Shoe Carnival Gets Walked On: Time to Buy?

Earlier this month, footwear retailer Shoe Carnival (NASDAQ: SCVL  ) lowered its guidance substantially after narrowing it back in January. Luckily, the company trades with little volatility and is about even with its starting stock price in 2013. This week, the company delivered financial results that were all together lackluster, and then went on to deliver disappointing guidance based on unfavorable weather-influenced shopping patterns. Let's look at earnings to see if there are any signs of long-term strength in the company.

Tough start
In last year's first quarter, Shoe Carnival achieved record results based on unseasonably warm conditions, which had consumers buying big in the early months of the year as opposed to the usual second-quarter spring shopping spree. This year, that trend was completely reversed, thanks again to Mother Nature.

High-margin sandal and sneaker sales, the second quarter's typical strong point, were hurt this March as the weather remained cold and wet for many parts of the country. This bodes poorly for Shoe Carnival's first-quarter results, for which management guided lower than the Street was expecting. Because of the cold weather, management expects Q1 earnings to come in around $0.36 to $0.44 per share, well below consensus estimates of $0.57.

As for the fourth quarter, the company performed on par -- though that par was lowered in the early days of March. Revenues managed to climb 13% to $205.7 million, though the bottom line came in at just $0.16 per share -- below the previously guided $0.20-$0.22 per share.

All of this bad news has the company trading close to its 52-week low, and at a valuation that could put the company in either activist or takeover territory.

Value talk
By the look of things, the second quarter should be a return to normal performance for Shoe Carnival, but that may not be enough for investors and analysts to switch from their current downtrodden opinion. The company currently trades at 12 times forward one-year earnings, and with an EV/EBITDA multiple of just 5.46.

DSW Shoes (NYSE: DSW  ) , for comparison, trades at nearly 16 times forward earnings and with an EV/EBITDA of 8.45. This would suggest that Shoe Carnival is available to investors at a discount, though it may just be indicative of the company's uninteresting near-term prospects.

Shoe Carnival may be appealing as a takeover, or activist target, given that it does generate substantial cash flow and has zero debt on the books. Free cash flow has been limited in recent years, given the company's expansion efforts. Management expects an additional $28 million to $29 million in capex spending for 2013. A larger company could come in and stabilize this spending, possibly closing underperforming stores and creating a more efficient, cash-rich business with plenty of cash to send to shareholders. 

Investors interested in value opportunities may want to keep a closer eye on Shoe Carnival in the coming months. If the stock continues to drop, it may present a very limited downside situation.

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