Good morning, and welcome to Shoe Carnival's Fourth Quarter 2022 Earnings Conference Call. Today's conference is being recorded. It is also being broadcast 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 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 would now like to 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 Fourth 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. Let me start today by thanking our nearly 6,000 team members. During 2022, they ensured our customer shopping experience at Shoe Carnival and Shoe Station stores across the country was exceptional with the freshest branded products, a modernized shopping experience, more convenient locations to shop and dedicated service to all to meet our customers' needs. As we start fiscal 2023 and I look ahead, we are well positioned to execute our strategic growth plan to become a multibillion-dollar retailer by 2028 and to provide our shareholders with the top-tier returns in our sector. I would now like to begin by reviewing the highlights from 2022. First, during 2022, we grew our customer base to over 32 million, with our loyalty membership surging over 34% from just 3 years ago. Every day of every week, we're learning more about these customers, enabling us to better segment our customer base, better identify the optimal product for them and to better engage them with meaningful messages and the freshest products. We continue to elevate our capabilities and CRM advantages that drive traffic into our stores and online, including upgrading our technology, building our analytical capabilities and developing our internal talent. This translated into a targeted promotional plan for the year and segmented marketing activities that helps deliver gross profit margins up 700 basis points for the year and 920 basis points growth for Q4 as compared to just 3 years prior. The acceleration of gross margin growth in Q4, our most promotional period of the year, is further reassurance that the improved margin levels are sustainable. In fact, gross margins have…

Thank you, Mark. As Mark highlighted, today's results are compelling evidence that our strategy continues to work. During the fourth quarter, we again saw a shift in consumer demand as sales continue to move to the nonathletic categories. This shift was 410 basis points compared to the same period during 2019. We anticipated this move in customer demand to the nonathletic product and positioned inventory to take advantage of this fashion change. We did see improvement in product deliveries as the supply chain issues we have been experiencing in the past several years continue to improve. Our outstanding team of merchants continues to collaborate closely with our vendor partners, ensuring consistent flow of products to our stores. The normalization and consistency of deliveries enables the merchant team to plan and execute appropriate monthly receipt levels. The result will see inventories reducing as we move through the year. This reduction will further support our modernization as well as our aggressive store growth plans. Diligently managing inventory flow will ensure our stores are stocked with the most desired product offerings that are time appropriate as we move through fiscal 2023. Importantly, both aged inventory and seasonal carryover inventories are in line. As a result, we do not have a glut of distressed inventories and see no need to provide deep discounts to liquidate goods going forward. Turning to results. As I mentioned, our anticipated shift in sales from the athletic categories to the nonathletic categories continued in the fourth quarter. Comp sales in the nonathletic categories versus 2019 were up in the low 20s, and comp athletic footwear sales were up in the mid-singles. Sales versus 2021 were down in the low singles for nonathletics attributed to lower boot sales, and athletics were down in the low 20s. By department, women's nonathletic…

Thank you, Carl. I'm excited to share with you the financial highlights from another successful quarter driven by the highest Q4 gross profit margin in our history despite a promotional holiday season. Similar to previous quarters this year, I will be comparing results versus 2019 as we see as the most relevant and normalized period prior to the start of the pandemic. Net sales in Q4 were $290.8 million and were the highest second -- the second highest Q4 sales in our history, surpassed only by Q4 last year. These sales increased $50.9 million or 21.2% compared to the pre-pandemic fourth quarter 2019 driven by sales of $24.3 million from our Shoe Station banner and comparable store sales increase of 12.6% from Shoe Carnival banner. This is the third quarter this year with double-digit quarterly comparable store sales increase resulting in a year-to-date comparable store sales increase of 13.9%. However, our sales results did fall below our expectations for the quarter. Total net sales increases over 2019 have been trending in the upper 20% leading into the holiday season but ended up in the low 20% increase for Q4. We attribute this to the blast of Arctic air, which brought dangerous temperatures along with snow and ice to much of the nation just prior to Christmas. It was apparent to us shoppers were waiting to buy closer to Christmas in the hope of finding promotional pricing. We saw a ramp-up in sales leading into Christmas, but the severe winter weather halted the positive sales trend until after Christmas, and we lost the last-minute impulse Christmas shopper. Our Q4 gross profit margin was 38.3%, a 920 basis point increase compared to the fourth quarter of 2019. This increase all came from our merchandise margin with buying, distribution and occupancy flat. Our…

[Operator Instructions] Our first question comes from the line of Mitch Kummetz from Seaport Research.

And Kerry, I want to thank you for all your help over the years. I want to wish you the best of luck. The first question is on the fourth quarter. I think in the press release, you gave comp on a 3-year basis. What was it year-over-year?

We were down 10.1% on a year-over-year basis.

Okay. And then for Q1, I think you mentioned that the guide is sales down mid-singles, earnings down. I'm wondering on the sales, is that kind of how you're trending quarter-to-date? Or do you -- or does the mid-singles assume some improvement over the balance of the quarter? And then I was hoping you could elaborate on the earnings being down year-over-year. I don't know if you expect it to be down a little or down a lot. Anything else there would be helpful.

