Shoe Carnival, Inc. Stock

Good morning, and welcome to Shoe Carnival's First Quarter 2026 Earnings Conference Call. Today's conference call is being recorded and is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

Management's remarks today contain certain forward-looking statements and certain non-GAAP financial measures. Forward-looking statements are subject to a number of risks and uncertainties that could cause the company's actual results to be materially different from those projected in such statements. Forward-looking statements should also be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's earnings press release.

Information about our use of adjusted or non-GAAP financial measures, including reconciliations to U.S. GAAP, can be found in our earnings materials that are available on our website.

I will now turn the conference over to Mr. Cliff Sifford, Interim President and Chief Executive Officer of Shoe Carnival, for opening remarks. Mr. Sifford, you may begin.

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 my second earnings call since returning as Interim Chief Executive Officer in late February. And I want to begin by thanking our Board, our management team and our associates across the company for their hard work during this period of transition.

When I returned in late February, the Board asked me to take a fresh look at the rebanner program and the broader strategic direction of the company. Working closely with Kerry, Tanya and Marc and the rest of our management team, we completed that review during the first quarter. Three conclusions emerged.

First, the Shoe Carnival and Shoe Station banners each serve distinct consumer segments, and the company is best positioned to operate both banners as permanent independent components of our portfolio. We are not pursuing a single banner strategy.

Second, while the rebanner program has been successful in markets where the consumer demographics aligned, our detailed analysis of customer data, individual store trade areas, shopping center cotenancy and brand awareness by market identified only a limited number of additional Shoe Carnival locations that meet the criteria for conversion. For this reason, we expect few store rebanners over the next 2 years, a substantial departure from the prior expectations.

Third, our store fleet includes underperforming locations that do not have a path to acceptable economics with or without banner conversion. We expect to close 12 to 14 such stores during fiscal 2026 and a further 6 to 10 stores during fiscal 2027. These decisions together with related fixed asset write-offs drove the strategic review charges of approximately $8 million that we recorded in the first quarter. I want to spend a moment on the Shoe Carnival banner, because we believe this banner has more potential than recent results have shown.

The first quarter offered an early indication of what is possible. Through a rebalancing of marketing investment and a more deliberate promotional cadence in our stores, we narrowed Shoe Carnival's year-over-year net sales decline to 2.2%, a meaningful improvement compared to the trends we experienced throughout fiscal 2025.

The plan from here is straightforward. We will restore the right product mix that delivers competitive opening price points our customer expects. We will pair that assortment with a measured in-store promotional cadence and supporting marketing presence. We'll execute consistently across the chain.

I want to be candid with you about the timing. We do not believe correcting the product mix will be visible in our reported results until back-to-school for athletic categories and into the fall season for nonathletic categories. We have also begun the effort to reengage the value-focused families in a more fast fashion-forward customer, both of whom we underserved in fiscal 2025, when our merchandising drifted toward higher price points and assortments that did not reflect what those customers historically came to Shoe Carnival to find. Reengaging those customers will take longer than a single quarter, but our back-to-school product offering and supporting promotions would demonstrate a clear return to the traditional Shoe Carnival proposition.

The Shoe Station banner net sales declined 3.1% in the quarter, the first banner level decline in some time. Part of that softness reflects the marketing rebalance towards Shoe Carnival that I just described, but it also reflects a more fundamental issue we identified through the strategic review, and one I want to address directly.

When we converted Shoe Carnival locations to the Shoe Station banner over the past 2 years, we applied a uniform Shoe Station assortment, one calibrated to the premium brand-led experience that our legacy Shoe Station customers in the Southeast know well. The assortment has performed well in markets where the trade area demographics align with the Shoe Station consumer profile. In other markets, however, the trade area retains characteristics of the original Shoe Carnival customer base and the uniform assortment has not resonated as we expected.

The path forward is not to reverse those conversions, rather, our merchandising team under Tanya's leadership and in close coordination with our key vendor partners is calibrating the assortment at each converted store to align with the actual demand profile of its trade area. In some markets, that means a more accessible mix within the Shoe Station banner. In others, it means leaning further into the premium brand-led positioning. The Shoe Station banner remains our premium concept, but the assortment discipline behind it is being tailored to each market. This is the most important operational priority for our merchandising team between now and August.

Our goal is to have the right assortments by store based on the customer shopping that particular store and time for back-to-school. Looking further forward, we expect to begin selective new store growth in fiscal 2027. Our plan currently contemplates 3 to 5 new stores in fiscal 2027, expanding to 8 to 10 in fiscal 2028. These new stores will be primarily under the Shoe Station banner and suburban trade areas within our existing 35-state footprint where the consumer demographic clearly supports the concept. We are executing this plan from a position of financial strength.

We ended the first quarter with $129 million in cash, cash equivalents and marketable securities, an increase of more than $36 million compared to the prior year quarter, and we operate with no debt. During the quarter, we also returned approximately $7 million to shareholders through the repurchase of 390,492 shares of common stock. This financial flexibility is a deliberate result of disciplined capital management over many years, and it allows us to fund the actions I have just described. The moderated rebanner activity, the store closures, the inventory normalization and the future new store program entirely from operating cash flows and existing reserves.

