Ladies and gentlemen, good morning, and welcome to Shoe Carnival's Third Quarter 2023 Earnings Conference Call. Today's conference call is being recorded and is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. I would now like to introduce Mr. Steve Alexander with Shoe Carnival Investor Relations. Mr. Alexander, please go ahead.

Thank you, and good morning. Thanks for joining us today. Earlier this morning, we issued our earnings press release for the third quarter of 2023. If you need a copy of the release, it is available on our website in the Investors section. Joining me on today's call are Mark Worden, President and Chief Executive Officer of Shoe Carnival; Carl Scibetta, Chief Merchandising Officer; and Patrick Edwards, Chief Financial Officer. Management's remarks today 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. And with that, I'll hand the call over to Mark.

Thank you, Steve, and good morning, everyone. I'd like to start today by introducing Patrick Edwards, who in September was promoted to the role of Chief Financial Officer, Treasurer and Board Secretary. Patrick has served as an Executive Officer of the corporation since 2021 as our Chief Accounting Officer and Board Secretary. Previously, he served as our Corporate Controller since joining the company in 2019. Patrick brings over 30 years of progressive financial leadership experience to his new role and has been instrumental to our financial performance. I'm sure you will all enjoy working with him going forward, and I know he's excited to get to know you all. Now moving on to the quarter. We started out Q3 with a very successful back-to-school campaign and strong results. We saw momentum building in key categories, market share growing and moderating sales trends compared to earlier in the year. However, once back-to-school shopping concluded, the sales trend softened significantly heading into Labor Day weekend, and we saw disappointing seasonal sales for the remainder of September and October. For the quarter, sales were $319.9 million, down 6.4% versus the prior year. This result was at the low end of our expectations, yes, I would like to commend the team's achievement of approximately $320 million in sales, which is a level of quarterly sales that the company had never come close to achieving in any quarter prior to 2021. I'm so proud of our team's customer focus and strong commitment to delivering results in the face of a challenging environment. Our EPS delivery was $0.80 in the quarter and $2.11 year-to-date. Both are below our expectations and were impacted by the very sluggish start to the fall season. Looking at how these results compare over the longer-term strategic horizon, our 2023 year-to-date EPS…

Thank you, Mark. I think it's helpful to start with a level set on the consumer backdrop and inventory positioning heading into the third quarter and back to school and how it impacted our results. We knew the family footwear consumer would be cautious with their purchases given persistent inflation and the highest interest rates in 17 years. Our consumer would be focused on essentials and more importantly, we knew they were looking for value, especially in the case of our lower income urban consumer, who continues to be challenged and is more price conscious in the current economic backdrop. The athletic supply chain constructions experienced last year [ east ], and we were ready for this value-conscious consumer with a significantly improved athletic merchandise assortment. As we saw, this consumer behavior played out in our results for Q3 and more specifically in our strong performance during August back-to-school, our assortment delivered on our customers' needs. Our total athletic business performed well in the quarter, down only mid-singles, reflecting this focus on central purchases. And one of our most essential categories, Children's athletics, we grew the category low single digits. Said another way, when it comes to the essential footwear brands that kids wanted as they headed back to school, we had them. And for parents who are looking for value on purchasing an essential footwear for their kids we deliver. As Mark discussed, our performance during the key August back-to-school season was very strong, particularly in the children's category where we grew comp sales low singles in August. We have been the leader in the children's category for decades. And once again, this year, we grew our sales and market share in children's footwear across Shoe Carnival and Shoe Station during the most important season of the year. Our…

