Good morning, and welcome to Shoe Carnival's Second Quarter 2023 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 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 those 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 Second Quarter 2023 Earnings Conference Call. Joining me on today's call are Carl Scibetta, Chief Merchandising Officer; Erik Gast, Chief Financial Officer; and Steve Alexander, supporting Investor Relations. Let me start today by saying that conditions impacting customer trends improved in Q2. As the quarter progressed, we saw encouraging signs that the impact of inflation on our customers is starting to moderate. Customer engagement in-store and online picked up, average transactions climbed to a new second quarter high, product margins are robust and customer conversion remains strong. Based on these improving conditions, we see an opportunity to invest to increase our market share to accelerate sales growth and to grow earnings per share results compared to the soft market and results in Q1 of this year. As such, we accelerated investments to fuel profitable brand-building activities and drive our excellent customer experience. We continued to roll out our store modernization plans and drive customer engagement with new stores in new markets to capitalize on improving conditions. Sales in Q2 grew approximately 5% versus Q1 2023 to $294.6 million. Earnings per share increased at an even faster rate of 18% growth versus Q1 to $0.71, demonstrating the success of our investments to accelerate profitable growth as the year has progressed. While the back-to-school season is not yet complete, August results provide further that inflationary conditions have moderated during the year. In Q3, while we're not seeing growth versus prior year yet, we continue to see modest improvement versus Q2 in sales, margins, transaction size and strong conversion. Competitive intensity has been high in both Q2 and the Q3 back-to-school season with many competitors, deep discounting products and running profit-losing promotions. We been committed to our profit transformation and…

Thank you, Mark. As you discussed, we saw some improving customer trends as quarter progressed that the impact of inflation on our customers moderated. Customer engagement picked up meaningfully. Product margins remained healthy. Average transactions climbed to new second quarter highs and customer conversion was strong. Back-to-school season is ongoing and our athletic and children's inventory is exactly where we want it. While competitive intensity has been high in Q2 and early Q3, we remain committed to our profit transformation and our targeted CRM strategies. We continue to focus on driving our strategic objectives, which include connecting with our consumers using our CRM program to maximize sales, continuing to reduce our inventory throughout the year and delivering strong product margin. We have many more untapped customers to reengage with going forward, making CRM a core driver of profitable customer engagement. Moving to the quarter. Total Q2 comp sales were down 6.5%, which was an improvement versus the low double-digit decline we saw in Q1 2023. Including August [ VTS ], we are seeing a trend of improved but down versus prior year, continuing for the balance of '23. From a category perspective, second quarter comp sales in women's nonathletic footwear were down low teens with dress down over 25%. Boots and sandals were both down mid-teens. Sport was down mid-single digit with leisure down low singles. Casuals were up low single digits in the quarter, led by flatten tailored. Men's non-athletic comp sales were down mid-single digit casuals were up low single digit with strong performance in both Canvas and slip-ons. Men's dress was down high teens and boots were down mid-teens in the quarter. Children's comp sales were up low single digits, led by Children's athletic, up low single digit, driven by performance in court, partially offset by children's…

Thank you, Carl, and good morning, everyone. Moving to the financial results. In my remarks, I will be comparing our second quarter results with the second quarter of 2022, not in comparison to Q1 2023 and year-end 2022, if needed, for context. Starting with top line. Our net sales in Q2 were $294.6 million. This was down 5.7% on a comp decline of 6.5% versus prior year. To offer some perspective on our performance, while net sales in the quarter were lower than the prior year, the Q2 performance represented an improvement of 5% as compared to Q1 2023. The comp decline was driven by approximately 7% reduction in traffic versus prior year, partially offset by a 5.4% increase in e-commerce net sales. Some customer trends are improving, but inflationary and economic headwinds are still impacting traffic. Shoe Station banner sales for Q2 came in at a low single-digit increase versus prior year and Shoe Carnival banner sales came in at a mid-single-digit decline. In August, we opened our 400th store with the fleet now comprised of 373 Shoe Carnival stores and 27 Shoe Station stores. Our overall productivity and profitability have increased significantly since 2018, which was the last time we operated 400 stores. Q2 gross profit margin was 35.8%, reflecting the tenth consecutive quarter at or exceeding 35%. The margin reflects continued advancement of our CRM capabilities, resulting in high customer conversion and increased loyalty members in the quarter. Compared to prior year, merchandise margins decreased 20 basis points, reflecting an improvement versus Q1 2023, led by our CRM strategy, which is driving strong product margin. Buying, distribution and occupancy costs declined in the quarter. However, we're deleveraging by 20 basis points as a result of the sales decline. The buying, distribution and occupancy expense reductions were primarily…

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

I've got maybe a handful. Mark, I was hoping you could start by just elaborating on what you're seeing with the lower income consumer, especially if you could maybe reconcile that with your prepared remark that the inflation impact is starting to moderate. Maybe you could just start there.