On a GAAP basis, we reported a first quarter diluted loss per share of $0.21, reflecting the costs associated with the Chief Executive Officer transition and the strategic review of our rebanner program. Excluding those charges, the underlying business generated $0.23 of non-GAAP adjusted diluted earnings per share, consistent with the consensus analyst expectations for the quarter.

Net sales of $270.7 million and a comparable store sales decline of 2.1%, both came in modestly ahead of consensus and gross profit margin of 33.3% was in line. Selling, general and administrative expense on a non-GAAP adjusted basis was modestly above consensus. That said, meeting consensus this quarter should not obscure the underlying issues we identified through the strategic review. The macro environment was a contributing factor.

Our customers, particularly at the Shoe Carnival banner are absorbing higher costs for fuel, food and other essentials with recent geopolitical developments adding pressure. We saw that reflected an unusually consistent softness across all 4 of our major footwear categories: adult athletic, men's nonathletic, women's nonathletic, and children, were each down low single digits in the quarter. That kind of cross-category symmetry tells us this is a consumer pressure story, not a category-specific one.

More fundamentally, the underlying issue in the first quarter was our product positioning at both banners. At the rebannered Shoe Station stores, our assortment was tilted toward a customer profile we have not yet attracted in meaningful volume to those locations, and one that, in many cases, does not naturally shop at the centers where those stores are located.

At our legacy Shoe Carnival stores, our merchandising has drifted toward a more moderate income customer, while underserving the value-focused family and fast fashion customers in large metropolitan areas, both of whom have been important customers for the Shoe Carnival banner. We believe those positioning issues are reversible, and both are being addressed by the corrective actions I described earlier.

We expect the work to begin to show in our results at back-to-school and athletic categories and through fall and nonathletic categories. Looking ahead, the consumer environment remains challenging. We expect continued pressure on moderate income households through the balance of fiscal 2026, particularly given the recent geopolitical developments affecting fuel and food costs. We are planning the business accordingly.

At the same time, the bulk of our annual earnings opportunity sits in back-to-school and fall, and our corrective actions at both banners are deliberately targeted to land in advance of those critical selling periods. For that reason, we are reaffirming the fiscal 2026 guidance we communicated in March. The most important quarters for our business are still ahead of us, and it is too early in the year to step away from the guidance we set. Kerry will walk you through the detail in his remarks.

I am confident in our team and the strategic conclusions that we have reached and in the financial foundations from which we are executing.

Kerry will now provide a detailed financial review of the first quarter. We will then open the line for questioning, after which I'll offer brief closing remarks. Kerry?

Thank you, Cliff, and good morning, everyone. Our first quarter results came in within the range of consensus analyst expectations with sales modestly above consensus, gross margin in line, and adjusted diluted earnings per share of $0.23 matching consensus. I will walk you through the detailed financial results, our balance sheet position and our reaffirmed fiscal 2026 guidance.

On a GAAP basis, we reported a first quarter net loss of $5.6 million or $0.21 per diluted share, reflecting $13.6 million of pretax charges associated with the CEO transition and strategic review of our rebanner program that Cliff described. These charges break down as $5.3 million of costs related to the CEO transition, primarily cash severance, the accelerated vesting of equity awards, outplacement fees, related payroll taxes and related legal costs. And $8.3 million of strategic review charges comprising of the impairment of 7 store locations, some of which were previously identified as rebanner candidates, write-offs of rebanner-related and corporate fixed assets and related lease costs.

The after-tax impact of these charges was $11.9 million or $0.43 per diluted share. Excluding these charges, non-GAAP adjusted net income for the first quarter was $6.2 million or $0.23 per diluted share. This compares to a net income of $9.3 million or $0.34 per diluted share in the first quarter of fiscal 2025. Net sales for the first quarter were $270.7 million, modestly ahead of consensus compared to $277.7 million in the first quarter of fiscal 2025. Total company comparable store sales declined 2.1%, also modestly ahead of consensus.

Breaking down performance by banner, Shoe Carnival banner net sales were $177.3 million, representing 65% of net sales, a decline of 2.2% compared to the first quarter of fiscal 2025. Comparable store sales at Shoe Carnival declined approximately 1.7%. This represents a meaningful improvement from the mid- to high single-digit comparable sales decline we reported at Shoe Carnival banner throughout fiscal 2025.

Shoe Station banner net sales were $93.4 million, representing 35% of total net sales and declined 3.1% compared to the first quarter of fiscal 2025. Comparable store sales at Shoe Station declined approximately 2.9%. While we saw an improvement in the rebanner stores, a moderation in the increase in Shoe Station's e-commerce sales resulted in the comparable store sales decline.

First quarter gross profit margin was 33.3%, a decrease of approximately 120 basis points compared to the first quarter of fiscal 2025. Within that, merchandise margin decreased approximately 140 basis points, primarily reflecting increased promotional activity and higher e-commerce-related shipping costs. The decrease was partially offset by approximately 20 basis points, primarily due to lower buying, distribution and occupancy costs.

The first quarter gross profit margin compression of 120 basis points is consistent with the full year fiscal 2026 gross margin expectation we communicated in March, which contemplates approximately 260 to 270 basis points of gross profit margin compression for the year, with the majority of that compression weighted to the first half.

