Shoe Carnival Stock: Growth at a Reasonable Price (NASDAQ: SCVL)

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2021 has been a strong year for the retail sector (XRT), with the index rising 40%, even beating the performance of the Nasdaq-100 (QQQ). One of the top performers, which hit new all-time highs, was Shoe Carnival (SCVL), which gained 99% for the year after a strong third quarter performance and a recent acquisition. With the Shoe Station deal being cash, this will provide incremental unit growth without dilution of the shares, while the company expects to return to net unit growth this year. Based on clear improvements in the business and an improving valuation, I would view pullbacks below $ 33.00 as buying opportunities.

Shoe carnival(Source: Company presentation)

Shoe Carnival released its third quarter results in mid-November, reporting record sales of $ 356.3 million, a 30% year-over-year increase. These strong results helped the company generate record earnings per share of $ 1.64, up 222% year-over-year, and put the company on track to post annual EPS of more than $ 5.00 this year. After the end of the quarter, the company acquired Shoe Station, a family chain that add ~ $ 100 million in net sales based on its 21 stores in 5 southeastern states. This has improved the long-term outlook, with a return to unit growth already expected after two years of net store closures in 2019 and 2020. Let’s take a closer look below:

Shoe carnival preview(Source: Company presentation)

For those unfamiliar with the business, Shoe Carnival operates 377 stores in 35 states, has a market cap of around $ 1.1 billion, and recently completed a two-for-one stock split, bringing its number to shares to approximately 28.2 million shares. The company managed to increase sales by a compound annual growth rate of 4.9% from 2000 to 2019 before the pandemic, and its brands include favorite brands like Crocs (CROX), NIKE (NKE), Wolverine (WWW ), Skechers (SKX) and New Balance. However, with the pandemic drastically reducing traffic, fiscal 2020 has been a tough year, with sales dropping to ~ $ 977 million. However, the company made a strong comeback in fiscal 2021, with cumulative sales of around $ 1.02 billion.

Revenue from the shoe carnival(Source: Company deposits, author’s table)

As shown in the graph above, Shoe Carnival experienced a full recovery in sales from pre-pandemic levels, with third-quarter revenue of $ 356.3 million, up 30% from one year to the next. This strong revenue growth resulted in the closure of seven net stores this year, offset by sales growth of 30.1% and impressive e-commerce sales, which nearly doubled from fiscal 2019 levels to exceed well over $ 100 million since the start of the year. Finally, the company’s loyalty program continues to grow like a weed, ending the quarter with around 28.5 million Shoe Perks members, up 10% year-over-year. The company noted that the good third quarter results were due to a significant increase in traffic, benefiting from a normal back-to-school season and a wardrobe refresh.

Carnival shoe store(Source: Company presentation)

While sales growth was exceptional, driven by a strong inventory position at the start of the quarter, reduced promotional activity and a significant rebound in traffic, the margin performance was even more impressive. In the third quarter, Shoe Carnival posted gross margins of 40.4%, an improvement of 840 basis points year-on-year. This was aided by the elimination of the Buy-One-Get-One-Half-Off promotion, which had a dilutive effect on margins. These results translated into quarterly EPS, which hit a record $ 1.64, which also benefited from sustained share buybacks (~ 209,000 shares bought back since the start of the year).

EPS Carnival Shoe(Source: YCharts.com, author’s chart)

Turning to fiscal 2022, it is unclear how much of these margin gains the company will retain, given that 2021 saw a significant increase in full-price sales compared to previous years across the board. sector. However, with a recent acquisition, continued share buybacks and a return to unit growth, the long-term outlook remains rather positive. So while FY2022 annual EPS is expected to decline sharply year-over-year based on current estimates ($ 3.95 vs. $ 5.10), we will still see significant growth compared to to pre-pandemic levels.

Shoe station(Source: Google Maps)

By digging deeper into recent developments, Shoe Station will strengthen the company’s presence in the Southeastern states and add up to $ 100 million in net sales. This increase of around 5% in the number of stores (21 stores compared to 373 stores at the end of the year in the current fleet) is not dilutive, given that the agreement was reached with the strong balance sheet of Shoe Carnival, with over $ 100 million in cash with no post-acquisition debt. This will notably complement a return to unit growth for Shoe Carnival, a slight tailwind in the future. Based on recent conference call comments, the company is expected to return to net unit growth in 2022, with plans to open more than 10 stores in 2023.

The other boost to future earnings growth will be share buybacks, with the company recently announcing a new $ 50 million share buyback program, resulting in around 5% of the free float at current levels. . Unlike some companies that announce share buybacks but rarely execute them, even in times of opportunism, Shoe Carnival has assuredly delivered in fiscal 2021 and continues to provide significant returns to shareholders, having returned over $ 230 million over the past eight years. Let’s take a look at the rating below:

Assessment and technical image

If we take a look at the valuation of Shoe Carnival below, we can see that the stock has historically traded well above 10 times earnings and the best time to buy the stock has been below 9 times earnings. profits. Evidenced by previous lows in the share price over the past few years with the first quarter of 2020 being an obvious anomaly due to the fierce bear market. Based on a current price of $ 38.00, Shoe Carnival is trading at just 10 times the earnings estimates for fiscal 2022, but if we remove the year-end cash that’s estimated to be around $ 140 million (around $ 5.00 per share), the stock is actually trading at closer to 8 times FY 2022. estimates.

Valuation of the SCVL share(Source: FASTGraphs.com)

This represents a very reasonable valuation compared to its historical multiple. Based on what I would say is a conservative multiple of 10 times earnings, the fair value of SCVL appears to be approaching $ 44.50 per share ($ 3.95 x 10 + $ 5.00 in cash). However, the goal should be to buy at a steep discount to fair value, especially in a market where the risk of a moderate to severe correction is high, as the S & P-500 (SPY) has passed close to 400 days without testing its 200 one-day moving average (the longest streak since January 2018). If we apply a 25% discount to fair value for cooking within a safety margin, this indicates a low risk buy point of $ 33.40 or less from a valuation standpoint.

Stock of carnival shoes(Source: TC2000.com)

SCVL actions(Source: TC2000.com)

Moving on to the technical chart, we can see that while the valuation is very reasonable at current levels, the stock is in the middle of its trading range. This is based on the fact that the stock has strong support at $ 31.50 but a new level of resistance at $ 44.30 after its sharp reversal in mid-November. Given that SCVL stands at $ 38.00, this indicates $ 6.50 of potential downside for support and $ 6.30 of upside for potential resistance. This results in a reward / risk ratio of 0.97 to 1.0, which is unfavorable for taking new positions.

As a general rule, I prefer a reward / risk ratio of at least 4 to 1 for small cap stocks, especially if the market risk is high when it is rarely profitable to buy breakouts or extended names. . In order for Shoe Carnival to meet this criterion from a technical standpoint, it would have to drop below $ 34.00 per share, where it would have $ 10.30 on the upside until its next resistance zone. and $ 2.50 on the downside to support. So while Shoe Carnival is attractive from a valuation standpoint, it is not supported by a low risk buy point, with the stock trading in the middle of its likely trading range.

Shoe carnival(Source: Company presentation)

Shoe Carnival had a strong year in 2021 with a strong recovery in earnings and is armed with an aggressive share buyback program to support the title. However, while the valuation remains fairly reasonable, I don’t see a low risk buy point on the chart. That’s not to say the stock can’t go up, but I would rather buy off support or stay away in extended markets. In summary, I think Shoe Carnival is a name to keep near the top of your watch list in the retail space, and I would strongly consider starting a position below $ 33.00.

Eleanor C. William