trend, we continue to see combat in lace-up boots performing well, and we see that strong, especially with some lug bottom and chunkier heels on them. We continue to see booties especially Chelsea Booties being really strong. And then a little bit of other boot categories that are out there, we see some platform dress boots and maybe a little bit of -- although not a big category anymore, but maybe some life in some of the taller shafted boots, but we feel good about the opportunity.

So I got a follow-up on boots and then one other question. If I recall correctly, given some of the late deliveries on boots last year, I think some of the stuff may have not even hit the -- left the warehouse and gone to the stores. And so there were some pack aways. I would guess that, that would be pretty margin accretive, given kind of the cost on some of that product versus maybe some of the stuff that you're buying more for fall '22. Is there any benefit on the margins from that? I mean, I don't know if it's material or not. And then again, I have one last question.

There will be benefits of the margin on those particular items, and I think they may offset some of the inflation we saw in other items that we're delivering new, I don't know that it's significant to the overall.

Okay. And then lastly, you guys are tracking to an 11.5% op margin this year. And I think when we kind of look at the year, it's kind of a tough macro with the consumer and inflation and there's higher distribution costs. So I'm just kind of curious to what's your takeaway on that? Obviously, that's well ahead of where you were pre-COVID and you made a lot of changes to improve the profitability of the business. Given some of the challenges this year to be able to kind of accomplish that level of margin, is that -- do you think that that's kind of a new base that you could potentially grow on next year as -- especially on the -- maybe the freight distribution cost side, if that were to improve a little bit next year. I don't know how you think about that.

Mitch, it's Mark. This absolutely is the new base. We're 6 quarters into double-digit operating profit. As we've shared, we've sustainably doubled the levels that we're at, pre-pandemic. And we do see that this Q1 and then Q2 sequential improvement of operating margin gives us the clarity we needed as what that new base is. It clearly isn't the base of 2021. That watermark was inflated with low promotions but we're seeing the competitive environment in 2022 have us back to the normal cadence of promotions, a healthy cadence of promotions. But the key difference is what we've alluded to for the last few years, our investments in CRM and analytics and in changing the way we promote has transformed the profitability of our promotions. But without a shadow of a doubt, no one should misunderstand, we are a value-based retailer and continue to be and are promotionally driven, but those promotions are incredibly profitable with all the learnings we've gathered over the last few years compared to where we were. And that's generated margins that were up 560 basis points for Q2 or as I said in my speech and a further acceleration in August with up over 650 basis points expected for the month of August. So without a doubt, just to be clear, we see operating margins in the double digits sustainable. We see this setting the new base, and we will see synergies and efficiencies help us grow as the inflationary environment calms down at whatever point that does in the future.

Your next question comes from the line of Sam Poser with Williams Trading.

Just a quick follow-up to that, Mark. You talked about the margins in August being up. But given the late shipments of athletic, how much is mix helping that margin? Like is that margin a little overstated? Because from what I understand, nonathletic runs higher margins than athletic. And so if you sort of balance that sort of a normal -- I know it'd still be up a ton, but if you balanced out a more normalized product mix between athletic and nonathletic, what would you foresee the margins to be at?

Yes. We see the Q3 and Q2 as sustainable. It's razor thin, you're right. The mix impact from the athletic challenge causes a razor thin change in margin. However, we'll also be able to get better BD&O from lower distribution costs when things continue to settle down in the supply chain. So the puts and takes have us confident that this is the right operating profit, this is the right gross margin. We have a real base now to start comparing to as we get into 2023 and stop lapping these stimulus infused quarters.

And just to -- this is just to clarify that. So you're saying sort of in that high 36 is -- will establish itself as the new base?

Correct.

There are no further questions at this time. Mr. Worden I'll turn the call back over to you.

Well, thank you all for joining us in today's call. And I'd like to thank our Shoe Carnival team members, our customers, our vendor partners and many shareholders. We wish you all a wonderful Q3 and look forward to sharing our successes with you in the near future.

This concludes today's call. Thank you for your participation. You may now disconnect.