Selling, general and administrative expense on a GAAP basis was $96.1 million in the first quarter, an increase of $12.3 million compared to the first quarter of fiscal 2025. Excluding the $13.6 million of nonrecurring charges associated with the CEO transition and the strategic review, adjusted SG&A was $82.5 million, a decrease of approximately $1.3 million compared to the prior year quarter. Of that decrease, approximately $0.2 million reflected lower rebanner-related costs and $1.1 million reflected the other lower selling expenses.

First quarter income tax expense on a GAAP basis was $0.6 million despite a pretax loss for the quarter. This reflects the nondeductibility of certain CEO severance payments, which increased reported income tax expense by approximately $1.6 million. On a non-GAAP adjusted basis, our effective income tax rate in the first quarter was approximately 27% compared to 28% in the first quarter of fiscal 2025.

We continue to operate from a position of significant financial strength. At the end of the first quarter, cash, cash equivalents and marketable securities totaled $129.3 million, an increase of approximately 39% or $36.4 million compared to the end of the first quarter of fiscal 2025. We remain debt-free.

Cash flow from operating activities in the first quarter increased $32.7 million compared to the first quarter of fiscal 2025. Capital expenditures during the first quarter totaled approximately $10.4 million, a decrease of approximately $3 million compared to the first quarter of fiscal 2025, primarily reflecting the moderated pace of rebanner activity.

Merchandise inventories at the end of the first quarter were $417.2 million, a decrease of approximately $11 million compared to the end of the first quarter of fiscal 2025. Consistent with the framework we communicated in March, we continue to expect inventory to decline by $50 million to $65 million by the end of fiscal 2026 compared to the end of fiscal 2025, driven by disciplined buying and planned promotional activity during the first half of the year.

During the first quarter, we returned approximately $12 million to shareholders through a combination of dividends and share repurchases. We paid a dividend of $0.17 per share, an increase of 13.3% compared to the first quarter of fiscal 2025. This marked the 12th consecutive year in which we have increased the quarterly dividend rate and the 56th consecutive quarter in which the company has paid a dividend. We also repurchased 390,492 shares of common stock during the first quarter for approximately $7 million, at an average price of $17.93 per share. As of the end of the first quarter, approximately $43 million remained available under our existing share repurchase authorization.

Turning to our fiscal 2026 guidance. The first quarter unfolded broadly in line with the consensus expectation on the key financial metrics. We are reaffirming the fiscal 2026 guidance we communicated in March, which continues to contemplate: net sales of $1.125 billion to $1.147 billion, representing a range of down 1% to up 1% versus fiscal 2025; adjusted diluted earnings per share of $1.40 to $1.60; gross profit margin of approximately 34%, representing approximately 260 basis points of compression versus fiscal 2025; reductions in adjusted SG&A of $12 million to $14 million versus fiscal 2025; and an effective adjusted income tax rate of approximately 26%. Our adjusted diluted earnings per share guidance excludes the impact of the CEO transition costs previously identified and strategic review charges recorded during the first quarter.

With that, I will open up the call for questions.

[Operator Instructions] Your first question comes from the line of Mitch Kummetz with Seaport Research Partners.

I guess, I've got a few. So let me start on the stores. I think you're at 426 now. So what is the mix between Carnival and Station on that number?

Do you want to take that? Marc, you want to talk about that?

I'm sorry?

Marc Chilton is on the call, and I'd like for him to give you that number.

And while you're looking for that, Cliff, you talked about closing 12 to 14 this year, and then you also talked about slowing the rebanners. So could you also address -- I mean, are the 12 to 14 all station stores? Are they some Carnival stores? And how many rebanners are you still looking to do this year?

And again, I'll turn that question over to Marc, who is our Chief Operating -- he's in charge of the stores. So Marc, please?

Yes, Mitch, when you look at the breakdown of Carnival, Shoe Carnival, Shoe Station, there's 281 Shoe Carnivals and 145 Shoe Stations...

And then the count of store closures?

I'm sorry, Mitch, have you asked about of the stores were closed. Almost a majority of them are Shoe Carnival. I think we have one right now slated in '26 to close that is a Shoe Station.

And then how many -- are you still rebannering over the balance of this year? And if so, how many are you doing?

No, we completed the rebanners for this year, this month in the middle of finishing them up. So we will be done going forward this fiscal year.

Mitch, If can I add. Can I add to that? The goal here now is to find sites to grow Shoe Station with new stores in the areas where the demographics match what we want Shoe Station to be. So there are chances that even in the cities that we serve today with Shoe Carnival, we'll be opening up across town with Shoe Station because that's where the customer that the Shoe Station wants to serve live. So that's the goal. And the new stores that we're opening up over the next 2 years will primarily be Shoe Station stores.

So maybe, Cliff, elaborate on that because in the press release, you mentioned, and I also think you hit on this in your prepared remarks that you see 2 distinct customer segments, one for Shoe Station and one for Shoe Carnival. Can you just maybe speak a little bit to what that means? Is this really about income level? Or is it -- how do you see these 2 customer segments?

In Shoe Carnival, you followed us a long time so that you know we served a very diverse customer base. Our strongest market was Chicago. We also had a strong market in Houston and other markets where we serve the Hispanic customer base, African-American, but we served a very distinct customer base or diverse in Shoe Carnival.