Mitch, thanks for joining us today. [indiscernible] with the trends we've started to see as Q2 began. In Q1, we saw significant declines from traffic with the urban markets and the broader market having challenges. As we got into the beginning part of Q2, we started to see meaningful improvements within the base and that led to us investing into that, driving advertising, the building brand activity. And we saw continued improvement as the quarter improved -- progressed through the quarter. If you unpack that a little, we're seeing 2 different situations, 1 in our more urban markets, inter cities across the geographies, we're seeing traffic challenged. On the other side, we're seeing improvement conditions where the inflationary impact is starting to show encouraging signs. So 2 different situations, but we're very pleased with what we started seeing as the quarter progressed. And that continued through Q2 and continue to moderate as we went into Q3.

Okay. That's helpful. And then on the merch margin, it was down 20 bps year-over-year. Can you say what that is compared to 2Q of '19. And then also, I'd be curious to know, I know you guys have really changed your BOGO strategy. Is there any way you can kind of provide us information on merch margin like BOGOs in this quarter versus maybe BOGOs 4 years ago.

Mitch, this is Carl. From a BOGO strategy, BOGOs 4 years ago, we would have run the entire stock of our inventory for the most part -- on a buy 1 get 1.5 of strategy. We no longer do that. When we see any buy 1, get something from us, it's a very curated product bought specifically for that particular event. And those margins are -- tend to run a about a 1000 basis points higher than they would have back when we were running BOGO on the entire inventory.

And Mitch, let me build on that for a second. If you take that back to 2019, we run a little over 550 basis points higher gross margin than we -- this Q2 compared to what we ran in 2019. 2019, we're at 30.1 gross margin [ however ] have merch margin in front of us right this second 4 years back, we can follow up with that. But on a gross margin perspective, we're still landing at over 500 basis points improvement versus 2019.

Okay. Good. And then, Erik, maybe just on the guide, we can kind of back into the second half of the year, but is there any color that you could provide 3Q versus 4Q, whether it's comp or margin anything there?

Mitch, this is Mark. I'm going to grab that. So again, we've seen conditions improving throughout the year. Q1 was down double digits, and that progressed, as I shared in Q2 to down mid-single digits. Q3 started off, and we've continued to see nice but moderate improvement versus Q2. So when we look at the whole year, we're taking in balance the perspective that the back half of the year continues with similar results that we're seeing right now. So taking a [ measured ] approach. We said, we'll be at minus 8% to minus 6%. So very similar to what we've just achieved in Q2, very similar to what we've just achieved in the month of August, but a measured conservative approach. However, if we start to see the economic conditions improve or sequentially get better as they have been each quarter, then we have upside potential, and we're going to continue to invest in the brand building and advertising to go after that should we see it.

Okay. And then on the SG&A, just a little help here because SG&A dollars were up $6.5 million in the quarter, and you talked about accelerated investment. If I back into the back half, it looks like SG&A dollars are actually down a little bit year-over-year, it sounded like you expect investments to continue. So I guess maybe really 2 questions. One, were any investments accelerated into 2Q, which led to that big dollar increase and -- and why is SG&A down in the back half if you're continuing to invest? Or are you finding some dollars to kind of pull out of the business in other areas?

Sure, Mitch. This is Erik. I'll get to speak with you. As I think about it, when we saw the market conditions improved, we did do some acceleration in our growth. And as you can see, the sales did improve, we're up 5%. EPS was up 18%. And Mark talked a little bit about where we invested and I'll just elaborate a little bit, for half of that was in the brand building, and we did have pull-forward investments, particularly in advertising you'll continue to have spend in new stores. We also talked a little bit about it, but we launched our Shoe Station business in February of '23. So there's a digital cost related to that expense. The other half of that increase was the in-store experience. We had modernization costs that strategy will continue. These investments are working, and we will continue to invest. So when I think about the back half of the year, however, as I mentioned, we did pull forward some of those expenses. So we will moderate and continue to watch that expense and we'll see how that plays out. And as Mark talked about, we'll see how opportunistic we are.

And then I guess last question for Carl. You talked about sequential improvement in the athletic business? It sounds like you've got better inventory. I mean one of the things that I just noticed online is that there's a lot of kind of promo Air Max product. And I'm just curious -- maybe just your broader thoughts on how you're positioned in athletics. And I'm curious to know if like a lot of that product was bought on closeout? Or are those promos margin dilutive?

