Shoe Carnival's Q2 2025: Contradictions Emerge on Competitor Pricing, Private Label Use, Rebannering Impact, and Store Performance

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 4, 2025

Financials Results

• Revenue: $306.4M, down 7.9% YOY (vs $332.7M prior year)
• EPS: $0.70 per diluted share, down ~15% YOY (vs $0.82 prior year)
• Gross Margin: 38.8%, up 270 bps YOY

Guidance:

• FY25 net sales: $1.12–$1.15B; back-half comps expected down low single digits (vs Q2 down high single digits).
• FY25 EPS: $1.70–$2.10 (low end raised by $0.10).
• FY25 gross margin: 36.5%–37.5% (+150 bps).
• FY25 SG&A: $355–$360M; capex: $45–$55M ($30–$35M for rebanners).
• Q3 net sales: $290–$300M (down 2%–5%); EPS: $0.50–$0.55.
• Q3 gross margin: 37.0%–37.5% (100–150 bps above last year's 36%).

Business Commentary:

* Strong Financial Performance and Margin Expansion: - Shoe Carnival reported earnings of $0.70 per diluted share for Q2 2025, beating expectations by over 20%, with gross margins expanding by 270 basis points to 38.8%, the highest in years. - The growth was driven by prioritizing margin dollars over lower-quality sales, investing in inventory depth for back-to-school, and the successful implementation of the rebanner strategy.

• Rebanner Strategy Success:
• The rebanner strategy exceeded targets, with Shoe Station's sales up 8% year-to-date through August, and product margins expanding by 270 basis points.

• This success is attributed to attracting new, higher-income shoppers and expanding margins, thereby reducing exposure to economic downturns.

• Back-to-School Success:

• Shoe Station achieved sales growth of high single digits during the back-to-school period, while Shoe Carnival delivered positive children's category comp sales growth.

• The strong performance was due to improved inventory availability, disciplined pricing, and focus on premium brands, contributing to margin expansion across categories.

• Inventory and Pricing Strategy:

• The company's inventory levels were intentionally increased to capitalize on macroeconomic volatility, leading to improved in-stock rates and margin expansion.
• Despite the high inventory levels, strategic pricing and disciplined cost management maintained gross margins and allowed for profitable sales growth.

Sentiment Analysis:

• Raised FY EPS and gross margin guidance; Q2 gross margin 38.8% (+270 bps) and EPS $0.70 despite sales decline; returned to positive comps in August back-to-school; Q3 gross margin expected 100–150 bps above last year; balance sheet strong with ~$150M cash post-August and no debt.

Q&A:

• Question from Mitchel Kummetz (Seaport Research Partners): Were Q2 results driven by a change in priorities versus plan, given sales below plan but margins well ahead?
  Response: Margins beat due to opportunistic low-cost inventory and mix shift to Shoe Station, while maintaining pricing discipline amid competitors’ discounting.

• Question from Mitchel Kummetz (Seaport Research Partners): Provide more Q3 detail on comps, gross margin, and SG&A.
  Response: Q3 sales $290–$300M (down 2%–5%), comps similar; gross margin 37%–37.5% (up 100–150 bps YoY); SG&A about $95M.

• Question from Mitchel Kummetz (Seaport Research Partners): How does August strength translate to the rest of Q3 to hit down 2%–5% sales?
  Response: Low end assumes high-single-digit declines; high end near flat; midpoint ~-3%, a step-up from 1H.

• Question from Mitchel Kummetz (Seaport Research Partners): What does managing Shoe Carnival as a cash generator mean?
  Response: Maintain margin discipline, avoid unprofitable promos for low-income shoppers, and use Carnival cash to fund the Shoe Station-led transition.

• Question from Mitchel Kummetz (Seaport Research Partners): Will rebannering be net neutral to next year’s earnings once Shoe Station exceeds 51% of stores?
  Response: Expect inflection to modest positive comps in 2H next year; H1 bears most rebanner drag; no full FY guidance yet.

• Question from Samuel Poser (Williams Trading): How can you keep gross margins high with $449M+ inventory; where did inventory stand post-August?
  Response: Inventory remains up mid-singles, skewed to opportunistic buys and key high-margin items (e.g., kids athletics); disciplined pricing and key-item depth support margins.

• Question from Samuel Poser (Williams Trading): What is the exact end-August inventory level versus $449M?
  Response: Not providing an interim number; inventory is intentionally elevated in good items, with no expected margin erosion this year and normalization targeted in 2026.

• Question from Samuel Poser (Williams Trading): Any Spring ’26 Jordan product and was Carnival’s decline driven by low-end/nonbranded items?
  Response: Won’t disclose specific brands; performance driven by premium branded assortments, not private label.

• Question from Samuel Poser (Williams Trading): How are wholesale partners taking price with tariffs?
  Response: Expect 5%–7% price increases into spring; Vietnam seeing +10% impacts; China at 30% paused for 90 days.