Shoe Station has been a little different and one that we found resonates well with a higher income customer, also diverse, but higher income, looking for better brands, better product. So that's the way we're going to run or the way we're going to grow Shoe Station in the future going after that customer, a diverse consumer with higher income, living in better size of town with -- and maybe a little older.

But one of the things that we've seen with Shoe Carnival is that it's a very young customer, families just getting started. And as they grow up and they get better jobs and their better income, sometimes we lose them at Shoe Carnival and we're replaced by the younger customers that are then coming up. Shoe Station takes amount at that point. And it is a great opportunity for us to service all customers of all income brackets. And that's why we're -- that's one of the reasons we're so excited about our opportunity. It's going to be a great growth opportunity going forward in markets and neighborhoods and shopping centers that we would not have been successful with, with Shoe Carnival.

Okay. And then, Cliff, at the Carnival side of things, you mentioned that you've tweaked kind of the marketing and promotional strategies there. Can you talk about what you've done, and how that's improved the performance of that banner?

Yes. The strength at Shoe Carnival, one of the things that we talked to you about early on as you covered us, was that when the customer walks in our store, our goal -- we assume that they want to buy one pair of shoes. They're there for that. Our goal is to sell them the second or third pair.

And we use the -- what we call the mic person that we make announcements in store to entice that customer to sell that customer a second or third pair. That mic person had been silenced somewhat and we're no longer calling out promotions. We un-handcuffed them and asked them to go back to the Shoe Carnival methodology that has made us so great in the beginning. And that worked, that worked.

The other thing that you'll see at back-to-school is that the promotional cadence for back-to-school on athletic and nonathletic product will be a little -- it will be paginated a little different than Shoe Station with some lower-priced product that will appeal to that customer with large families and then Shoe Station product will be a bit different even from there with higher price points, higher product categories.

And then on back-to-school, it sounds like some of the adjustments that you're making to the assortment that those will be in place on the athletic side, but the nonathletic piece won't come until a little bit later. I know that back-to-school skews athletic, but are there any concerns that you won't have the right nonathletic assortment in place for back-to-school, especially on some of these kind of price point items?

I'm going to let Tanya address that, but I'm going to start off by saying this to you is that there are brown shoe products that sell well during the back-to-school time period. And we will be in-stock on those items. But 70% of our business is still athletic during that time period.

Tanya, you should round that out.

Yes. Thanks, Mitch. Just to build on that, we will on the nonathletic side, we have made changes. We're just going to see a bigger shift when we get into the fall season when we really get into the nonathletic side of the business. And just to reiterate what Cliff said, 70% of the business at back-to-school is athletic, and we've positioned that very well.

We have positioned on the nonathletic side, some more of our urban brands where we walked away from that consumer, the Shoe Carnival consumer. So we do have those positioned on the nonathletic side, and we do have more value positioned on the nonathletic side for back-to-school. But again, as we move into fall and we get into our boot assortment, we were able to go back and make many more pivots before the third and fourth quarter.

Your next question comes from the line of Sam Poser with Williams Trading.

Just one, the timing -- this is paperwork. The timing of the store closures that you foresee this year, could we assume Q2 and Q4? Or is most of it going to be like right at the end of the fiscal year?

Yes. Sam, it's Marc. We're looking at 5 in Q2, 2 in Q3 and somewhere between 5 and 7 in Q4.

And then can you go in a little bit more into the local -- I mean, I'm paraphrasing the localized assortments that you're working to put in place and how long by both banners will take to sort of be at a level that you can work with, but I don't think you're there at the moment given the standardization of the mix that's been put in place?

Sam, it's Tanya. Yes, you're absolutely right. We are not there today, but we, again, have made changes for back-to-school and then more changes as we get into the back half of the year. We were able to go back and make pivots, because you're right, the assortments that we have in the store today, we bought all stores the same. So we got away from our localization, meaning really leaning into that urban consumer in the Shoe Carnival stores as well as the Shoe Station stores. We have urban customers in both markets and did not serve her properly in terms of assorting to the consumer in those markets, whether it's Shoe Station or Shoe Carnival.

So we have gone back and pivoted. We've got more assortments coming in to serve those consumers and to get more value in and making sure that the Shoe Carnival assortment, when you think about the assortment in terms of good, better, best and getting the value in there, both banners need the good, but Shoe Carnival leans much heavier into that good and that value. And we have gone back and pivoted. Again, you're going to see a lot more of that as we get into the second half of the year on the Shoe Carnival side just based on the pivots that we've been able to make and really increasing some of those urban brands on the Shoe Carnival side. So you'll see -- you'll definitely see it in back-to-school. But then as we get into the fall, you'll start to see even more changes just based on who the customer is.

And going back to what Cliff said, the customers are very different. The Shoe Carnival customer is a much younger consumer, fast fashion consumer at very value prices and a lot built on that good spectrum. So again, we had a lot of changing to do to get that Shoe Carnival assortment back the way it needs to be. And then Shoe Station, that consumer is a more mature consumer. They definitely like value. And on the nonathletic side, they like the brands, but they like the brands at a value.

So what we have today based on how -- what the direction was and how they were bought, we didn't necessarily have those at the right value. We have been able to go back and get the brands, the more mature brands that, that consumer likes added value, and we will be competitively priced in both banners. Does that answer your question?

