Quality business, cheap based on earnings
Shoe Carnival Inc (SCVL) (filings) (Wikipedia page) is a large shoe sales retail chain in the US. The company tries to create an atmosphere resembling carnival in its shops. It "encourages customer participation" with "upbeat music, opportunities for our customer to spin our iconic spin-n-win wheel, and a mic-person who runs specials for customers shopping at our stores." The company operates about 400 stores in the US.
Apart from the shopping experience the company focuses on the following key strengths: broad merchandise assortment, value pricing for customers, efficient store level cost structure, heavy reliance on information technology and disciplined approach to capital management.
On page 42 of the annual report the auditor mentions the following critical audit matter: "Merchandise Inventories". Red flag: the company has been using the same auditor since 1988.
Cash flow from operations is less than EBIT. This is caused by increasing inventory and taxes. I do not think the difference is a red flag.
Not only the stock is one of the best stocks among the US-listed low EV/EBIT + quality stocks at 35.18 USD per share, but also it is a good stock in my international low EV/EBIT + quality list. Furthermore it is among the best 69% in my international low EV/EBIT list.
On 3 December the company acquired Shoe Station for 67 million USD. Shoe Station is another shoe sales retailer with 21 stores in 5 Southeastern states in the US. The company intends to continue developing Shoe Station as a second brand. Furthermore, the company expects the transaction to be "immediately accretive to diluted net income per share in fiscal 2022".
The balance sheet is strong with moderate leverage, a high current ratio and no debts. There are 177 million USD of lease liabilities offset by about 120 million USD of cash and marketable securities and, according to page 19 of the quarterly report, an unused credit facility of 100 million USD. I do not see any financial distress here.
In July 2021 the company did a 2 for 1 stock split structured as a 1 for 1 stock dividend. I think the reason for the stock split was promotion (red flag): It "further underscores its confidence in Shoe Carnival’s long-term growth trajectory."
A search on the company name and keyword "fraud" did not reveal any relevant information.
Unlike many other public American companies the board is small. Including the CEO I count 6 directors. I think this predicts higher returns. According to page 14 of the annual report the chairman and main shareholder is an executive director.
Red flag: the chairman is 86.
In the board are 4 formally independent directors. One of the non-executives directors, Charles B. Tomm, is 75 and seems to have a busy daytime job as CEO of a "retail automotive company". Therefore, he might not spend enough time for his work at Shoe Carnival. He is also already for (almost) 10 years a director. After such a long time, he might not act fully independently anymore. Independent director James A. Aschleman is also already a director since 2012. Another independent director, Kent A. Kleeberger, is already a director since 2003.
I saw 2 comparison sites presenting data suggesting employees are relatively happy, which is a good sign. According to page 25 of the proxy filing the company is recruiting among its own employees for the highest positions in the company. I think that also suggests good governance.
The company pays a tiny dividend each quarter. In recent years it has spent substantial sums on repurchases, except for in 2020. In 2021 the company resumed repurchases. I expect repurchases to continue but so far repurchasing activity was less than in the year ending on 30 January 2019 and before.
Substantial shareholders: The 86-year old chairman J. Wayne Weaver and his wife 29.0%, the CEO Clifton E. Sifford 1.2%, Leigh Anne Weaver 6.3%, BlackRock 10.3%, Dimensional Fund Advisors 7.6%, Royce & Associates 2.9%.
According to page 45 of the proxy document there were no significant related party transactions in 2020.
According to page 43 of the proxy the chairman earns 300k USD per year for part-time work, which is about twice the average compensation for the non-executive directors. I do not think the chairman gets any equity based compensation, which is a good sign.
On 30 September 2021 the company replaced the CEO. I suppose the previous CEO retired, at 67 years old (page 7 of proxy). He stays as executive director though.
In 2020 the previous CEO earned 1.6 million USD of which about half as variable pay. In 2018 and 2019 he earned 2.4 and 2.8 million USD with about 2/3 variable pay. Compensation for the other 4 executives follows the same pattern. Normally they seem to earn about 1.4 million USD per year but in 2020 they earned much less. Variable pay makes up for the difference.
My take on Shoe Carnival
Shoe retailer in the US that is cheap based on EV/EBIT, EV/Revenue and other earnings multiples, at the current share price of about 31 USD. Strong balance sheet, good management resulting in good multi-year metrics for earnings quality and asset allocation. Though governance can still be improved I consider it better than at the average public company in the US.
In the past the company has paid out substantial amounts to shareholders, mostly through repurchases. Starting from the the COVID lockdowns it has reduced payouts. I suppose the company will increase payouts once COVID uncertainty fades.
Despite all these positives the stock price is pretty volatile. I attribute that to increase market volatility and the effect of COVID lockdowns. I suppose COVID measures will soon be something of the past. All in all, I think this is a good stock for a small position.