Shoe Carnival Performs as Expected

Shoe Carnival Inc. ( SCVL - Snapshot Report ) recently posted third quarter 2011 earnings of 78 cents per share, in line with the Zacks Consensus Estimate but above the year-earlier earnings of 70 cents per share.

Net sales rose 5.4% year over year to $215.5 million during the quarter aided by an early back-to-school season, offset somewhat by decelerating comparable store sales (comps). Comps increased 2.8% in the quarter versus 7.2% increase in the year-ago quarter. Lower-than-expected store traffic trends in late September and October resulted in the modest comps growth. The warmer fall season adversely affected the demand for fall footwear.

During the quarter, gross margin increased 10 basis points (bps) to 30.2%. Flat merchandise margin as well as a 0.1% fall in buying, distribution and occupancy costs hurt the margin to some extent. Selling, general and administrative (SG&A) expenses increased 2.5% year over year to $48.3 million. As a percentage of net sales, SG&A contracted 60 bps to 22.4%, due to higher comparable sales leverage.

Financial Position

At the end of the quarter, the company had cash and cash equivalents of $53.0 million and shareholders’ equity of $280.4 million.

Outlook

For fourth quarter 2011, the company anticipates revenue growth between $186 million and $190 million and earnings per share in the range of 33 cents to 36 cents. Comparable store sales are expected to increase in the range of negative 1%- positive 1.0%.

For fiscal 2011, Shoe Carnival remains on track to open approximately 17 new stores and close 4 stores in its existing markets. Among the scheduled openings, the company has already rolled out 4, 5 and 7 stores in the first, second and third quarter, respectively. This leaves only one opening for the final quarter.

The company closed one store in the reported quarter and intends to shut down another in the remaining period. The company plans to end the year with 327 stores.

Our Take

Shoe Carnival, a leading retailer of value-priced footwear and accessories, performed according to our expectation as well as its own guided range in the third quarter. Management remains optimistic about its assortment for the holiday season. Shoe Carnival offers a competitive pricing for its products to continue to attract consumer in this value-sensitive environment.

However, we remain cautious on the execution risk associated with the launch of Shoe Carnival's e-commerce platform, which is expected to increase software costs. Additionally, sluggish comps growth expected in the fourth quarter also remains a cause of concern.

Shoe Carnival, which competes with Cache Inc. ( CACH - Snapshot Report ) , currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are maintaining our long-term Neutral recommendation on the stock.