Description
We are short shares of Shoe Carnival (SCVL). The company isn’t a fraud, isn’t an imminent bankruptcy candidate (slight net cash B/S looking across seasonality) and we don’t have an identifiable catalyst other than gravity. Simply we think this is a below average business with very limited power relative to its suppliers, operating in a highly (and increasingly) competitive environment selling at what we think is a very expensive price (10.5x EV/EBITA, 17.8x P/E). I think this idea is timely as Shoe Carnival’s share price increased a whopping +30% following Friday’s (Nov 17) following a slightly better than expected earnings report. Some of the dramatic move in the share price may be related to Foot Locker also having reported better than expected earnings after the close on Thursday (Nov 16) and rocketing up 28% on Friday. With SCVL also reporting a beat and having a relatively limited free float, this may have lead to an exacerbated share movement. Anyway, I see 50%+ downside over the medium term.
Shoe Carnival operates ~430 stores across 35 states and Puerto Rico primarily in open air shopping centers. On average stores are 11,000 square feet and offer a mid-priced selection of shoes for the whole family. The company does not own any of its real estate. 28% of the share count is owned by Chairman J Wayne Weaver and his spouse.
As you have probably guessed, the company is heavily reliant upon key suppliers including Nike (33%) and Sketchers (12%). Sales break out as follows:
| Categorical Mix |
|
|
|
| |
|
|
|
| Non-Athletics |
2014 |
2015 |
2016 |
| Women's |
27% |
27% |
26% |
| Men's |
14% |
14% |
14% |
| Children's |
5% |
5% |
5% |
| Total |
46% |
46% |
45% |
| Athletics: |
|
|
|
| Women's |
16% |
16% |
16% |
| Men's |
21% |
22% |
22% |
| Children's |
13% |
12% |
13% |
| Total |
50% |
50% |
51% |
| Accessories |
4% |
4% |
4% |
As shown above, sales are slightly skewed toward athletic shoes but this company doesn’t have the same dynamic of selling $150-200 Michael Jordan shoes as say Foot Locker so you don’t have the same benefit (or risk) of high priced sneaker fatigue.
While the company’s sales have steadily increased over the past 5 years due to both an increased store base and positive same store sales growth, operating profit has steadily declined as gross margins have been squeezed while operating expenditures have increased. An increasingly competitive environment has crimped gross margins while operating expenses have increased reflecting 1) the cost of growing the store count (lease expense grew from $54 mn in 2012 to $ 66 mn in 2016) and (2) e-commerce initiatives (website operating expenses, marketing costs and of course fulfillment costs - ship from store, ship to store, and the high cost of processing returns).
As you can see below operating margins and overall operating profits have declined over the past 5 years despite increased same store sales as well as greater scale from an increased store base which would theoretically create greater buying power as well as allowing the company to leverage regional management & distribution costs in addition to regional advertising costs. A similar downward trend in OPMs can be seen in the comp set as well.
While the company sees ‘potential for 1200 stores’, based on history, it is far from clear that this would lead to any increase in operating profit/free cashflow/shareholder value.
Historicals & some comps
| Shoe Carnival Historicals |
|
|
|
|
|
|
|
| $ mn |
53 wks |
52 |
52 |
52 |
52 |
39 |
39 |
| |
2012 |
2013 |
2014 |
2015 |
2016 |
9 mo 16 |
9 mo 17 |
| Revenue |
855 |
885 |
940 |
984 |
1,001 |
767 |
776 |
| Growth |
|
3.5% |
6.3% |
4.7% |
1.7% |
|
1.2% |
| Gross Profit |
257 |
259 |
274 |
291 |
289 |
225 |
226 |
| GPM |
30.1% |
29.3% |
29.1% |
29.5% |
28.9% |
29.3% |
29.1% |
| EBITDA |
64 |
61 |
62 |
70 |
65 |
57 |
55 |
| EBITDA Margin |
7.5% |
6.9% |
6.6% |
7.1% |
6.5% |
7.4% |
7.1% |
| OP |
48 |
44 |
42 |
47 |
41 |
39 |
38 |
| OPM |
5.7% |
4.9% |
4.5% |
4.7% |
4.1% |
5.1% |
4.8% |
| Net Income |
29.3 |
26.9 |
25.5 |
28.8 |
25.7 |
24.4 |
22.8 |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Stores open @ y/e |
351 |
376 |
400 |
405 |
415 |
|
424 |
| Comp sales data |
4.5% |
0.0% |
1.8% |
3.0% |
0.5% |
|
0.9% |
| |
|
|
|
|
|
|
|
| D&A |
16.0 |
17.4 |
20.1 |
23.1 |
23.7 |
17.7 |
17.9 |
| CF Operations |
25.9 |
38.6 |
57.7 |
58.6 |
63.8 |
21.5 |
9.0 |
| Capex |
-26.0 |
-31.0 |
-33.5 |