Yes, it does. And then I have two more. One for Kerry. You talked about this 270 basis point drop in gross margin. You said that it would be skewed towards the front half. How should we think about -- I mean, how should we think about this at all? What is Q2 going to look like from a gross margin perspective? Because I mean, are we looking down like 500-plus basis points in Q2? And then -- or even, I mean, that's -- can you help us a little bit there?

Well, directionally, you're right about that because last year in Q2 was the biggest increase on a year-over-year basis in our merchandise margin. The merchandise margin was up almost 400 basis points. And we -- as we talked about in our Q4 call, we expect to give that back because that pricing was in front of the cost increases, and we were not competitive on our pricing at that point in time. So not only will we give up that 400 basis points, but we will -- through liquidation of product promotional categories that we'll do in Q2 to keep getting our inventories in better shape, we'd expect our merchandise margin to be higher decline. Having said that, though, we will leverage our BD&O against the higher sales base. So your 500 basis point may be a little high, but directionally, you're right -- you're right on the trend.

Okay. And then lastly, for Cliff, I have to ask you this question. I apologize ahead of time, Cliff. But how does the new Chief Merchant rank versus her predecessors?

Be honest with me, Sam. Your dog just gave you that question.

No, you were. I said, I didn't ask that question on the last call. So I felt like I needed to ask that. So no pressure, it's just a question, Cliff.

Here's the way I look at it. I hired Tanya. And after I got a very strong recommendation from Carl that I hired Tanya, and I hired Carl, and I always hire people that remind me of the way I did the business. So I would say I'm very proud of her, and I'm so happy that she's here. And we've just had a great string of great Chief Merchants every since I was hired by [ Marc Lamont ].

And then -- so Tanya, when are you taking over the entire company, and I'll leave it at that. And I don't need an answer, but have a great one and I'll talk to you soon.

Talk to you soon, Sam. Thank you.

Your next question comes from the line of Mitch Kummetz with Seaport Research Partners.

I guess, I have a few more. Cliff, you talked about some of these converted stores not aligning with their trade areas. Have you really been able to identify yet how many stores we're talking about? And can you give us that number?

I would ask Marc to maybe jump in on this one. But yes, we know the stores that don't align because that was part of the strategic review. It's truly not a hard -- in my mind and in Tanya's mind as well, it's really not a hard fix. It's just the timing of the fix because, as you know, actually, you probably know better than anyone that you're 6 months out by the time we identified the store on getting the right product. And it's not a complete change.

It's really important to understand it's not a complete change of the total inventory in those stores. It's just adding additional product into those stores, maybe eliminating some of the higher-end product, but adding in some of the opening price points of those stores to get them fixed. And Tanya, you should jump in on that because you're the one working through it.

Yes, absolutely. Just to build on that, the brands -- the overall brand mix, as you well know, based on the national brands, about 60%, 65% of the assortment is very similar because the national brands are what the national brands are, and we need to carry those. It's just the penetration of each of those brands that is different based on who the customer base is in each of the markets.

And then to Cliff's point, for the Shoe Carnival consumer, it's really getting in more value in those stores. And like I spoke to earlier, getting more of that younger fast fashion at a good price -- good opening price point. And then on the Shoe Station side, it's, again, really getting in the branded piece of it for that more mature consumer at a great value.

And then as an enterprise, as you think about running both of these banners long term, I think you said -- I think you're in 35 states. I know that station when you bought it, was relatively small initially. I think it was based out of Alabama that had a kind of a real Southeastern presence. Are there any -- do you see any limitations on Station, in terms of growing into your kind of geographic footprint of 35 states? I mean as you've opened stores in geographies outside of this kind of core, have those stores worked well? And do you see it as a banner that can function as broadly as the Carnival banner has?

Mitch, let me start with that one. I think that the key differential for the Shoe Station when we're looking at it is finding the right customer base, which, as Tanya and Cliff both said, is a little older, a little more affluent. So I think that is the limiting factor, not -- but ethnicity, as Cliff said, it hasn't been an issue in Shoe Station. So we don't perceive that there is a limitation to being a nationwide retailer if we can find the locations. Now obviously, that's over time.

That just -- I get excited when I think about some of the towns like Indy or St. Louis, some of the towns that we have historically been strong in, but in more urban areas, opening up those cities with a Shoe Station store in a higher income neighborhood or a shopping center and servicing the customer on both ends of the income spectrum, I just see it as a tremendous opportunity for long-term growth.

Marc, do you want to add?

Mitch, I would add to what Cliff just said. If you look at some of our top markets where we're very successful, we don't operate out of that entire market because there's large sections that a Carnival does not make sense. This gives us the vehicle to complete a market and to -- and I think it gives us a lot of room for growth as we look forward into areas, markets and states we already know very well.

Okay. And then two last ones. I think these are for Kerry. One, on the first quarter, can you give us comp by month? And then -- I don't know if you can add it to sort of how early 2Q is trending?

Well, directionally, I'll give you -- as we said at our Q4 call, February started out nicely, and we were comping up low singles. And then you get into the shift of Easter, which makes it a little bit more difficult. And then we ran into the macro issues where you could see a slowdown in the consumer. So the quarter ended much more difficult than it began.

And has that continued the macro, I don't think it's gotten any better in May. Have you seen that kind of continue into May?

