Good morning, and welcome to Shoe Carnival, Inc. Fiscal Year 2023 First Quarter Earnings 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 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'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, everyone, and thank you for joining us today for Shoe Carnival's First Quarter 2023 Earnings Conference Call. Joining me on today's call are Carl Scibetta, Chief Merchandising Officer; and Erik Gast, our new Chief Financial Officer. Erik joined the company a few weeks ago, and we are excited to have him on the team and to engage with the investment community ahead. Let me start out today saying that Q1 was a challenging quarter. While we continue to make significant progress against our long-term strategies and achieved many important milestones, we saw softer-than-expected consumer trends developed in March and April and unseasonable level persist throughout quarter end. The biggest headwinds that our customer faced in Q1 were persistent inflation across everyday expenses they need to spend on, interest rates continuing to climb and unexpectedly, federal tax refunds ended the quarter with a nearly 10% reduction versus the prior year. Historically, our traffic and sales surge when our customer receives their annual tax refund. This year, the reduced tax refund amounts did not generate traffic levels of prior year. These headwinds resulted in store traffic declining approximately 10% versus prior year. What we saw was a segment of customers from lower-income households who had stretched disposable income, they delayed their shopping trips for footwear, apparel and accessories. Furthermore, spring weather did not improve in the second half of the quarter as unseasonably cold wet conditions persisted across most of our markets. This resulted in a sandal season that did not meaningfully start during March or April. All combined, Q1 sales and earnings finished at the low end of our annual expectations. We see a pathway to deliver the low end of our original annual guidance if economic conditions improve this summer. However, we do not have clear visibility to…

Thank you, Mark. As highlighted, today's first quarter performance was below our expectations. Persistent inflation and the large reduction in tax refunds were major factors that affected Q1. In addition, the cool weather we called out in our March -- in March continued the remainder of the quarter. We anticipated that the weather will have normalized the back half of the quarter, but unfortunately, that never materialized. As a result, sales in seasonal categories did not hit our expectations and contributed to the shortfall. With that said, we continue to focus on driving our strategic objectives, which include connecting with our consumers using our CRM program to maximize sales, reducing our inventory throughout the year and continuing to deliver our transformational product margin. By categories, first quarter comp sales in women's nonathletic footwear were down low double digits with dress and boots being down over 20%. Sales in women sandals were negatively affected by the late arrival of spring and comp sales were down high teens in the category. Sport and casuals were the bright spot with sport down low single digit and casuals increased mid-single digits. Men's nonathletic comps were also down low double digits with casuals down mid-singles. Men's dress was down low double digits and boots down high teens. Children's comp sales were down high singles with nonathletic flat and athletic down low teens. Comp sales in adult athletic footwear were down low teens. Due to the late start of new seasonal selling and enhanced promotional activity in the marketplace, merchandise margins were down; however, remained up 750 basis points over pre-pandemic leverage. This further demonstrates the transformation of our promotional strategy. Our outstanding team of merchants continue to collaborate closely with our vendor partners, ensuring the appropriate flow of products to our stores. Our best-in-class vendor…

Thank you, Carl, and good morning, everyone. First, I joined Shoe Carnival in late April, and am appreciative of the collective team and how they have supported me in the transition from Kerry Jackson, the previous CFO. Kerry, as you know, was here 35 years and recently retired. I am looking forward to continuing the good work he started and working with the team at Shoe Carnival. Having worked over 30 years of most of that time in retail, I look forward to sharing experiences and collaborating with the Shoe Carnival team. The company has long-term plans to grow to over 500 stores and become a multibillion-dollar retailer in 2028, and I am excited to be a part of it. Now moving to the financial results. In my remarks, I will compare our first quarter results with the first quarter of 2022, noting comparison to 2019, if needed for context. Starting with revenues. Our net sales in Q1 were $281.2 million. This is down 11.4% on a comp decline of 11.9% versus prior year. To offer some perspective, while representing a larger-than-expected decline, the sales were the third highest first quarter in company's history. The comp decline was driven by an approximately 10% reduction in traffic. Our consumers are being negatively impacted by inflation and lower tax refunds. Lack of normal seasonal weather shifts driven by cooler weather patterns was also a contributing negative factor, resulting in spring seasonal product down by over 20% to prior year. Shoe Station banner sales came in at a mid-single-digit decline versus Shoe Station banner sales at a low double-digit decline. Q1 gross profit margin was 35%, reflecting the ninth consecutive quarter at or exceeding 35%. The margin reflects continued advancement in our CRM capabilities, resulting in high customer conversion and increased loyalty members,…

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

I'd like to welcome Erik. Let me start with the guide. Can you update us on SG&A in either operating margin or EBIT for the year? There was nothing in the release, and I didn't hear anything in your comments, but I think you previously had given guidance on those line items.

