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Shoe Carnival Inc. (SCVL - Snapshot Report) recently posted second quarter 2012 earnings of 14 cents per share, in line with year-ago quarter, but ahead of the Zacks Consensus Estimate of 11 cents.

Net sales grew 9.3% year over year to $182.2 million during the quarter aided by comparable store sales (comps) growth of 3.0%. The increase in traffic (up low-single digits) and transaction (up mid-single digits) resulted in the strong comps growth. Comps were on the high end of the company’s guided range.

During the quarter, gross margin increased 90 basis points (bps) to 28.7%. Higher merchandise margin as well as a fall in buying, distribution and occupancy costs favored the gross margin.

Selling, general and administrative (SG&A) expenses as a portion of sales increased 80 bps year over year to 26.1% due to an increase in the number of stores operated, as well as higher incentive compensation.

Financial Position

At the end of the quarter, the company had cash and cash equivalents of $52.9 million and shareholders’ equity of $301.9 million.

Outlook

For third quarter 2012, the company anticipates revenue growth between $240.0 million and $245.0 million and earnings per share in the range of 55 cents to 60 cents (the guidance includes a pre-opening expense of 2 cents a share). Comparable store sales are expected to increase in the range of 4.0–6.0%.

For fiscal 2012, Shoe Carnival remains on track to open approximately 31 new stores and close 6. Among the scheduled openings, the company has already rolled out 13 stores in the first quarter and 11 in the second. While there will be no openings in the third quarter, the fourth quarter will witness 7 openings.

The company shutdown a respective of 3 and 2 stores in the first and second quarter and intends to close the remaining one in the final quarter. The company plans to finish the year with 352 stores. Management also plans to open as many as 30 new stores in 2013.

Our Take

Shoe Carnival, a leading retailer of value-priced footwear and accessories, performed better than expected in the reported quarter. The company’s sales growth is also on a good trajectory. Shoe Carnival offers a competitive pricing to attract consumers in this value-sensitive environment.

The back-to-school season will likely facilitate the third quarter. The trend can be validated by the 6% increase in comps so far in the third quarter.

Management also remains optimistic about its expansion plan. While the solid expansion plan will widen the company’s market reach, over the long term it will face threats of higher pre-opening expenses which will likely hurt its earnings.

Shoe Carnival, which competes with Cache Inc. (CACH - Snapshot Report), currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are maintaining our long-term Neutral recommendation on the stock.
 

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