We have -- that has -- that trend has continued into May. And we -- I'll just tell you, we believe that we're going to see a continuation of this trend into the macroeconomic issues clear up whenever that might be, or until we get to back-to-school. Because when we get to back-to-school, we'll be talking to our customer where they live and how they shop. And I think it's going to set us up differently than we've been set up in the past.

I'm truly excited about the opportunity for that time period and beyond. I said through -- I mentioned I'm going to get all subject in a minute and Kerry is going to slap me around. But I sat through a boot presentation the other day for this fall. And I just have to tell you, it is by far the best boot presentation I have ever seen, and it is so targeted to the customer that shops each one of these brands, Shoe Carnival and Shoe Station. And I just -- I am so excited about our opportunity even when you get past the boot presentation and see that the product mix in athletic and women's nonathletic past boot brand, it's just is very exciting to see. We have even reenergized the kids department where before, I believe that it was downplayed because it didn't seem to fit the Shoe Station customer base. But I've seen it. I'm excited about it. And I do believe that as we get toward back-to-school, you're going to see a change in direction from our sales.

So this is when Kerry steps in and guide to a double-digit positive comp for the fourth quarter then, right?

Yes. That's why I said he's going to not be happy with me. But I do -- there's a change. And yes, the geopolitical issues of today will still have an effect, but I think we can overcome some of that with the product mix I've seen.

Partly why we were able to feel comfortable reaffirming our earnings is that even with the difficult trend we're seeing in Q2, the opportunity we see in the second half, which we've said all along is that we expect to see a down first half and an up second half, and that's still played into our thought process when we reaffirmed our guidance.

Your next question comes from the line of Sam Poser with Williams Trading.

Okay. No more silliness. The comp that you -- sorry, will the comp be better in Q2 -- do you expect the comp to be better in Q2 than it was in Q1, given that you'll be in better position for back-to-school? And I assume July -- I mean July is what, 40%, maybe more of Q2 revenue?

I don't think it's quite at 40%. Back-to-school starts the third week of July, and it really is an August play for back-to-school.

Mitch, I think we're going to be cautious on giving any sales guidance at this stage on Q2 or even direction on that until we see the macro issues more identifiable. So it's a wildcard for us right now.

Well, let me ask you a different way, Kerry, is whatever you're trending, like you know how many dollars a week or dollars a day you're doing right now, correct? I assume over the first few weeks of Q2, correct?

Okay, yes.

And you know on a relative basis, given that the macro or the micro or -- it's not great out there, you generally know how things accelerate at back-to-school. So it would tell you even if things don't get better, they will stay the way they are, do you have some idea of where they're going to be. And -- but things have gotten arguably worse since you gave your initial guidance earlier in the year. So why not give direction based on what you know today, assuming it stays lousy?

Here's the thing, Sam, is that if the macro environment cleared up quickly, you could have a rebound with the consumer on the spring product, and they could be more open to buying at BTS earlier. If the macro environment doesn't open up for us, then we may not get that rebound we're seeing. We might have to get more aggressive there. So that's why we're going to shy away and stick with our annual guidance direction of we expect for the year to be down 1, up 1 and the first half to be down and the second half should be up.

And then can we assume that the gross -- because the gross margin guidance is inferring that, gross margin is going to be down triple digits in the back half. Is that just because you're going to be running sort of a more aggressive promotional cadence than you did, coupled with -- I mean -- and then -- well, then -- and how much is the tariffs work or the lack of thereof of tariffs help you potentially in the back half of the year?

Yes. And I add one additional item as we talked about in the Q4 call is that our margins -- so we raised the prices in Q2 of last year, and we weren't very competitive. We saw it in our traffic, but it helped our margin throughout the year. So we're more competitive on pricing, and I called that in the last call, somewhat artificial margin enhancement because it really wasn't sustainable over the long term. So that's where we're at.

So yes, in the second half, we will still have margin compression. It's really getting back to more promotional pricing, but we're also seeing average unit cost pressures through tariffs. And in the first half, you have to add in we have a liquidation product that we're trying to clear out our inventories and get cleaner and get the inventories down. So those components all play into it.

So then theoretically, you hit a base at the end of fiscal '26 and then that should -- and then once you get cleaner and where you should be, that's where potentially you can build back margins by within better localized assortments, being more directed, being able to target this promotional activity the way you once did, but not how you have recently done. Is that sort of -- I'm not asking for numbers, but is that -- that's a generally fair way to look at it?

Yes. And I made the statement last quarter that we expect to rebound in 2027 back into the 35%, which are more traditional. It's below what we did in '25, but that '25, but that wasn't sustainable. And '26 is below because we're getting a rebound effect, cleaning out inventory, but we should rebound back to normalized margins in '27 based on a reasonable economy.

We have reached the end of the Q&A session. I will now turn the call back to Cliff Sifford for closing remarks.

Thank you for your questions and joining us this morning. Before we close, I'll leave you with three thoughts.

First, the strategic review we completed in March and April has resolved the questions about our direction. The Shoe Carnival and Shoe Station banners are permanent independent components of this company's portfolio. The work from here is operational, getting the right product into the right stores, executing with discipline across the chain and reconnecting with our customers at both banners.

Second, the corrective actions we have set in motion are deliberately timed to support the back-to-school and fall selling periods, which represent the expected bulk of our annual earnings opportunity. The visible results of that work are expected to arrive during the third and fourth quarters, not the second. The team's focus through this summer will be execution against that plan.

