Shoe Station Group, Inc. Common Stock 2027 Q2 Earnings Call

Good morning, everyone, and thank you for joining us today. With me on the call are Kerry Jackson, our Chief Financial Officer, Tanya Gordon, our Chief Merchandising Officer, and Marc Chilton, our Chief Operating Officer. Tanya and Marc are both available to take your questions during the Q&A portion of the call. This is our first earnings call as Shoe Station Group, which became official in June. The new name reflects our strategic vision, Shoe Station as our primary vehicle for long-term growth, operating alongside Shoe Carnival in an ongoing two-banner model, with each banner serving its localized customer base with the right assortment at the right price. Our second quarter results fell short of our expectations.

This morning, I'll cover what drove the quarter, what our product and customer data tell us, and the actions underway for the fall season, several of which are already showing up in our Q3 results. Kerry will then take you through the financials and our updated outlook. Three factors drove the quarter, and they interacted with one another. First, and this is the issue we identified and discussed with you on our first quarter call, the assortments in our Shoe Carnival and re-bannered Shoe Station stores were not fully aligned with the customers actually shopping those stores. This alignment by location includes brand, assortment, and sizing, all of which were not up to the standards we have set for our stores. When the assortment and sizing based on the customer that shops the store is wrong, promotion cannot fix it. Both of these opportunities showed in our quarter 2 results.

Second, we accelerated the liquidation of our aged and excess inventory. This was also deliberate. It pressured merchandise margin in the quarter, but it converted slow-moving inventory into cash and open receipt dollars for our fall assortments that I will describe in a moment. Our inventory ended the quarter down 5% from last year, and we remain on plan to reduce inventory approximately $50 million by year-end. Third, the footwear marketplace became increasingly promotional as the quarter progressed. Faced with that environment, we made a deliberate choice. We priced in-season product competitively to protect our market position rather than defend margin rate and lose the customer. That said, we were pleased with our customer conversion rate. When customers came in our stores during the quarter, they bought. Store conversion improved in both banners, rising to levels we have not experienced in years. What declined was traffic. Lower prices alone did not bring customers through the door.

Our challenge is clearly traffic and consumer awareness, not price, and that shapes where we need to invest. We will be communicating our value proposition and our assortment to both the legacy Shoe Carnival customer and the Shoe Station customer. The message will be differentiated, but it will communicate our improved assortment and value proposition. We need to rebuild trust with our customers that our stores offer the best selection of shoes and accessories at a great value for the entire family, and that takes effective and targeted communication, not deeper discounting. Let me spend a moment on the product, because the category detail tells you exactly where the assortment work matters and where we believe it is already paying off. Adult athletic, our largest business at roughly 37% of sales, declined mid-single digits, but the story underneath is mixed.

Men's athletic was down only about 1%, with the running category comping positive in both men's and women's. Where we underperformed was fashion athletic, including the basketball category. Running shoes are a staple for our customers. They trust us to have the best brands and a broad assortment. When we have the right brands in the right doors, we win. That is a localization thesis in one category. Women's non-athletic, roughly 23% of sales, declined high single digits with both sandals and women's sport casuals down double digits. Children's shoes declined high single digits. This is a business that we should own in the Shoe Carnival stores. Our family proposition in these stores start with the children's business. Our children's shoe buyers are as good as it gets in the industry, and they are rebuilding this business back to the levels we have traditionally experienced.

This is a huge opportunity for us, and we believe we will once again be the destination shop for kids' shoes. Men's non-athletic declined high single digits in dress and casual, while men's work boots, a replenishment business with a loyal customer, comped up about 2%. The pattern across all categories is consistent. Replenishment categories performed better. The categories that depend most on having the right localized assortment and sizing structures underperformed. We believe this is fixable, and we are very focused on making that happen. Back to school is the first evidence that our localized assortment focus is working. Ahead of the season, we were able to change many distributions to a more localized athletic assortment, the category that drives back to school.

In August 2026, the beginning of our third quarter, comparable store sales declined 2.7%, a substantial improvement from the second quarter's 7.1% decline, with improvement in both banners and continued double-digit e-commerce growth. As we move forward, our merchandise will reflect not only the right product based on the customer shopping in each store, but also the size profiles that best serve that customer. We believe the bigger opportunity is still ahead of us. The majority of our fall receipts localized across categories, not just athletic, arrive after back to school. I will say this plainly, I believe our boot assortment is outstanding, the strongest we have offered in several years, and boots are the most important fall category in family footwear. The brands, the styles, and the depth are targeted to each store's customer in a way they have not been before.

We are supporting the season with intensified advertising, an incremental investment directed at building customer traffic and communicating our assortment and value to both customer groups I described. The second quarter demonstrated that price alone will not deliver traffic. We believe communication is the missing element. During the quarter, we completed the rebannering of 20 stores, bringing the year to 21, and we do not expect to rebanner additional stores for the remainder of fiscal 2026. This pause allows us to concentrate on retail fundamentals, assortment, presentation, and the customer relationship, particularly at our converted stores where that relationship is still being established. We expect the promotional environment to persist through the balance of the year, and our updated guidance reflects that reality. We are not assuming the environment improves.

What we are assuming is that the actions I have described, localized assortments arriving for fall, a boot offering we believe in, and intensified advertising, continue to close the sales gap the way back to school has begun to. We enter the second half debt-free with strong cash position and inventory position for the season. With that, I'll turn the call over to Carey to review the financials and our updated outlook in detail.

Carey? Thank you, Cliff, and good morning, everyone.

Our second quarter results came in below the expectations underlying our first quarter guidance, driven principally by lower sales and gross profit margin in an increasingly promotional footwear marketplace. This morning, I'll review the quarter, our year-to-date results, fiscal August, and our updated fiscal 2026 guidance, which we have lowered. I will start with the balance sheet because it is the foundation from which we are managing through this period. We ended the quarter with $131.6 million in cash equivalents, and marketable securities, an increase of $39.7 million compared to the end of the second quarter of last year. We have no debt outstanding with $99 million currently available under our $100 million credit facility, which we expect to renew or replace in the second half of fiscal 2026.

During the quarter, we paid the 57th consecutive quarterly dividend. Inventory ended the quarter at $426.6 million, down $22.4 million, or 5.0% from last year, with inventory per store down 3.6%. This reduction was achieved deliberately through the accelerated liquidation of aged and excess inventory Cliff Sifford described, and we remain on plan for an approximately $50 million reduction in inventory by fiscal year-end. We are converting slower-moving inventory into cash while funding open to buy for localized fall assortments. Due to the lower than originally expected sales performance for the year, we are targeting the year-end inventory reduction at the low end of the range we gave in Q1 2026. One additional item. Following the Supreme Court's February rule striking down certain tariffs imposed under IEEPA, we submitted initial tariff refund claims in July and expect to file additional claims in the second half of fiscal 2026.