Shoe Station Group (SHOE) Bets On Localized Stores To Reverse A Slide

On September 10, Shoe Station Group (NASDAQ:SHOE) unveiled its first earnings under the newly adopted name, painting a picture of a company still in its early stages of recovery. Despite a 7.2% dip in second quarter net sales to $284.3 million, the report highlighted a promising 2.7% improvement in August comparable sales. This shift, according to interim CEO Clifton Sifford, stems from localized store product changes, a move away from the previously uniform store assortments.

The strategy appears to have worked, as adult athletic sales rebounded in August after a low single-digit decline in the second quarter. Running shoes from both men's and women's categories were also positive, while men's work boots, a loyal customer category, grew by 2%. E-commerce sales surged by 18.8%, despite a decline in store traffic, indicating that shoppers are buying but not visiting stores in the same numbers.

The company concluded the quarter with $131.6 million in cash, up $39.7 million from the previous year, providing ample funds for the localized rollout. However, the quarter was otherwise challenging, with Shoe Carnival stores seeing a 6.5% sales decline and the new Shoe Station banner dropping 8.4%. Gross profit margin fell 690 basis points to 31.9%, a result of a promotional footwear market and accelerated liquidation of aged inventory.

Management does not expect an immediate turnaround, emphasizing that they are not anticipating an improvement in the environment. Gross margin guidance for the year remains below last year's levels at 32.5% to 32.7%, suggesting a compression of 390 to 410 basis points. The company is experiencing an impairment charge of $6.7 million on 11 stores year to date, acknowledging that the core issue is not price but rather a marketing and trust problem.

This calls for more than just an improved boot wall. The stock is backed by 22 hedge funds, up from 16 in the previous quarter, and has a 39.49% short interest, indicating significant skepticism about the turnaround. With a forward P/E ratio of 14.95, the stock is trading at a middling multiple, neither anticipating a rebound nor a total unraveling.