Shoe Carnival: Should We Buy or Avoid This Footwear Retailer Going Into Earnings?

Shoe Carnival (NASDAQ: SCVL  ) , one of the largest footwear retailers in the United States, has widely underperformed the overall market for the last several months and weak earnings have played a key role in its decline. The company is about to release its fourth-quarter report to complete fiscal 2013 after the market closes on March 20, and this report will have a strong influence on the share price for the next few months. Let's find out if the company is set to turn things around or if we should continue to avoid this beaten-down retailer.

Source: Shoe Carnival.

The last time out
On Dec. 2, Shoe Carnival released its third-quarter report and the results were mixed in comparison with analysts' expectations; here's a breakdown:

Metric Reported Expected
Earnings Per Share $0.54 $0.53
Revenue $235.80 million $239.49 million

Source: Benzinga.

Source: Shoe Carnival's Instagram.

Shoe Carnival's earnings per share decreased 10% and revenue decreased 3.6% year over year, as comparable-store sales increased 0.7%. Gross profit decreased 7.1% to $71.01 million and the gross margin took a hit, declining 120 basis points to 30.1%. Management was pleased with the quarter, given that this is not a very active period for retailers as customers await holiday season sales, and went on to give an initial outlook on the fourth quarter, calling for earnings per share in the range of $0.18-$0.22 on revenue of $215 million-$219 million. In summary, this was a good quarter for Shoe Carnival and the stock reacted by moving more than 4.5% higher; however, the company faced several unexpected issues over the next three months which have led to a reduction in its outlook and a sell-off in the stock, which we will discuss next.

Expectations and what to watch for
The current consensus analyst estimates for the fourth quarter call for another quarter of negative growth and look like this:

Metric Expected Year-Ago
Earnings Per Share $0.04 $0.16
Revenue $203.60 million $205.7 million

Source: Estimize.

These expectations call for earnings per share to decrease 75% and revenue to decrease 1% year over year; this is right in line with the updated outlook provided by Shoe Carnival on Jan. 9:

Metric Updated Outlook
Earnings Per Share $0.03-$0.06
Revenue $203 million-$205 million

Source: Shoe Carnival.

As you can see, these expectations are well below the original estimates given by Shoe Carnival in its third-quarter report. Management said the company experienced a strong selling season in October and November, but it then saw double-digit traffic declines in the first three weeks of December, which led to the outlook reduction; the weak traffic continued in January and the company sees comparable-store sales declining up to 4% during the month. Needless to say, things took a major turn for the worse for Shoe Carnival after the end of the third quarter.

Source: Wikinvest.

Key metrics aside, another very important update to watch for will be the company's outlook on fiscal 2014; currently, analysts expect earnings per share in the range of $1.50-$1.65 on revenue of $961 million-$980 million. With the extreme weakness the company has experienced in December and January, I highly doubt that it will be able to guide within this range.

Cliff Sifford, Shoe Carnival's chief executive, said he is "disappointed" with the expected sales and earnings for the fourth quarter and I believe this is an understatement. The dismal outlook on the quarter ahead has led the stock to fall more than 6% year to date, and I do not think it will regain strength anytime soon. Foolish investors might be wise to avoid Shoe Carnival going into earnings and, depending on what the company says in the report, maybe indefinitely.

The brands are strong, so what's the problem?
The brands being sold in Shoe Carnival's stores are doing very well, and this leads investors to believe that shoppers just don't want to visit the retailer anymore. Skechers (NYSE: SKX  ) and Steve Madden (NASDAQ: SHOO  ) , two very popular footwear brands, exemplify this observation; here's a look at what each company accomplished in its most recent quarter and a year-over-year comparison:

Metric Skechers Steve Madden
Earnings Per Share $0.28 $0.54
EPS Growth 250% 10.2%
Revenue $450.74 million $342.90 million
Revenue Growth 13.9% 8.7%

Source: Earnings Reports.

Steve Madden Shoes. Source: Wikimedia Commons

Skechers exceeded analysts' expectations on both the top and bottom lines, which caused shares to spike more than 19% on the day of the release. The company cited increased demand for its products and expects this demand to continue throughout fiscal 2014.

Steve Madden's quarter was mixed in comparison with expectations, with earnings in line and revenue missing by just $40,000; the market shrugged off this narrow miss and pushed shares 2.1% higher in the trading session. Steve Madden's retail segment was weak, but wholesale was strong, and this is the segment that does business with large retailers like Shoe Carnival. In review, if the brands the retailer sells are strong, why is Shoe Carnival experiencing such weakness?

The Foolish bottom line
Shoe Carnival has become one of the dogs of the retail industry and it does not appear that things will get much better following its fourth-quarter report. The company and analysts both expect negative growth and I do not believe its outlook on 2014 will be very promising either. For these reasons, I would avoid Shoe Carnival going into earnings and would recommend looking elsewhere for an investment. However, if you have your mind set on investing in the footwear industry, dig deeper into popular brands such as Skechers or Steve Madden. 

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