Third, we are reaffirming our previous communicated fiscal 2026 guidance, and we are doing so from a position of financial strength. With $129 million in cash and marketable securities, no debt, and continued capital returns to shareholders during the first quarter, we believe we have both the time and the resources to execute this transition properly.

I am confident in the management team you heard from this morning and the strategic conclusions we have reached and in the financial foundation from which we are operating. Tanya, Marc, Kerry and I look forward to speaking with you in early September when we will announce our second quarter results and give an update on the important back-to-school selling season. Thank you for your interest in Shoe Carnival.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to Shoe Carnival's Fourth Quarter 2025 Earnings Conference Call. Today's conference call is being recorded and is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited. Management's remarks today may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual results to be materially different from those projected in such statements. Forward-looking statements should also be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's earnings press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date.

The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements discussed on today's conference call or contained in today's press release to reflect future events or developments. Today's call will reference forward-looking non-GAAP measures, including expenses related to CEO transition costs. These forward-looking metrics have not been reconciled to GAAP as all forward-looking expenses associated with the CEO transition are not known at this time. I will now turn the conference over to Mr. Cliff Sifford, Interim President and CEO of Shoe Carnival, for opening remarks. Mr. Sifford, you may begin.

Good morning, everyone, and thank you for joining us today. With me are Carrie Jackson, our Chief Financial Officer; and Tanya Gordon, our Chief Merchandising Officer. I want to address directly the leadership change since our last earnings call. Mark Wordon departed from his role as President and CEO on February 24. On behalf of the Board and the entire organization, I want to acknowledge Mark's contribution to this company throughout his tenure and wish him well. The Board appointed me Interim President and CEO and a search for a permanent successor is underway. Some of you know my history here well. I served as President and CEO from 2012 to 2021 and have remained on the Board as Vice Chairman since then. I know this business, I know our people, and I know what it takes to execute in family footwear retail.

My focus is straightforward: lead with clarity, execute with discipline and ground every strategic decision we communicate today and what our operational data supports. Let me turn to the results and a path forward. Fiscal '25 demonstrated this organization's fundamental operational discipline. Full year EPS of $1.90 exceeded consensus. Gross profit margin exceeded 35% for the fifth consecutive year. We ended the year debt-free for the 21st consecutive year with over $130 million in cash and securities. These outcomes reflect the work of 5,000 employees executing through a challenging consumer environment. The fourth quarter came in above consensus at $0.33 per diluted share. Holiday was intensely competitive, and we chose not to chase unprofitable sales volume.

That discipline preserved margins and protected the balance sheet as we moved into fiscal 2026. Shoe Station's full year results continue to validate the model. Shoe Station net sales grew 2.7% for the year, outperforming the family footwear industry for the third consecutive year, while Shoe Carnival sales declined. The Shoe Carnival banner still represents roughly 65% of total volume. The performance gap between our 2 banners is real, but we will be working diligently to improve Shoe Carnival's performance and lessen the gap between the 2 banners. I also want to note Shoe Station's e-commerce performance, which has been particularly strong. Online sales are demonstrating broad consumer resonance with Shoe Station brand and assortments well beyond the physical store footprint of the converted locations. That is an important signal as we think about the opportunity ahead.

I want to be direct about where the rebanner program stands and while we are adjusting the pace. Fiscal 2025 was the first large-scale deployment of this program. We completed 101 rebanners, a significant step beyond the initial 10-store test conducted in fiscal 2024. When we evaluated the performance of those 101 stores, particularly the second half results, we observed meaningful variability in in-store sales performance across the converted locations. Some stores are performing very well. Others have not yet achieved the results we expect from the model. As the number of stores increased, the e-commerce channel, as I noted, performed strongly across the board. That variability tells us we have more work to do before continuing conversions at the pace we had planned.

Specifically, we are focused on better understanding which consumer demographics respond most favorably to the Shoe Station format in store, which marketing approaches are most effective at driving sustained traffic to newly converted locations and how we can further refine product assortments and rebanner stores to improve in-store conversion and productivity. We are not stepping back from our rebanner strategy. We are being disciplined about its pace and targeting. We plan to rebanner approximately 21 stores before back-to-school 2026, while that evaluation is completed. The Board's conviction in Shoe Station as a company's long-term growth vehicle is unchanged. The proposed corporate name change to Shoe Station Group, Inc. remains on the agenda for shareholder consideration at our annual meeting on June 10, 2026.

At the same time, we recognize that Shoe Carnival banner continues to serve an important customer base in a meaningful number of locations, and we will continue to manage both banners with discipline and intent. We expect to provide updates on the longer-term rebanner trajectory as this work progresses and as we gain greater clarity on where the model delivers the strongest and most consistent returns. Kerry will walk you through the detailed financial guidance. Let me set the context. Fiscal 2026 has 3 operational priorities: reducing inventory, completing targeted rebanners and controlling costs. On the inventory, we entered fiscal 2026 with close to $440 million in merchandise inventory, up 14% from the prior year end. This increase is primarily opportunistic pre-tariff buys that supported our strong margin in fiscal 2025.

