Shoe Carnival's Q2 2025 Earnings Call: Contradictions Emerge in Sales Strategy, Inventory Management, and Rebanner Impact

Date of Call: September 4, 2025

Financials Results

• Revenue: $306.4 million, down 7.9% YOY (prior year $332.7M)
• EPS: $0.70 per diluted share, down from $0.82 prior year (net income $19.2M vs $22.6M); included $0.21 of rebanner investments in Q2
• Gross Margin: 38.8%, up 270 basis points YOY; merchandise margins improved ~390 bps while buying/distribution/occupancy delevered ~120 bps

Guidance:

• Net sales guidance raised to $1.12B–$1.15B for fiscal 2025
• EPS guidance raised to $1.70–$2.10 for fiscal 2025
• Gross profit margin guidance 36.5%–37.5% (up ~150 bps)
• SG&A expected $355M–$360M
• Capital expenditures $45M–$55M, with $30M–$35M for rebanners
• Q3 guidance: net sales $290M–$300M; EPS $0.50–$0.55
• Back half comps expected to improve to down low single digits (from down high single digits in Q2)

Business Commentary:

• Revenue and Margin Expansion:
• Shoe Carnival reported net sales of $306.4 million in Q2 2025, down 7.9% year-over-year, while gross profit margin improved by 270 basis points to 38.8%.

• The margin expansion is attributed to disciplined pricing, improved product mix, and better inventory availability, despite lower sales.

• Rebanner Strategy Impact:

• The Shoe Station banner achieved sales growth of 1.6% with essentially flat comparable store sales, while Shoe Carnival saw a 10.1% sales decline.
• The overall comparable store sales decline was 7.5%, with a 100 basis points impact from rebannering.
• The strategy aims to transition to a higher-margin customer segment, reducing exposure to economic downturns.

• Back-to-School Performance:
• During fiscal August, Shoe Station achieved high single-digit comparable sales growth, driven by the children's category and adult athletics.
• Shoe Carnival delivered positive children's category comp sales growth despite facing pressure from a low-income consumer segment.
• This successful back-to-school period was due to strategic inventory depth, disciplined pricing, and effective brand presence.

• Financial Performance and Guidance:
• EPS for Q2 2025 was $0.70, beating expectations, with a revised EPS guidance range for fiscal 2025 increased by $0.10 to $1.70 to $2.10.
• This improvement reflects positive back-to-school results, margin expansion, and the strategic success of the rebanner initiative.
• The balance sheet remains strong, with $148 million in cash and securities, up over 10% year-over-year.

Sentiment Analysis:

Overall Tone: Positive

• Management beat consensus by >20%, reported Q2 gross margin of 38.8% (up 270 bps), returned to positive back-to-school comps, and raised annual EPS and sales guidance while highlighting rebanner momentum and a strong balance sheet.

Q&A:

• Question from Mitchel Kummetz (Seaport Research Partners): Going to be a handful. First of all, Mark, I'm curious on the second quarter. Your sales came a little below plan, but obviously, your gross margins were well ahead of plan. You talked about prioritizing margin dollars. I'm just curious, is there something about the quarter that was a bit unexpected? Or did you kind of change your priorities in the quarter in order to kind of achieve the results that you did that were a bit different than what you kind of laid out 3 months ago?
  Response: Opportunistic buys and higher inventory performed better than expected, and accelerating Shoe Station mix plus disciplined pricing drove stronger-than-anticipated margin expansion.

• Question from Mitchel Kummetz (Seaport Research Partners): And then, Patrick, on the third quarter, you gave us guidance in terms of sales and earnings. Is there anything more you can say in terms of kind of what your comp expectations are for the quarter and then also margins gross versus SG&A?
  Response: Q3 sales guidance $290M–$300M (down 2% to 5%, midpoint ~-3%); gross margin targeted ~37%–37.5% (100–150 bps above prior year) and SG&A about $95M.

• Question from Mitchel Kummetz (Seaport Research Partners): That's very helpful. And then just as a follow-up to that. I mean, it sounds like August is off to a very good -- or 3Q is off to a very good start, given August. Can you just maybe talk through kind of your expectations for the balance of the quarter in order to get to sales down 2 to 5?
  Response: Midpoint expects an overall ~3% sales decline for Q3; low end assumes high-single declines, high end assumes closer to flat.