So Mitch, we're in a much better position heading into back-to-school and coming out of back-to-school soon with our athletic inventories versus a year ago really had to do with the delivery -- on-time delivery of products from our key, key vendors. As far as promotional activity, as we've stated, since we are not in a global promotion environment at since -- we have the sort of remodeled our promotional strategy. We're able to take products that we need to move on, get very aggressive and clean them up while we maintain price the most valuable product that we have and that balance enables us to achieve margin goals and continue to liquidate distressed inventory and remain competitive in the marketplace with those, frankly, that are doing more global promotions.

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

I want to talk about the inventory and how you're getting to $40 million below at the end of the year. My math tells me, and I know it includes other things that your receipts in the back half of the year would probably have to be down almost 17%. And even if you get to that number, the inventory is still going to be well above where it is. And my question is, if your receipts have to be down in that range, then how do you bring enough newness in for both holiday and for spring early, and keep things going? Or should you just be more aggressive with the inventory you have now to drive it down to open up more -- more open to buy for better goods and still achieve the inventory you want at the end of the year?

Sam, it's a -- the inventory reduction is an accumulation of several strategies. Receipts would be down to a year ago. If you remember a year ago, receipts balloon significantly in the fourth quarter when the late inventories due to supply chain issues, came in at the same time as the early receipts due to improved supply chain situation that caused a big blip in inventory. We'll be down to that and more in line with the appropriate amount of receipts at that time frame, That's part 1. Part 2, we continue to work very closely with our vendor partners to get creative on many ways to reduce inventory as we go through the back half of the year as well as reevaluating model stocks, letter plans, everything based on the sales trend that we're seeing. So we're very confident, we're going to hit that number. And as we stated, it's something in progress. It will be ongoing as we move forward. We're being very careful here to continue to deliver great product assortment to our stores and continue our strong margins. And we believe we have a formula to get there by the end of the year.

Okay. And then -- can you tell us what your store productivity was year-over-year. And also, you had guided Shoe Station to be up low double digits prior for the year. Where does that stand now?

Thanks, Sam. Store productivity has progressed dramatically like I said, in my speech, over the past 5 years, revenues per door are approaching the highest they've ever been. They won't touch the high watermark of the stimulus induced '21 and '22, but they're up 15% from when we're in the midst of the last time we had 400th store. And more importantly, the profit has just been transformational. Now that we've completed the modernization and half our fleet conversion is strong and the response was outstanding. Profit per 400 doors now is up over 40%, as I said, compared to when we were in the midst of the program. Neither sales nor productivity are going to touch the high watermark near term of the stimulus years, we're incredibly pleased with where it's grown over the long term. In terms of Shoe Station, it's accelerating. We could be more pleased with the integration, with the synergies, with the margin capture and with the customer response to that incredibly fresh performance running portfolio, it's been spectacular. When you look at where it's been, as I said in my prepared remarks, we started to see growth in Q2 meaningfully and it accelerated throughout Q2 and climbed into the mid-teens in Q3. We're not breaking out specific guidance, but we're expecting in this very difficult context, the Shoe Station is going to grow this year and buck the trend in the challenging retail environment.

So I just want to walk through something here. You feel great about everything. You've cut your EPS guidance by 16%. You've cut your revenue guidance by 3-plus percent after cutting last quarter as well. So you seem to feel based on what you're saying, a lot better than the results are telling us right now. And I think everybody wants to sort of put that -- balance that against your confidence what's really going on and what you need to do to fix the business right now rather than just saying it's macro stuff.

Yes, at -- so we do feel really good about our underlying business and the improvements we're seeing through the year. As I said many times in my prepared remarks, we're having difficulty with store traffic and particularly in urban markets. We don't see that measurably improving in the balance of the year, and therefore, we are taking a measured approach on that dimension. When you look at the other side, as I talked about, we're encouraged by the more affluent customer results, whether that's the Shoe Station, turning to meaningful growth, compared to Q1 or our affluent e-commerce shopper, showing signs of improving as the year goes. Our transaction is climbing to new highs. There are so many things that are moving forward positively. But the bottom line is it's a challenging economic market, and we do not see it getting better to a point of getting into growth during Q3 or Q4 as our guide implies. The underlying thing that...

One last thing. What percent of your overall business historically or however you want to talk about it has been sort of the moderate more urban customer that seems mostly affected? What is the -- what percent of your total revenue does that business -- has that business represented.

Yes. So I was talking about it earlier that about historically over half of our customers and about half of the revenue comes from households under $50,000. And -- there's a segment below that, though, which we have about double-digit percent come from the households under $30,000 hospitals. The $30,000 per year household income. It's that segment in particular in urban markets, the sub-$30,000 households in urban markets across the country that represent double-digit portion of our business that's the portion that's struggling. That's the portion that's giving us some traffic headwinds. It's been moderating, as I said, Q1 double digit, Q2 mid-singles, Q3 improving, but we don't see improving fast enough to put optimism in the back half of the year. Simply put, until the households under $30,000 have better economic conditions, we're going to see a headwind in our urban markets, offset by the things that are working in the nonurban markets, which I want to reiterate again.

