While the quiet, publicly traded company hardly attracts the same attention as some of its larger retail brethren, Shoe Carnival Inc. has been a star performer during the past year.
Company President and CEO Mark Lemond said the 311-door chain has thrived, in part, because consumers continue to hunt for lower-priced, value-driven product. He said Shoe Carnival also has reaped a windfall from “some hot trends,” such as toning and boots.
No wonder, then, the Evansville, Ind.-based firm recently swung to a fourth-quarter profit of $2.6 million, reversing a $3 million loss in the period a year earlier. Additionally, it projected a higher-than-expected first-quarter profit.
Sam Poser, an analyst with Sterne Agee, said the company is also benefiting from having most of its stores located in strip centers, instead of malls.
“The convenience for consumers of not having to go to a mall is paying off huge for these guys,” Poser said. “On top of that, they’re delivering what the customer wants, and the executives’ execution — from buying the right products to having strong internal assortment systems — has made them a very compelling story.”
And Wall Street agrees. The company’s stock last Tuesday hit a 52-week high of $24.50, up from $7.39 on March 23, 2009.
Shoe Carnival, which operates stores mainly in the Midwest and Southeast regions of the U.S., aims to double its doors in the next decade by expanding into new areas of the country.
Here, in a rare interview, the soft-spoken Lemond talks about the company’s unique risk-averse strategy and how it will maintain its momentum.
FN: Shoe Carnival has done well by cementing its position in the lower-price channel. Has the bad economy, in a way, been good for your growth?
ML: It’s hard to separate the overall retail economy with the footwear industry right now because the footwear industry is enjoying such a big uplift that you really have to talk about the two in one breath. A couple of things are happening in retail and, more particularly, in the footwear industry. There’s been gravitation to the value sector. I don’t mean discount centers; I mean the mid-tier sector of retail and particularly those retailers outside the mall. You’ve got companies like Shoe Carnival, Famous Footwear, DSW that have very dominant presences outside the mall, and that’s where consumers are gravitating right now. The other thing that’s happening is there have been a number of very good, hot trends over the past six months.
FN: How have those trends affected your business?
ML: It started in the back-to-school period last August and it has continued through the fourth quarter. We started to see vulcanized products sell very, very well in the third quarter, products like the Converse Chucks. We also saw women’s flats sell very well, and then as we progressed through the third quarter, women’s, men’s and children’s boots really came on strong, particularly women’s fashion boots, in a variety of styles, not just shearling but suede flats and Western looks. And there’s one more important trend that took off in the fourth quarter: the whole toning or wellness category.
FN: What do you make of the toning category?
ML: It took off, and it continues to be an extremely hot category. It will continue to be a category that will see a definite lift in 2010.
FN: How does toning need to evolve to be a sustained, long-term category?
ML: Whether you call it the toning category, the wellness category or the fitness category, there are going to be tremendous off-shoots from that particular kind of footwear. The category itself is already expanding with new product innovation, and even though the toning shoes from Skechers — the Shape-ups — are not really innovative in terms of the technology, they did a good job of making that product mainstream. When Reebok came out with their EasyTones, it not only made the product mainstream with their advertisement but it was a little less aggressive in terms of style, so it was a little more mainstream in its look.
FN: Are mostly women buying the toning product, or are men embracing it as well?
ML: We don’t see as many men buying it. We don’t have the sell-throughs that we see in the women’s category, but men are buying it. They’re just not buying it at the same rate as women.
FN: What consumer groups are driving the Shoe Carnival business today?
ML: The female consumer drives the business on an overall basis. They buy our products for their children, for their significant others, for themselves. We do a really good job with the children’s business. But moms are buying the majority of the children’s shoes. So we direct our advertising primarily to women ages 18 to 49.
FN: Are you concerned that once the economy rebounds people will want to buy up-channel again?
ML: There’s a certain portion of the consumer base that may leave the moderate channel. But more important, there has been a shift in the consumer mindset from the conspicuous consumption that we saw three years ago to what we’re seeing now. The whole consumer behavior pattern is shifting to more of a value proposition, and companies like ours are very strategically positioned to take advantage of that.
FN: With so much competition in that price point, especially from Famous Footwear and DSW, how are you positioning Shoe Carnival to stand out?
ML: In different ways with different retailers. From the standpoint of DSW, we have a customer base that’s more athletic driven than DSW’s and with a little more of an eye toward the value proposition. We have a smaller footprint than DSW — we average about 11,000 square feet — but we carry nearly the same number of footwear units within our store. On average we carry about 28,000 units of footwear. But where they’re more dominant in the women’s fashion business, we’re more dominant on the athletic side of the business.
[In regard to] Famous Footwear, we’re a little bit different from them in terms of the size of the store and the amount of footwear we carry. Our sales per store are significantly in excess of Famous Footwear. That has a lot to do with the amount of inventory we carry per store and the amount of sizes we carry. In other words, the depth of the product mix is very different.