• Question from Mitchel Kummetz (Seaport Research Partners): And then, Mark, you made a comment in your prepared remarks that you're managing Shoe Carnival as a cash generator. Can you just elaborate on that?
  Response: Carnival will be managed with margin discipline rather than aggressive promotions—treated as a cash generator while company shifts toward higher‑income Shoe Station customers.

• Question from Mitchel Kummetz (Seaport Research Partners): And then maybe last for me. You mentioned that once Shoe Station gets to -- like 51% of your store base kind of the model lifts, that would happen kind of midway through next year. Does that mean that the impact of the rebannering is kind of net neutral to next year's earnings because whatever drag that you see in the first half gets offset by a tailwind in the back half? How should we think about that? I know you're not giving next year guidance yet, but if you could just kind of walk us through that intuitively.
  Response: When Shoe Station reaches ~51% of stores next back‑to‑school, management expects an inflection—back half comps for the company move toward low‑single positive territory, though Carnival remains a headwind.

• Question from Samuel Poser (Williams Trading, LLC, Research Division): I'd like to talk to you about the inventory levels and the gross margin guidance and get some color on maybe where inventories are at the end of August. And just looking at the 3Q guidance and the gross margin guidance there, it looks like you'll sell $60 million, $70 million of cost of goods in August, give or take, you have $449 million of inventory on hand. How do you keep the gross margin guidance as high as it is with all this inventory? Doesn't the rubber have to hit the road sometime?
  Response: Inventory is intentionally up mid‑singles and includes opportunistic, high‑margin buys and key athletic/kids items for back‑to‑school; management does not expect margin erosion this fiscal year.

• Question from Samuel Poser (Williams Trading, LLC, Research Division): Just a follow-up. So we know a hard number. The inventory was $449 million. That's a hard number that can tell us what's happening. Is that -- what is the number -- I mean, I don't know, since we don't know what the mid-single-digit increase year-over-year means, is -- what -- I mean, what is the number? Is it higher or lower than $449 million? Is it -- since you had that strong August, is that now at 420? Because it's really what the number is, not what the increase is. It's looking forward, not looking backwards.
  Response: They will not provide an interim August inventory figure; Q2 close was $449M, and while they acknowledge inventory is high, they believe it's good product and won't cause margin deterioration this fiscal year.

• Question from Samuel Poser (Williams Trading, LLC, Research Division): Are you guys going to see Jordan product for Spring '26? And with the Shoe Carnival business comping down high singles, could we assume that their brands such as Birkenstock and Skechers and others that were probably significantly better or possibly up, and it was a lot of the real low-end, moderate nonbranded products that really drove the comp down because the -- even the lower-income customers want those sort of high-in-demand brand?
  Response: Management declined to disclose specific vendor/product plans; they confirmed higher‑ticket, branded items outperformed and are driving margin and higher‑income customer gains.

• Question from Samuel Poser (Williams Trading, LLC, Research Division): And then lastly, how are you seeing -- like how are the brands in general taking price? What are you seeing from price increases going into the balance of this year and going into next year due to the tariff impact from your wholesale partners?
  Response: Expect price increases of roughly 5%–7% into spring 2026 as tariff-related cost increases (Vietnam/China adjustments) are passed through.

Contradiction Point 1

Sales Performance and Strategy

It highlights inconsistencies in the company's sales performance and strategic focus, particularly in relation to market segmentation and customer targeting.

Was there an unexpected factor in Q2 or did you adjust priorities to achieve higher gross margins despite sales falling below plan? - Mitchel Kummetz(Seaport Research Partners)

2025Q2: The opportunistic buys and additional inventory that the team brought in performed better than we expected. We captured success at a lower cost basis and strength at a higher-margin run first. The Shoe Station performance continues to accelerate, and as that grows towards a higher percent of our mix, that's helping us drive our margins higher than we expected. - Mark Worden(CEO)

Why is the company accelerating expansion of Shoe Station—due to its outperformance or differing competitive conditions compared to Shoe Carnival? - Sam Poser(Williams Trading, LLC, Research Division)

2025Q1: Mark Worden: Shoe Station operates in white space, serving a higher-end customer not fully met by other retailers. It competes less with traditional family footwear retailers like Shoe Carnival and more with premium outlets. The unmet need in markets like rural Tennessee and coastal Florida indicates strong potential for growth. - Mark Worden(CEO)

Contradiction Point 2

Inventory Management and Pricing Strategy

It involves differing statements regarding inventory management and pricing strategy, which could impact financial projections and market positioning.