Well, what we're seeing right now with the weather the way it is, we're trending a little bit higher than our expectation. And as Carl said, we've seen this story before. As it warms up, we expect our sales trend to get better, but we still expect to be down at mid-single digits. We're not going to quantify yet. We just want to alert the fact that we do believe we'll have a down EPS quarter in Q1, but that we see that as in the range of the outcomes we've given for annual guidance.

Okay. Okay. Maybe let me just sneak in one more for Carl. Carl, you mentioned -- I think you said for '23, you expect stronger performance in nonathletic than athletic, but that I think by the back half, you expect athletic to kind of kick in starting with back-to-school. Can you just maybe provide a little bit more color in what you're seeing there between the 2, particularly as it relates to inventory flows? If I'm not mistaken, I think that's gotten quite a bit better on the athletic side.

Sure, Mitch. You're absolutely correct. As we move through the back-to-school time frame last year, we had a lot of disruption in deliveries on the athletic footwear side, late deliveries and goods that actually missed the back-to-school selling period. This year, what we're experiencing starting in the fourth quarter and forward, our athletic deliveries actually coming in on time and in some cases, early. So we think that's an opportunity as we move out of second quarter into third quarter and throughout the fall season from the athletic standpoint.

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

In Q -- I might have missed it, but in Q4, what was the merch margin and the year-over-year?

We gave gross profit book -- well, as all -- the entire increase was the increase in the merch margin, buying distribution and occupancy costs were flat.

In the quarter?

In the quarter.

And then a couple of -- a little more color on the guidance. The 53rd week, what is the -- how are you valuing that week in dollars?

It's about $14 million.

Okay. And then the -- in the first quarter guidance, I mean, are you -- how should we be thinking about that? Are you looking at the same kind of gross margin you saw in -- I mean, how should we think about the gross margin in the first quarter relative to the current trend and so on and so forth?

Yes. We're still running an elevated gross profit like we did last year. So it really is the traffic in the stores that we're seeing a decline in the sales.

So then, Carl, how do you get the -- I mean how are you maneuvering bringing the inventory down? Or is most of this inventory down coming out of athletic receipts in the first -- athletic and kids receipts in the first part of the year and then that improves. So to not have to take the markdowns like in boots and stuff like that.

Yes. Sam, the inventory, as I stated, from a seasonal category and an age category is well in line. In fact, the seasonal inventory carryover is less than it was a year ago. We delivered and Kerry had pointed out a lot -- we delivered delayed product and a lot of on-time product at the same time, which elevated the inventory in both those areas. We've worked very closely with all our vendors to put together a program that enables us to maneuver, sell through that inventory, keep freshness going and get ourselves where we want to be as we head into the back-to-school time frame. So the need for markdowns to push out inventory isn't there with the partnership we've had with our vendors.

Okay. When you are comparing -- when you were comparing Q1 earlier on the question, you were talking about year-over-year or versus '19?

Anything that's referencing '23, Q1 '23 will be against Q1 '22. We -- it was important this year in '22 to recognize that what a comparable was -- now the best compare was in '19. But as we rest into '23, the '22 results, we think, are the new benchmark, and we'll be comparing '23 against '22 from now on.

All right. I just want to clarify something. In Q4, the improved gross margin versus in Q4 '22, what was the breakdown of the gross margin versus 4Q '21? Was it 67 basis points of merch margin and the BD&O is flat on a year-over-year basis? Or can you clarify that just year-over-year?

So you're saying you're wanting to know Q4 of '22 versus '21? Is that what you said, Sam?

Right. The merch margin versus BD&O.

Yes. The merch margin was up 250 basis points. We deleveraged BD&O by 150 basis points, and we saw 100 basis point improvement on a GAAP basis.

But your gross margin -- all right. all right. I appreciate it.

Sam, you have to decide if you're talking about GAAP or adjusted because we had -- with the acquisition of Shoe Station, we had adjusted earnings in Q4 of '21, which changed some of the margin numbers.

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

So your gross margin in fourth quarter was the strongest 3-year performance of the year and well above the full year improvement. So I'm curious as you lap some of the freight and distribution expenses in the first half, how are we thinking about what the potential benefit from some of those tailwinds are? And then what are some of the headwinds you may be facing that offset that?

Well, the -- you're absolutely right, Jim. And in the first half of '22, we saw significantly higher freight costs. That will become a tailwind for us as we go into '23. We -- the supply chains have healed. While fuel is still elevated and labor for transportation is still elevated, it's not going to go back to '19 levels, but we will see a benefit against that on a go-forward basis against '23. Now one of the things that we want to kind of take into account is that as retail more normalizes, we're leaving ourselves some opportunity within our guidance that we're going to become more a lower merchandise margin, slightly lower, but that will be offset by the supply chain costs coming down also. So that's why we're guiding to about a 37% gross profit margin. It doesn't mean we're changing the way we're operating. We're giving the opportunity as retail more normalizes that we may see a little more pressure on our merch margin.

Okay. And then your Shoe Station looks like it missed by like $5 million or something in fourth quarter. So any color around what happened with Shoe Station in the fourth quarter would be great. And then does it change the outlook for the business going forward?