-27.9 |
-21.8 |
-17.4 |
-16.7 |
| FCF |
-0.1 |
7.7 |
24.1 |
30.7 |
42.0 |
4.1 |
-7.7 |
| Share buyback |
-4.7 |
0.0 |
-7.5 |
-18.8 |
-42.6 |
-35.4 |
-29.8 |
| |
|
|
|
|
|
|
|
| Shares repo'd ('000) |
219 |
0.0 |
405 |
809 |
1,697 |
|
1,235 |
| Avg Price paid for repo |
21.35 |
0.0 |
18.60 |
23.27 |
25.11 |
|
24.13 |
| |
|
P/E |
OPM |
| Comps |
|
Actual |
Cons |
Cons |
Actual |
Actual |
Actual |
| |
Share Price |
2016a |
2017e |
2018e |
2014 |
2015 |
2016 |
| Foot Locker |
40.82 |
8.3 |
10.2 |
10.2 |
11.3% |
12.6% |
12.9% |
| Finish Line |
9.74 |
14.5 |
18.4 |
16.8 |
6.8% |
5.0% |
3.9% |
| DSW |
22.15 |
14.6 |
14.8 |
13.8 |
9.2% |
8.2% |
6.5% |
| Caleres* |
30.92 |
19.9 |
14.2 |
12.6 |
6.6% |
6.9% |
5.3% |
| Shoe Carnival |
26.75 |
18.7 |
17.8 |
16.2 |
4.5% |
4.7% |
4.1% |
| |
|
|
|
|
|
|
|
| *OPM for retail (Famous Footwear) segment only |
|
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Valuation
I really don’t see how this company is worth more than 6-8x operating profit and I think I’m being generous at that. End of year cash balances are overstated due to seasonal working capital fluctuations - I think that on a realistic basis, the company is about has $1.50 or so a share in net cash. Using a $40 million EBIT # at a 7x multiple and giving credit for $25 mn in net cash (y/e is overstated given seasonality) I don’t think this thing is worth more than $305 million or $18/share and I really think that is being generous. Given the competitive nature of the industry (shrinking gross margins and increasing cost of doing business), I think that OP will continue to gradually decline and see $12 or so (basically $30 million in OP at 6x multiple with some interim free cash flow plowed into over-priced buybacks) as a realistic price for the stock over a 3ish year horizon.
Risks
- Shoe Carnival is a full tax payer (37-38% over past several years) and could be expected to benefit from a tax overhaul. I say expected to benefit because at the end of the day, I believe that taxes are an input cost and these savings will ultimately be passed through to consumers in the form of lower prices. I would say that this would be the case for any company operating in a high competitive (commodity-ish) type business. While I believe this to be the reality, it wouldn’t surprise me in the least if the few sell side brokers covering this (and possibly some buyside investors) were to pile into these type of stocks because of the mechanical increase in EPS that one could project by simply changing the tax rate. And while I believe that in the medium term this benefit will be passed through to consumers, it is certainly possible that it takes a few quarters (or even a year) before my expectation shakes out. Of course I could also just be wrong about this. The flip side is that if the tax cut is a pass through to customers, this could stimulate demand for retail goods giving a bounce to sales.
- Weird little things can probably happen in this business like getting a fashion trend right (or even just a trend emerging and stimulating demand thus driving same store sales) or having the weather go a certain way. Getting a trend right here would certainly be less pronounced than at a branded shoe manufacturer but it could be a factor around the margin.
- Given the Chairman’s ownership, the company has a relatively small free float at ~$300 million or so and has been quite volatile over the past several years. Coupled with share buybacks, this could be bumpy.
- I feel like I should put ‘this thing could get taken out’ but I honestly can’t imagine somebody ponying up to buy this at anywhere near it’s current quote. I suppose stranger things have happened. I’ve never met the Chairman. Maybe he will buy it out at some stupid price and I’m an idiot for shorting this.
- Stock has always been expensive (got less expensive earlier this year during retail swoon), regularly trading at 18-20x P/E. I have no idea why but I suppose one could argue it isn’t expensive relative to its own history - as mentioned throughout this report, on a fundamental basis (both relative & absolute), I find it impossible to justify it’s value. Paradoxically, if I’m right about the intrinsic value of the business, the company’s relatively high valuation has harmed value creation via capital allocation as management has repurchased shares.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Retail gloom returns
- Gravity