Thanks, Carl, and thank you, Mark, for the earlier introduction. I am excited to be in my new role and to continue supporting the future success of Shoe Carnival and execution of our growth strategies. We have a strong foundation, and I am confident in our ability to continue growing and driving shareholder value and growing market share. I look forward to getting to know each of you and working with you. Now moving on to our financial results. Starting with top line. Our net sales in Q3 were $319.9 million. This was down 6.4% versus the prior year and down 7.4% on a comparable store basis. As Mark discussed, our results during the key August back-to-school period were sequentially improving compared to Q2 and Q1, including growth in the children's athletic category. We invested in advertising and marketing, and we gained market share. Our strategy worked. Going into Labor Day, top line trends for our Shoe Carnival banner softened versus the prior year on warm weather impacting seasonal merchandise, including boots. That trend continued into September and October. September and October, both reflected high single-digit comparative call declines more than offsetting the improved back-to-school trend. The 7.4% comparable sales decline for the entire third quarter was driven by an approximate 11% reduction in traffic, partially offset by a nearly 10% increase in e-commerce net sales. Shoe Station banner, total sales for Q3 came in at a low double-digit increase versus prior year on the strength of new stores and e-commerce. And Shoe Carnival banner total sales came in at a high single-digit decline, particularly impacted by September and October activity. I would like to take a moment to discuss the success of our Shoe Station banner acquired in December 2021. Our expectations were that the transaction would be immediately…

[Operator Instructions] And we will take our first question from Mitch Kummetz with Seaport Research Partners.

And Patrick, congratulations on the promotion. I've like a half a dozen questions, I hope that's okay. Starting with the quarter, you guys gave Carnival and Station sales but you didn't comp, could you give us comp on those 2 businesses for 3Q?

Mitch, this is Patrick. I'm glad to talk to you, I can't wait to meet you in person. We're not going to give out comp guidance for the individual banners at this time. It's just not what we do. We think the total number is just fine 7.4% down.

Okay. Can you say if Station was positive comp in the quarter? I know that the growth was double digits, but I imagine a lot of that's from stores.

Mitch, it's Mark. Let me build on it again. We don't delineate comps between it. Here's what I'll tell you now. A few Stations performed [indiscernible] in the quarter. If you go back over the last 3 quarters, Station declined single digit in Q1, in Q2, it grew single digit, in Q3, it grew double digit. We're seeing great acceleration and continuing trend. So we're very pleased with where it's going. We just don't delineate the comps between the banners.

Got it. And then you mentioned that boots -- the compound boots was down low 20s. Can you either give us what the boot penetration was in the quarter? Or can you tell us what like your consolidated non-boot comp was for 3Q?

Mitch, this is Carl. Good penetration is really not high for the quarter to the total. It runs approximately just under double digits for the quarter. What I would say is the entire non-athletic category was affected by a lack of the consumer in September starting fall and boot which certainly falls into that shopping. So they were all affected in the non-athletic area about the same. And we gave you on the prepared remarks were kids and adult athletic directionally [indiscernible] finish.

And then Carl, and on boots, was it broad-based softness? Can you maybe speak to your boot performance by any sort of subcategory, if there was any variation in the performance? And I'm also curious on boots. Have you seen any uptick in November, particularly the first week of November because I know there was some colder weather that way.

Sure. Sure. Sure, Mitch. For the quarter -- for the third quarter, we saw some signs, positive signs in the fall category. And we -- I'm sorry, fall for a category, let me get that out right. And we did see though not a big category, stronger sales in [indiscernible] shaped boots than in booties. So more traditional booties that are a big, big piece of our business started off very slow. [indiscernible] earlier in the first week of November when weather cooled. The boot category did improve quite a bit and that booty category that we have, that's a little more traditional, did pop up quite a bit as weather cooled. However, once the weather -- second week of November got warm again, we saw the -- a revert back to what happened in the third quarter.

Okay. And then you mentioned inventories down 10% year-over-year. How are you feeling about your boot inventory in particular? How does that look? And what does that kind of portend for 4Q, particularly on the margin side?

I'm very pleased with the job the team did, our planning boots and purchasing the styles and boots. They left themselves, frankly, with a lot of flexibility and we'll react to that flexibility if needed. But as a result, the way they planned and purchased the category, I do not see any margin erosion liquidating boot inventory to hit our target at the end of the year.