We have a follow-up question from Mitch Kummetz of Seaport Research.

Just to follow up on that question from Sam. Does that consume that below $30,000 household income consumer, do you think you're losing them right now to kind of the targets in the Walmarts of the world and as the macro gets better that you can kind of regain them?

They're still engaged simply, but we look at our broad CRM database that's now over $33 million, which is over 12% growth. We can dissect that and understand who's still engaging with us. And we're seeing strong engagement still in under $50,000 and under $30,000 household income. But we're not seeing them convert at the same levels as we did during '21 and '22. So we say them active, but not converting, which says we have an opportunity to continue to engage with them as we did in Q2 as we started doing back-to-school. [indiscernible] we are encourage about was reengaging those customers starting back-to-school with our broader athletic position showed very encouraging results. They still have weakness in that segment Mitch, but we continue to see improvement. We've seen...

And then with your upper income consumer where you seem to be doing better I'm also curious, do you think that some of that strength is people trading down from maybe specialty retail or the department stores? And if so, how do you retain that new customer as the macro improves?

Yes. Our over $75,000 households, we saw the biggest growth in the past quarter. We're capturing as part of our strategy is the former department store shopper, through the brand assortments and the depth of product that Carl and his organization are bringing in. We're able to satisfy what the department store is used to as well as some family footwear that are heavily private label were instead continuing to be focused on the best brand, the depth of assortment and they're liking what they see. That -- the KPIs are working across the board for that higher-end consumer. And I do think we retain them as the mall shopper, the department store shopper and private label-focused family footwear retailers don't have the same assortments we have.

Okay. And then maybe last one for Carl. When you were going through your kind of category performance in the quarter, I thought I heard you say that boots weren't very good. I don't think of 2Q as being much of a boot quarter. But are you getting any early reads on boots as you've gotten into kind of August and back-to-school. And kind of remind me how you're thinking about boots for the back half of the year.

Mitch, we're not seeing a lot of action right now in boots, during Q2 and early Q3, we did see an uptick in Western, which typically happened at this time, especially with a lot of the festivals in the whole Taylor Swift stadium concert thing. That typically is short-lived. We are hearing, although experiencing in a very small way, some early sales on combat, which is frankly a little surprising to us. But that's about it. It's -- with the weather and the -- frankly, the lack of some new fashion there, we're not seeing anything too much at this point.

And we have another follow-up question from Sam Poser of Williams Trading.

Carl, you said that the adult athletic business was down low single digits. Your inventory had improved. Can you give us some idea of like stock-to-sales ratio there? Is the inventory down low single digits as well? Is it up -- double -- I mean, just some ratio of that relationship?

Here's what I would say, Sam. As we came out of second quarter, the inventory levels in athletic were higher than a year ago with sales down at a -- down low singles. That had to do all with the timing of deliveries last year and the fact that we didn't deliver a lot of that athletic inventory until late August, early September. So a comparison really wouldn't be fair at this point. I'll say we feel real comfortable with our athletic inventory is going forward as we move through Q3 and the end of the year.

And then to follow up 1 more time. The -- you mentioned that skate and running were soft and court and basketball were good. Can business really get that much better with skate and running soft? And do you see any light at the end of that tunnel.

I would say that we're seeing some improvement. We certainly are performance running business, where we have access to the hot brands that has turned and is very strong. We're seeing small improvements beyond [indiscernible] category. At this point, we don't see any improvement in skate. I will say at Shoe Carnival, a large percentage of our athletic business is done in basketball and court, likely the biggest percentage in the channel. And that business is very strong, and we'll continue to ride that until the other businesses come back.

And then lastly, Erik, what about -- given where the stock is and everything else, I mean, where are you standing on share buyback and so on these days?

Thanks, Sam. Our priorities, as you know, we invested in the business, then dividends. And then lastly, if there's an opportunistic position, we'll look at the stock buybacks. We still have the $50 million that was authorized at the beginning of the year. So that's going to -- that's an opportunity for us. So we will be continuing to evaluate it.

There are further questions at this time. I would now like to turn the call back to the management team for closing remarks.

Thank you all so much for joining today's call. I look forward to discussing Q3 results later this year. And as I mentioned at the top of the call, Steve Alexander has recently joined us to support our Investor Relations function. Please reach out to him with any questions or follow-ups you might have.

Thanks, Mark. Thanks again to everyone for joining the call today. I'm all day. I look forward to speaking with you and hopefully meeting you in person going forward. Thanks very much again for joining the call.

This concludes today's conference call. You may now disconnect.