Sure, Mitch, and thank you for that kind welcome. SG&A, as you know, in our previous guidance, we called out approximately 25.6%. As we look through the balance of the year, we continue to look for cost management. And as we look through operating income, you can see that our EPS does reflect that continued management. So the guidance that we would give is that our percentages are going to be consistent with what we've provided in the original guidance. There will be some increased basis point changes possibly in the range of 30 to 50 basis points. . Regarding operating income, we've talked about the original guidance of 11.4%. Really, we're looking at a range of -- there is going to be some impact to the operating income in the range of 40 to 100 basis points as a result of the sales decline.

Got it. All right and then just looking at the revised sales guidance. Obviously, it came down for the year, but it looks like, at least I can kind of back into growth that's sort of flat to maybe up low single digits over the balance of the year on a year-over-year basis, which is obviously better than what you achieved in the quarter. Can you just elaborate on why that is? Is that just that we're past tax refunds? Do you expect the weather to be more normal? I'm just kind of curious your assumptions around the consumer to kind of get to those numbers. And also if there's any color you can kind of provide by quarter? I would guess that you're maybe most optimistic around 3Q just given what you said around back-to-school and better athletic inventory, but maybe some more color there would be helpful.

Mitch, it's Mark. Thanks for joining today. Yes, you got it right with those key elements. We see back-to-school significantly improved versus last year. As I shared on the call, our athletic inventory positions is in hand, it's fresh and it's far superior to the supply chain disrupted back-to-school we had last year. We think it's going to come in Q3, Mitch. We're still seeing the macro headwinds in Q2. But I -- we believe our Q3 position is ready to go for back-to-school and then moderate as the year continues on as inflation continues to get more and more in control. I think the second thing you talked about that is encouraging, and I talked briefly about it as the weather has turned, our Shoe Station business getting some good momentum along with the new stores. At Shoe Station, the dotcom going live, CRM going live. We're growing nicely as we progress into this Q2. And we see that continuing to accelerate as the year goes on. So we're really highlighting that we think Shoe Carnival's segment of customers that are really hit by the inflation hit that small segment under 1/3 of our customers. That's the variability that we're just not sure yet when that customer is going to be healthier, which quarter that's going to turn. As soon as it does, we're in great shape to start accelerating growth.

Got it. And then Carl, on sandals, I know they were challenged in the quarter. I believe that Q2 is by far your largest sandal quarter. What are you thinking there? Do you think there's pent-up demand for the category? And how do you feel about your sandal inventory and your ability to kind of work through that in Q2?

[Technical Difficulty]

I'm sorry, this is the operator. Could you start again? The line is coming in broken.

Okay. Hopefully, you guys can hear me better now. The question has to do about sandals. I was asking Carl about sandals and obviously, they didn't perform well in the quarter. But I was curious if you feel like there's -- Q2 being your biggest quarter for sandals, do you think there's pent-up demand. And how do you sort of expect that to play? Or how are you planning that for the second quarter, especially kind of working through whatever sandal inventory you have?

[Technical Difficulty]

I'm sorry, this is the operator. It seems as though we're having some technical difficulties with the speaker line. We're going to try to rectify them. One moment, please, the conference will continue momentarily. Thank you for your patience, ladies and gentlemen. We will continue with Mitch Kummetz's question?

So I don't know if you guys heard my question about sandals. It's really for Carl. Just curious about your outlook for 2Q, that being your biggest sandal quarter, wondering if you think there's any pent-up demand just given the challenges in the first quarter, and also how you're expecting to work through your sandal inventory given the shortfall in Q1?