Okay. And then maybe my last one, and I'll get back in queue. In terms of the 4Q comp guidance, I think down 9% to 12%, how did you guys come up with that? Are you basically extrapolating September and October over the balance of the year? And actually, maybe you can give us comp for the first 2 weeks of the fourth quarter, but how did you come up with that as your comp guidance?

Mitch, this is Patrick again. The high single-digit comp decline that we saw in October and in September, have continued into the first part of November, and we're seeing very similar results to that. The 9% to 12% comp decline in Q4 sort of brackets what we're seeing right now and also encompasses the comp decline that we saw in Q1 of 2023 that was around 11.9%. So it's within that range. Also just one other point, too, on that. There's a lot of limited visibility on the holiday season. We're uncertain how this holiday season is going to go, given our low-income customer and consumer sentiment all over. So I would just indicate that the targeted days on which we sell, we don't know how that reaction is going to come around day after Thanksgiving.

And we will take our next question from Sam Poser with Williams Trading.

And Patrick, congratulations as well. I want to just talk about the inventory for a second. And could you tell us, Carl or anybody, what your optimum inventory turn would be? Because even getting the inventories down to where you're planning to get them, it still leaves you with a far greater of forward weeks of supply than you've had back -- if you want to go back -- if you want to go way back to when your business was smaller. So I'm wondering what that optimum turn -- annual turn would be and where you're trying to get the inventories too?

Sam, as in the past, we're not going to give out what inventory turn targets we have. What I'll tell you is the rightsizing or in our mind, the optimizing where we think the inventory should be, continues out through 2024, and we certainly feel we'll have internal improvements in '24 to where we were in 2023. As I said before, we're carefully surgically reducing inventory to ensure that we're not damaging the business and we're still able to deliver the shoes and the products our customers want and fill back into what's working. So it is an ongoing process like I have stated and like we've talked in the past, it is a long-term strategy more than a 90-day strategy to get where we want to go and keep the business as healthy as it could possibly be.

And then can you talk also about -- you talked about the traffic and you talked about the e-commerce sales. Can you, one, give us the variance of e-commerce sales between Shoe Station and Shoe Carnival? And secondly, can you tell us what your -- you had the traffic down 11%. Can you talk about -- I assume that's store traffic, can you talk about conversion rate within that as well, please?

Hi Sam, it's Patrick. Thanks for the question. With respect to e-commerce growth, it's split about evenly between the 2 banners, the growth this period. And with respect to conversion, our conversion rate remains the highest that it's ever been. It has some variation within it from quarter-to-quarter but overall, it remains about 400 basis points higher from where it was back in 2019.

When you say e-commerce was evenly split, so it was up 10% in both -- at both?

Well, the e-commerce website didn't exist at Shoe Station last year, so its growth is 100%. But just on balance, the growth in our overall e-commerce business was evenly split with growth out of both banners.

So you were up at shoecarnival.com as well as up against nothing?

Yes.

Okay. I mean, I want to ask the same -- I want to ask the same question. I mean you talked about how good how -- good you felt about Shoe Station. It sounds like it's quite good and you're giving overall comps. Son I mean, I think from a disclosure perspective, providing -- for people to understand -- to understand your business to provide the comp for both banners it may be in time for an exception here, just so people can sort of understand what's going on. I know it's not a thing you normally do, but people want to hear it. And I think it's important. I don't think it's giving away the firm to tell anybody that.

Sam. I appreciate the input, and I enjoy that. We'll take it under advisement, and we will consider that in future calls, but we're just not prepared to do that today.

And we will take our next question from Jim Chartier with Monness, Crespi, Hardt.

Let me add my congratulations, Patrick as well. Can you just talk about what do you think has been driving the acceleration in the Shoe Station sales over the last 3 quarters? And then following up, what's kind of the store opening plan for next year with Shoe Station?

