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Why Shoe Carnival Has Strong Growth Potential

- By Robert Stephens, CFA

Having risen 28% in the last year, the stock price of shoe retailer Shoe Carnival (SCVL) could offer further growth potential. The company is putting in place a refreshed strategy that includes an increasing use of data in order to differentiate its offering and strengthen its competitive position.

Further store openings are expected over the next couple of years, while changes made to existing stores are improving customer engagement levels. Increasing margins may also help to offset potential risks to sales growth if, as expected, consumer confidence declines during the rest of the year.


With a fair valuation and double-digit earnings per share growth forecast in the current year and next year, the stock could continue to beat the S&P 500.

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Leveraging data

An increasing use of data about its customers could provide Shoe Carnival with the means to differentiate its offering through increased personalization. It is in the process of implementing a customer relationship management initiative that will provide a greater amount of data in areas such as shopping habits and conversion rates. The data is expected to be used to provide a more relevant offering to consumers at the store level. It will also allow the company to target a broader range of consumers who have the same characteristics as existing customers.

Data from shoppers is also being used to enhance the company's loyalty program. In July 2018, it began the process of relaunching its Shoe Perks loyalty scheme, with a new gold level of rewards for its most active customers. On average, gold-level shoppers frequent the company's stores more regularly and spend on average 20% more than non-gold shoppers. The company's customer base has responded positively to its relaunched loyalty program. Conversion rates and engagement levels have been boosted, which could lead to improved comparable sales in future.

Store changes

Shoe Carnival continues to upgrade its store estate. Over the last two years its merchandise and real estate teams have sought to improve the metrics of stores that are failing to meet expectations. As a result of this strategy, it ended up closing 14 stores in fiscal 2018 versus a previous estimate of 35. Further improvements are expected to take place across the estate, while there are forecast to be 10 store closures in the current fiscal year as the business seeks to refocus on its most profitable locations.

In addition to store closures, there are expected to be around 10 new stores opened in fiscal 2020. As part of the process of identifying new sites and locations, the company is leveraging a wider range of data and analytics tools. This could enhance the performance of new stores, which could prove to be a significant catalyst on the business over the long run.

Risks

The company's most recent quarterly update showed signs that slowing sales growth may be ahead. Traffic declines were in the low single digits, while the average transaction value was flat. This could be a feature of the wider retail sector over the medium term, with the prospect of a slowing economy having the potential to cause consumers to become increasingly cautious regarding their spending levels. Consumer confidence declined in March, and is expected to experience a downward trajectory during the remainder of the 2019 calendar year.

In response, Shoe Carnival is seeking to improve its margins. Last quarter, for example, its gross profit margin increased by 90 basis points to 28.4%. This was made up of a rise in the merchandise margin of 50 basis points, while buying, distribution and occupancy expenses fell by 40 basis points versus the same quarter of the previous year. Further improvements in gross margin could help to offset slowing sales in the medium term.

Outlook

Shoe Carnival's earnings per share growth forecasts suggest that the strategy changes being made are having a positive impact on its financial prospects. In the 2019 fiscal year it is forecast to post a rise in earnings per share of 15%, with that expected to be followed by growth of 10% in fiscal 2020. Since the stock has a price-earnings ratio of 17, it could offer good value for money.

Although a slowing wider consumer industry could threaten its growth outlook, changes to its estate and the increasing use of data may enhance its competitive advantage and differentiation. Its loyalty scheme and the planned rollout of the customer relationship management system may further enhance its financial performance.

Even after comprehensively outperforming the S&P 500 in the last year, the stock could still offer investment potential for the long run.

This article first appeared on GuruFocus.