Sure, Mitch. Thanks. We do believe starting to see some movement on the sandal business as we have consistent warm weather that has hit a part of most of the Midwest. So we're encouraged by some very recent sandal business in the Shoe Carnival business. Shoe Station business, it actually started a bit earlier, pretty much, I believe, based on the geographics of that business and the higher-income consumer that tends to shop earlier. In regards to the inventory, we have made the necessary adjustments as we move forward with our position on sandals based on the fourth quarter results, and we anticipate ending the season in a better inventory, more reduced inventory position than we did last year. So we're confident we've got that business under control.

[Operator Instructions] And there are no further questions at this time. I will turn the call back to -- oh, sorry, we do have a follow-up from Mitch Kummetz.

Okay. I thought there would be other people. So I guess my other question -- or one of my other questions was just on the BOGOs, you talked about the gross margin. Obviously, it was down year-over-year, but still way up from 4 years ago, particularly on the merch margin side. I am curious -- you guys still do BOGOs, but you do them very differently than before. Is there any way you can comment on the margin of the BOGOs? Is there any way you can kind of isolate that and talk about how that's different from what it was 4 years ago?

Sure, I'll take that. The -- any BOGO promotion that we run, and we only do it a couple of times a week on seasonal products that we have purchased at a very advantageous price. So they are planned in on selected items, and the margin on them during BOGO actually is in line with the total company margin. And in fact, in some cases, is margin accretive. So they're limited time, very targeted product and merchandise that was bought for that intent.

And so how does that compare from like 4 years ago when it was more of an all-store BOGO? I assume that those margins were dilutive to the total. But I mean -- have you seen like within kind of the BOGO piece, I mean, is like the margin 1,000 bps better than it was 4 years ago? Or is there any way you can again sort of isolate how much that's improved? And how much of that is kind of a story for the overall margin expansion of the business?

Sure, Mitch. That is definitely the story. The BOGOs that we used to run included the entire inventory. They weren't targeted and the margin was -- you pretty much said up about 1,000 basis points dilutive to the margins we run today on the very selected BOGO products. So that is a major factor in the trend to margins we've been producing.

Got it. And then maybe one last for me. Just on back-to-school and athletic. Can you -- Carl, can you speak to how much better the athletic inventory is versus last year. I don't know if you can kind of speak to it in percentage terms. And then just remind us of the athletic comparison that you're going up against for back-to-school, I assume it's a pretty easy comp.

Yes. It is. The athletic inventory, if we go back historically, when we look to last year, our athletic inventory was really hampered by supply chain. We received quite a few delays with product [indiscernible] late August into September and missed the back-to-school time frame. In addition to that, we have many products that we purchased that, frankly, we never got. So from an athletic standpoint, I see a major improvement also in the products, but in the quality of the brands and the quality of the products we have. We anticipate our athletic inventory as we go into the back-to-school time frame being up in the teens. But it's really the quality of the inventory that we have and the timing of the delivery of that inventory actually ending July in the mid-teens. And as we move through early part of August around 20%.

And if I can -- yes, Mitch, I'll give you one point. So if you look at comps last year, to remind you, Q2 was down 13.8%, and it was really driven by between 15% and 20% declines in comp in June and July during that period where our supply chain was really disrupted. So we see that as an opportunity with this great position Carl talked about to claw back and gain market share. and have a much more solid Q2 than we did last year.

Okay. And then -- and then I guess maybe one last one for me. Just on the loyalty, Mark. I know that Shoe Station is now plugged into Shoe Perks and has access to all of those loyalty members. What have you seen there? Have you seen some of those customers buying product from Shoe Station, especially maybe some brands and some price points that they didn't have access to in the Shoe Carnival stores?

We do. We see -- we have got almost 2 million people already have joined Shoe Perks on the Shoe Station side. I would see a great opportunity to grow that rapidly as we're just starting now to engage with them. And we're seeing them buy purchases in different price tiers now that they can cross shop. We're seeing them engage with different categories that they haven't had before. And importantly, we're seeing the [indiscernible] direction to where the Shoe Carnival Shoe Perks members are also being introduced to new products from the new brand, too, that aren't offered. This is a big opportunity for cross introducing over the quarters ahead and really fueling growth.

There are no further questions at this time. I will turn the call back to Mr. Mark Worden.

Thank you all for joining us for today's call, and thank you for bearing with our technology, struggled there for a moment. We look forward to talking to you all again as we get into the back-to-school season and have Q2 report.

This concludes today's conference call. Thank you for joining us. You may now disconnect your lines.