Jim, it's Mark. Good morning. Thanks for joining today. Three things are working very well for Shoe Station. First, it's a higher-income consumer as I talked about in my speech. The lion's share is over 50,000 in large segments over 75,000. And we're seeing the health of that consumer significantly better than the health of the consumer, and that's up 30,000 urban consumer. So number one, a healthy consumer base compared to the other parts of our business. Number two, we fully integrated Shoe Station onto our Shoe Perks CRM platform, and we've fully launched the shoestation.com business. So we're now able to rapidly get new customer acquisition and start talking to them through our shoe [ purse ] program. We gained over double-digit growth of Shoe Perks memberships through Shoe Station, and we're talking to them actively building that loyalty, building those purchase occasions. So we're very pleased with that. Third, our new store growth is successful. As Patrick mentioned, we have grown from 21 to 28 stores and have line of sight to moving into the 30-plus range over the near term ahead. We're very pleased with the performance we're seeing overall from our station new store growth, and it's contributing as we said, to double-digit overall growth in Q3. And as Patrick said, while we don't delineate the comps, I would just share with you the health of the first 21 stores is very good and continues to improve each quarter. I don't have a number that we can share with you to the analyst community that's asked it, but I'd share Q1 the software of the company. But those 21 original stores continued to improve in Q2 and Q3, it was industry-leading share results for the banner of the comp stores, and it was industry-leading share results for the new stores as well as the dot-com. So I've kind of track-backed it, it's all working.

Great. And then you don't give quarterly EPS guidance, but where did you expect third quarter EPS would have come in back in August?

Jim, this is Patrick. We had expected our top line revenues to come in appreciably better than what they came in at. We saw continuing trends in Q1 and Q2, narrowing comp declines. We saw August comp declines narrowing even further. And our initial reactions with that was that we would continue to see that trend then through October into September and October. And our plan was at the time, about $0.90 per share. We missed it by 10 on top line sales.

And we will take follow-up questions from Mitch Kummetz with Seaport Research Partners.

All right. I've got another handful. Carl, getting back to the -- what is that penetration typically in 4Q?

It's about 40%.

Okay. And how do you -- so the comp guide on 4Q is down 9% to 12%. Are you expecting boots kind of be in line with that or are you expecting it to be worse kind of following the 1Q -- or I'm sorry, the 3Q performance?

Here's the way I would answer that, Mitch. Our initial plan for boots going into the season was right at that number you mentioned. But we have the flexibility to manage that based on whether the weather turns cold and we have the ability to drive more sales or if the weather stays the way it is, we are positioned to be able to transfer that consumer out of boots into shoes or athletic product going forward. So the team has done a great job keeping us flexible as we can move through the balance of the fourth quarter.

Okay. And then, Patrick, on the guide for 4Q, you've given us sales and earnings, -- comp sales and earnings. Can you say a little bit more about margin, -- gross margin versus SG&A? I'm particularly interested in your thoughts around March margin in the fourth quarter. I assume that you expect it to be down -- curious down how much?

Mitch, thanks for the question. Overall, we're sitting at like -- I think year-to-date, we're sitting at -- in the high 35s, 35.8% on overall margin and our projection for the entire year is approximately 36%. So we can expect upper 38%, it's just about 36% margin or in that range for Q4 is what we're planning for. On the March margin side, we will be down versus the prior year, but it's not going to be anything appreciable.

Okay. And then my last question, maybe for you, Mark. You guys have done a great job on the gross margin in particular, with March margin being up substantially versus 4 years ago. When I look at SG&A for this year, it kind of pencils out to be maybe 27.7%, 27.8%. Back in 2019, it was 24.9%. Now I recognize the business is different in terms of mix and also there is some deleverage on the sales given around the challenges there. But how do you think about SG&A rate longer term? And like are there any levers that are worth pulling here if there are any?