Jim, it's Mark. The Shoe Station ended just slightly below what we expected at approximately $100 million. The customer count landed ahead of where we wanted and the integration far ahead of where we wanted. As Kerry mentioned, we had weather disruption throughout some core seasons. And I think I mentioned in the last call, we decided to postpone the shoestation.com launch to the beginning of this new fiscal as opposed to putting any risk into the fourth quarter of a successful launch. That launched smoothly to begin this year in February. And we're rapidly capturing new customers, new data and great success. On a go-forward basis, we're incredibly enthusiastic about Shoe Station. It's exceeding our internal expectations, and we've got a bright future ahead.

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

Just starting -- just a little bit more again the shape of the year. If Q1 sales are down mid-singles and full year sales are flat to up 4.5%, can you kind of help me understand how we get to that? I mean, do you expect sales to progressively -- the sales growth to progressively get better over the course of the year? Or do you think there's a big step change from sort of Q1 to Q2? Any more color kind of on the shape of the year?

It's Mark. We'd love to. If you recall, last year, we had some significant supply challenges and disruptions to our athletic business in our most important part of the year. And we were disappointed with our ability to delight that athletic kid customer in back-to-school. As Carl alluded to, we expect significantly improved position on the product and all the brands our customers most want this back-to-school season. And therefore, we're expecting significant growth surrounding the back-to-school season as well as leading into it, where we also had choppy supply chain challenges from some of the world's biggest vendors in that June, July time frame. We're in a much better place for that. So we have a lot of confidence in that time frame. Kerry can provide some more specifics. But that is the primary reason we'll see a significant acceleration. And we don't really see that tied to the macroeconomic situation. That is a real benefit or a tailwind for us based on challenges last year being rectified this year.

Mitch, also on -- so when you look at the comps, we see the comps flowing that way. We see the better opportunity being in Q2 and early into Q3. There's also the wild cards is the opening of the new stores. So to get to the high end of the guidance, if we see the economy in good shape, we're negotiating a lot of deals that would be later this year in the second half. And if we felt the economy wasn't set right, we could push those into early '24 also. So it's dependent upon our view of the economy and how many new stores we could open.

Okay. And then, Mark, you mentioned that Shoe Station was roughly $100 million in '22. What kind of sales projection is embedded in the '23 guide for Shoe Station?

Strong growth. We have a double-digit growth plan for Shoe Station. And I think 2 biggest drivers we're most excited about are new store openings plus in the guidance are largely Shoe Station as well as shoestation.com is now up and running and capturing growth. So we got it in the low double digit to put a range on that Mitch.

Okay. And then, Carl, just a couple of quick merchandising questions. So I think you said for Q4, boots were weak. I'm wondering if that has continued into early Q1, particularly February. I believe that February was a pretty strong month for boots a year ago.

You are correct. The boot trend that we saw in fourth quarter did continue into the early part of the spring season as customers are looking for newness and freshness. So that boot issue did continue. Frankly, we're waiting for fresh new boots for next year.

Okay. And then sandals, I don't think it's terribly important for you in Q1. I think it's a lot more important for you in Q2. But I'm guessing sandals probably not off to a very good start in March. But -- and so I'm curious if that's the case. And then remind me, I feel like a year ago, April was not the best month weather-wise. I'm wondering if that's an easy compare on the sandal business for April and then maybe the balance of the quarter, I guess that is the balance of the quarter. So...

Sure. Sandals -- yes, sandals have -- a good majority of our stores are in the midwest and in the north. And you've seen how that weather is in those areas. So that directly affects sandal business. In some of the areas where we've seen very few areas decent weather, sandals seem to be performing. Last year, absolutely it came late, sandal business really did kick into the very end of April and through the May time frame in the second quarter. And based on weather, that certainly could happen again this year.

Okay. And then last thing, just housekeeping. I know, Kerry, Sam asked you about the 53rd week impact on sales. Is there any impact on earnings for the year?

It's immaterial. There's a slight benefit to EPS, but it's not material to the overall guidance.

Our final question comes from the line of Sam Poser from Williams Trading.

Well, I guess the question is you've baked -- you've said 10 to 20 new stores, and I wonder how many -- like what's the -- is 15 new stores baked into the guidance? Is 10 on the range? I mean -- or is the range of the guidance reflective of the new store count?

Sam, there's a range of outcomes that we have built into the high end of the guidance -- and what we try to do is at the high end, what the comps would be and the number of new stores. One of the biggest factors about new stores is when do they open in the year, how productive would they be in sales for the year. But when you look at the high end, it's both the comps and higher new store count.

And then lastly, Kerry, it's been a pleasure. I wish you all the best in your retirement.

Sam, I appreciate that, and I also appreciate Mitch's kind words and it's been a -- Jim, you too also. It's been a pleasure working with all 3 of you.

I would now like to turn the call over to Mark Worden for closing remarks.

Thank you, again, all for joining us for today's fourth quarter call, and I look forward to discussing Q1 results with you in May and again, we wish Kerry all the best for a wonderful retirement after 35 years. Thank you.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.