Appearing to be on a roll over the past few weeks, affordable footwear seller Shoe Carnival (SCVL -1.41%) first revealed strong third-quarter results in its late November 2021 earnings report and announced the acquisition of privately held Shoe Station. The deal is expected to start boosting earnings in the coming fiscal year, along with accelerating Shoe Carnival's ambitious expansion strategy. While the company's future looks quite sunny, there is one potential risk counterbalancing at least two big upsides.

1. It's building on a foundation of success

As it launches the next phase of its plans to build itself from a company with an approximate $1 billion market capitalization (market cap) into a multi-billion enterprise, Shoe Carnival is fresh from a record-setting Q3 giving it plentiful resources to work with. Store traffic rose more than 40%, driving a 39.9% year-over-year revenue surge to $356.3 million. Comparable store sales, or comps, grew 30.1%.

A person trying on a pair boots in a shoe store, with other boots on a wall display nearby.

Image source: Getty Images.

The success stemmed from long-term planning and seizing opportunities as they presented themselves. During the Q3 earnings call, executives noted the company's tactic of boosting inventory ahead of back-to-school sales paid off, as did the development of high-quality vendor partnerships enabling the stores to bypass many supply chain problems. The company CEO remarked that Shoe Carnival was "prepared and positioned to meet pent-up demand, and we did it."

At the bottom line, net income surged 218.4% to $46.8 million, while adjusted earnings per share (EPS) rose from $0.51 in 2020 to Q3 2021's $1.64 EPS. Cash dividends per share were boosted from $0.045 to $0.07. E-commerce sales grew 12.5%, and it saw a 10% rise in customer loyalty program memberships. CEO Mark Worden described these results as "by every measure that matters, our best quarter, of our best year, in our 43-year history," which not only points to operational success but is a solid springboard for more gains. The company ended the quarter with $173.3 million in cash, adding about $66.8 million net cash during Q3, a resource useful for the most recent part of its plans.

2. It just made a significant and financially positive acquisition

Well-heeled from its Q3 cash gains, Shoe Carnival announced on Dec. 3 it's snapping up independent shoe seller Shoe Station for $67 million in cash. Shoe Station has 21 retail outlets in the southeastern United States, along with what Shoe Carnival describes as "a comprehensive e-commerce site." The latter could help Shoe Carnival build out its e-commerce faster, along with its stated goal of rapidly expanding its brick-and-mortar retail footprint.

Profits are expected to accrue from the buyout right away, with a $100 million revenue boost expected in fiscal 2022 and immediate gains to adjusted EPS in the coming year. CEO Mark Worden stated, "this deal accelerates our journey toward becoming a multi-billion dollar retailer in the years ahead," making the company's goalpost clear. Even after the purchase, Shoe Carnival will still have about $100 million in cash available.

While the acquisition of Shoe Station is expected to be profitable in its own right, Worden made it clear in a telephone interview with Footwear News this is just the opening salvo in an ongoing, aggressive growth strategy. He said Shoe Carnival will continue opening new stores of its own, while its new subsidiary will start "growing the Shoe Station footprint immediately." He added that his company is "also looking for ways to increase our market share with further acquisitions."

Shoe Carnival is clearly not just resting on its laurels but is also investing its record-breaking gains into dynamic expansion, making the most of current opportunities. Footwear is forecast to grow at a relatively modest 2.3% through 2026 by market research firm ReportLinker, but it will also be worth $440 billion worldwide by that year, making market share gains by Shoe Carnival, if realized as planned, an engine for revenue, earnings, and share value growth.

A cautionary note in Shoe Carnival's stampede to growth

Shoe Carnival's initiatives seem to be coming together in a very bullish manner, but there's one possible source of difficulties lurking in the background. Its current acquisition and the additional acquisitions its CEO hinted might be in the works could potentially attract unfavorable notice from the Federal Trade Commission (FTC). The FTC announced on Dec. 3 it's abandoning the hands-off merger policy it has followed since 1995. A bureau director remarked that the FTC is reviving its "prior approval policy," which "forces acquisitive firms to think twice before going on a buying binge because the FTC can simply say no," as the National Law Review reports.

The FTC lost no time in ramping up its anticompetitive actions, firing off a lawsuit against major semiconductor manufacturer Nvidia the same day in an effort to halt Nvidia's $40 billion buyout of Arm Holdings, an English central processing unit (CPU) maker. While this is a much bigger acquisition than Shoe Carnival's buyout of a regional shoe company, the FTC isn't going after high-profile, "big fish" deals only. The FTC's displeasure was enough to prompt Sportsmans Warehouse and Great Outdoors Group to break off a planned merger. Though Sportsmans Warehouse might still be a growth story, the action illustrates the FTC is concerning itself in competition issues in lower-profile markets like outdoor clothing or fishing, camping, and hunting supplies. Shoes certainly aren't immune under the new policy.

If Shoe Carnival uses its remaining cash (and future windfalls) to go on what the FTC now calls an acquisition "binge" as part of its expansion strategy, it might attract the newly activist FTC's notice and possibly even lawsuits from the government agency. Despite this risk, however, it currently looks like a bullish pick among shoe stocks, dexterously using its juicy 2021 profits to build toward long-term growth and certainly worth consideration for investment.