Yes, I'd say we think it's the right size, roughly dollar range to fuel our growth as we get back into an economic landscape where we start to get leverage that differently. We've built an organization to be ready to take on more M&A to get growth accelerated in '24 or beyond when it's available. And that organization is now built in the merchandising team, that organization is built now in the marketing team and all the other back-office functions. So we recognize that sales has taken a down cycle for us in the industry, that's deleveraged, but we'll be able to gain leverage on that as soon as things start turning around, and we make those next acquisitions. And longer term, Mitch, we remain committed to double-digit operating margin. We absolutely see we're at a lower portion of our delivery right now as we're in that down cycle and we are investing aggressively in trying to capture the demand out there with advertising and marketing. We're overinvesting for the revenues we are capturing right now to try to offset the soft consumer demand in that customer base right now. So to reiterate, double-digit operating margins is what we're committed to getting back to as we come out of this downturn, it's going to come from better leverage as we get the next top line driver through M&A as the organization is built for it and ready to go.

Mitch, I just want to make something clear here. I may have misquoted. The 40% boot business is of our total nonathletic business in the quarter to the total of the boot businesses in the mid-20s when you're throwing the athletic side of the business. I don't want to mislead you.

All right. That makes more sense. Thanks Carl.

And we will take all the questions from Sam Poser with Williams Trading.

I have 2 questions -- 2 more. One, Carl, are you finding -- I mean part of what we've heard a lot about this year is the sort of event-driven shopping. So you had a good back-to-school, then it softened post back-to-school. So, I mean, are you expecting holiday to be more event driven or do you think that, that sub- $30,000 and arguably maybe sub $50,000 consumer, especially who shops at Shoe Carnival is feeling it more now than he or she may have been feeling it during back-to-school?

Yes, Sam, I believe it's event driven. I think your dead on there and that customer -- that consumer that's challenged will wait and shop during the event, I think the softness comes in between. We saw it in spring, and then we saw it pop up for back-to-school, which is an essential necessity kind of time frame. I think we'll see the same thing around holiday as well. I think it will come late but I think in between is where we anticipate the softness.

And then, I mean, you talked a lot about what you did really well with the kids business and the marketing for back-to-school. So when we look at what happened post back-to-school with the warmer weather and everything else, I guess my question to you is, what could you have done better to lessen the impact of those macro-issues that hurt your business, what are you learning from that and applying it to now or into next year during, let's say, softer than expected or times?

It's a great question. And the thing we need to do is continue to invest in getting that limited customer occasion a shopping trip to choose Shoe Carnival during this down cycle. And said differently, in hindsight, I probably would have invested more marketing dollars during the quarter to continue to try to gain even faster market share. I said it a few times, we gained material share in a down market in family footwear. We're pleased with that. It's working. And in hindsight, we're taking a queue that traffic is not coming organically. So it's going to be a more expensive period of time to get those customers to choose whoever they choose, and we believe it will continue to be us. We're going to take that perspective into Q4 and into early next year as economic conditions, as I've said, have certainly not improved in Q4. And we don't see any signs that in early next year, there's going to be a rapid improvement in the economic situation. So that's the key learning we're going to take the marketing and branding and CRM and engaging with customers is working. We should have done more with it, but we probably balanced the profitability with the sales driving activity, maybe a little too high on the short-term profitability perspective in hindsight.

And are you -- given that you talked about the share gain, can you quantify what the share gain you've seen is? You've mentioned a number of times that there was share gain. Can you quantify what you've picked up?

Sure. If you look at the family footwear industry, year-to-date, it's down approximately 10% in dollar sales, and we are down significantly less than that as we have the numbers. We don't translate to that to an exact share, Sam, but we're down significantly below what the family footwear industry is right now. We're going to continue to drive that. We're in a really good position with good learnings through back-to-school, what worked. And like I said, some good learnings in the Labor Day post period of what we could do even better.

Thanks for that. Happy holidays.

Thank you, Sam. And to you.

And ladies and gentlemen, that is all the time we have for questions today. I will hand the call back over to management for closing remarks.

Thanks for joining the call today. We look forward to discussing Q4 results early next year. This is Steve. I'm around all day, so please reach out with any questions or follow-up you might have. And thanks for joining again.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.