FN: Most of your stores are in the Midwest and Southeast. Have you tried to crack other territories, such as the Northeast or West Coast?
ML: If you draw a circle around the Midwest, our overall strategy has been to expand concentrically around that circle. The real estate in the Northeast has been, not prohibitive, but more expensive than real estate in the Midwest or Southeast. We’ll get there at some point in time; we don’t need to get there right now. It’s the same way with California. We are expanding, and we have big expansion plans in Arizona, Utah and Idaho — those states that border the very Western coastal states.
FN: Are there specific plans for growing your retail base?
ML: We’re planning to open 10 to 15 new stores this year, but we’ll probably close 10 to 15 stores as well. We don’t expect any net growth in terms of the store base in 2010. There are a couple of reasons for that. The biggest reason is the lack of new strip-center real estate development. When some of the big anchor stores in the strip centers we like to go into — Target or JCPenney, for example — slowed their growth, that led to a dearth of new strip-center development in the areas where we’re primarily looking to grow. But as that real estate development market picks up in 2011 and in future years, we fully expect to accelerate our expansion. While we’re only opening 10 to 15 stores in 2010, I would like to get back to opening 25 to 35 in 2011.
FN: Is there a total store target?
ML: Our plan is to grow this company nationwide. We’re at 300-plus stores right now, and we think we can grow the chain to around 700 stores. Our initiative over the next five to 10 years is to increase our expansion rate. When we look around the nation, we see the potential for 650 to 700 Shoe Carnival concept stores. Right now, we’re focused on profitability and cash generation during this economic downturn. But as the nation comes out of that economic downturn, we want to start expanding at an accelerated rate. We have a tremendous opportunity from an expansion standpoint with the concept we have right now, the Shoe Carnival concept.
FN: Let’s shift gears to talk about cost management. What have you done in that area?
ML: We curtailed our costs in terms of holding them fairly flat, not only at a store level but from a general administrative level as well. The one thing we did not do — and we did this for the sake of future expansion — is we did not have the massive layoffs that other retailers went through. In fact, we really didn’t have any layoffs at all. We lost a few people through attrition in 2008 and 2009, but only a few people.
FN: What other steps have been taken?
ML: We made some improvements in our logistics to save money from the standpoint of freight costs and distribution costs. One other key element of our strategy for the past couple of years began in 2007, when we started to cut inventory levels on a per-store basis. In 2007 and 2008, we followed that strategy, and in the second half of 2009, we started to build inventories again. We’ve put a push on building inventories, not greatly, but to the tune of a 5 percent increase on a per-store basis. That’s helped our sales in the past six months. We intend to continue to slightly increase our inventories into 2010. Even though we’re going to be faced with a tough economy, there are enough good, hot trends in the footwear business that we can take advantage of some of them by having a better in-stock position within our stores.
FN: One area the company appears to lag in is e-commerce. What’s the plan for that?
ML: We’re looking at e-commerce. We currently don’t have Internet fulfillment capability. We have stayed away from that strategically. I don’t think it’s a good fit from a profitability standpoint. Going into the future, we recognize that we need to do some innovative things in regard to e-commerce and the Internet. We’re looking at a number of different ways that we can take advantage of Internet marketing right now. Currently, we have a site that shows customers all the product within the stores and any store where they can find that product in their size within a 30-mile radius of where they are. We’re trying to do some things not by fulfillment through the Internet but by telling customers, “Here are our stores, here’s where your sizes are located, come visit our brick-and-mortar stores.”
FN: Shoe Carnival is a self-service, open-stock model. Is it hard to improve customer service there?
ML: When retailers were cutting back on their store-level payrolls and cutting costs, we didn’t do that. We kept the number of people in the stores fairly constant throughout this economic downturn. We’ve always prided ourselves on the service we give customers, even though it’s an open-stock format. We’ll have somewhere around an average of 10 to 12 people on the floor in our stores. Customer service is very important to us.
FN: Shoe Carnival has 311 stores and is publicly traded, yet the company keeps a low profile and takes a measured approach to most things. Is that by design?
ML: The fact that we’re retail-only probably plays into that from the standpoint of generating industry news, along with us being located in the Midwest. Obviously, we’re very well known in the wholesale community. We are a decent-size player. We’re in many sides of the industry if you look at it from an athletic standpoint and a non-athletic standpoint — and that’s one of the advantages we have. When a particular category gets hot, then our comp-store sales may not necessarily accelerate very dramatically, but at the same time, it’s a defensive strategy or a risk-averse strategy as well. We’re not reliant upon the athletic piece of it to drive comps, and we’re not reliant on the casual, dress-casual side of the business to drive comps. It’s a risk-averse strategy that has been working pretty well.