How do you justify maintaining high gross margin guidance with $449 million in inventory and estimated $60-70 million in August COGS? - Samuel Poser(Williams Trading, LLC, Research Division)

2025Q2: The inventory is strategically built up in areas like opportunistic buys and key athletic items to drive margin growth. The inventory in hand is mid-single digits higher than Q2. Our disciplined pricing strategy and opportunistic buys will help sustain high gross margin guidance. - Tanya Gordon(CMO)

What is the impact of rebranding on next year’s P&L, given the accelerated store rollout? - Mitch Kummetz(Seaport Research Partners)

2025Q1: Our disciplined pricing strategy, combined with opportunistic buys, will help us sustain strong gross margin guidance for Q2, even with higher markdowns in the Shoe Carnival stores. - Tanya Gordon(CMO)

Contradiction Point 3

Inventory Strategy and Gross Margin Impact

It involves the company's strategy for managing inventory and the expected impact on gross margins, which are crucial for financial planning and investor expectations.

How can you maintain the high gross margin guidance with current inventory levels? Will there be eventual challenges? - Samuel Poser (Williams Trading, LLC, Research Division)

2025Q2: The inventory is strategically built up in areas like opportunistic buys and key athletic items to drive margin growth. The inventory in hand is mid-single digits higher than Q2. Our disciplined pricing strategy and opportunistic buys will help sustain high gross margin guidance. - Tanya Gordon(CMO)

Can you update inventory levels and clarify the distinction between opportunistic buying and bailouts, including their breakdown and impact on next year's gross margin guidance? - David Bellinger (Insider Investment)

2025Q4: Our inventory position is strategically built in areas like opportunistic buys and key athletic items to drive margin growth. We ended Q4 with inventory up approximately 2% versus the prior year. - Tanya Gordon(CMO)

Contradiction Point 4

Sales and Earnings Guidance for the Third Quarter

It involves the company's financial guidance for the third quarter, which is essential for investor expectations and strategic planning.

Can you provide more details on your comparable sales growth expectations for the quarter and the outlook for gross margins versus SG&A margins? - Mitchel Kummetz (Seaport Research Partners)

2025Q2: Our sales guidance is $290 million to $300 million, which implies a sales decline of 2 to 5 percent, with comps aligning to this range. We expect gross margins to be 100 to 150 basis points above Q3 last year, targeting around 37%. SG&A is expected to be consistent with Q2, around $95 million. - Patrick Edwards(CFO)

How is the Q3 FY25 sales guidance calculated? What assumptions underlie the comp estimates for that period? - Jim Chartier (Monness, Crespi, Hardt & Co., LLC)

2025Q4: Sales guidance for Q3 is in the range of $295 million to $305 million, which implies a sales decline of 4.5 to 7.5 percent, with comps aligning to this range. We expect gross margins to be 150 to 200 basis points above Q3 last year, targeting around 37%. - Patrick Edwards(CFO)

Contradiction Point 5

Rebanner Strategy and Financial Impact

It involves differing expectations about the financial impact of the rebanner strategy, which is a significant business decision.

Is the impact of rebannering net neutral to next year's earnings, as the first-half drag is offset by a second-half tailwind? - Mitchel Kummetz (Seaport Research Partners)

2025Q2: We believe when we hit 51% of our fleet is operating a Shoe Station, next back-to-school, we start seeing sustained comp positive versus a sporadic, which we're delivering now in key event periods. - Mark Worden(CEO)

How many stores meet the Shoe Station profile based on demographics and store size? - James Chartier (Monness Crespi Hardt)

2025Q3: We're optimistic that we will see this new banner is going to be -- we're going to look back and say, boy, this was a good strategic decision. - Mark Worden(CEO)