In fiscal 2026, we will work that inventory down through disciplined selling and targeted promotional activity. That process will create near-term gross margin pressure, but it is necessary and it is the right thing to do. On rebanners, we plan to convert 21 stores before back-to-school 2026, focusing on locations where we have high confidence in the underlying consumer and store level economics. We are using our customer analytics to more precisely tailor assortments by location, aligning product with both the customer who has historically shopped the store and the customer we intend to attract with more premium brand mix. This targeted approach reinforces Shoe Station as our primary store growth banner while supporting comparable store sales improvement across both Shoe Station and Shoe Carnival as we move through the second half of the year.

On costs, our SG&A expenses are expected to decrease approximately $12 million to $14 million compared to fiscal 2025 reflecting reduced banner activity and continued operational cost discipline throughout the organization. On the product side, I want to highlight a significant brand launch heading into the first quarter. We launched the Jordan brand from Nike, and it is currently available in over 60% of our stores with a full fleet rollout expected by mid-April. Jordan resonates across both banners, but we believe it will be particularly effective in our legacy Shoe Carnival stores, which serve a more urban consumer whose lifestyle and brand preferences align closely with Jordan's identity.

We believe Jordan has the potential to reach approximately 5% of our enterprise-level athletic sales. We do not expect all of that volume to be incremental as some displacement of existing athletic assortment is anticipated. But the brand addition is a meaningful positive and important signal of the strength of our vendor relationships. The financial results is EPS guidance of $1.40 to $1.60 compared to $1.90 in fiscal 2025. That step down is real, is explainable and is almost entirely a gross margin story, driven by the timing of our price and cost changes related to tariffs. Kerry will explain that dynamic in more detail. I also want to note that our fiscal 2026 guidance excludes CEO transition costs, which will be disclosed separately and reported as incurred. Earlier this month, the Board approved an increase in our quarterly cash dividends to $0.17 per share.

This marks the 12th consecutive year we have increased the dividend, representing a compounded annual growth rate of approximately 15.5% over that period. The dividend is payable April 20, 2026, to shareholders of record as of April 6, 2026. The company has now paid a dividend for 56 consecutive quarters. That record reflects a consistent commitment to returning capital to shareholders from a position of financial strength. In closing, I want to stress that the fundamentals of this business are sound. We have a debt-free balance sheet, substantial cash reserves, a proven store format with the Shoe Carnival banner and a proven growth vehicle with the Shoe Station banner that is winning where it has been appropriately deployed. The near-term earnings pressure is real. It is understood, and we have a clear plan to manage through it.

The decisions we are making in fiscal 2026 on inventory reduction on the pace and focus of rebanners and on cost discipline are deliberate and they're grounded in what our data tells us about our long-term returns. These actions are designed to position this company for meaningful improvement in fiscal 2027 and beyond. Kerry?

Thank you, Cliff. Good morning, everyone. I will cover the fourth quarter and full year financial results, balance sheet and cash flow, rebanner strategy financial impacts and our fiscal 2026 guidance. The guidance reflects meaningful context to interpret accurately and will provide that context in some detail. Net sales in the fourth quarter were $254.1 million, a decline of 3.4% versus $262.9 million in the fourth quarter of fiscal 2024. Comparable store sales declined 3.5%. By banner, Shoe Station net sales were approximately flat with a low single-digit comparable store sales decline. Shoe Carnival net sales declined 4.5% with a mid-single-digit comparable store sales decline.

Rogan's now fully integrated into the Shoe Station's operating structure, generated $15.5 million in net sales with product margin expansion exceeding 500 basis points as we completed the transition to the Shoe Station assortment in those stores. Gross profit margin was 34.9% in the fourth quarter, approximately flat compared to 34.9% in the fourth quarter of fiscal 2024. Merchandise margin expanded 30 basis points, reflecting continued pricing discipline. This improvement was offset by 30 basis points of deleverage in buying, distribution and occupancy costs on lower overall sales volume. The holiday selling environment was highly competitive, and we made deliberate pricing adjustments to maintain competitiveness through December without sacrificing the quarter. SG&A was $77.8 million or 30.6% of net sales compared to $77.6 million and 29.6% in the prior year period.

The year-over-year increase as a percentage of sales reflects deleverage of the lower revenue and approximately $2.7 million of rebanner-related investment, partially offset by lower variable selling costs. Net income was $9.1 million or $0.33 per diluted share, exceeding consensus expectations. For context, this compares to $14.7 million or $0.53 per diluted share in the prior year quarter. The prior year fourth quarter contained certain tax credits and other benefits associated with the Rogan's acquisition that totaled $0.19 per share and did not recur in fiscal 2025. Our Q4 2025 earnings contained approximately $0.08 per share of rebanner investment and otherwise increased $0.07 per share before the impacts of these prior year Rogan's benefits and current year rebanner investment.

For the full fiscal year, net sales were $1.135 billion, a decline of 5.6%. The full year comparable store sales decline was also 5.6%, with Shoe Carnival's mid-single-digit decline, partially offset by Shoe Station's low single-digit growth. Shoe Station's net sales were $236.7 million, representing 21% of total net sales. Shoe Station grew organically 2.7% versus fiscal 2024, outperforming the family footwear industry and exceeding Shoe Carnival's performance by 10.4 percentage points for the full year. Full year gross profit margin was 36.6%, an increase of 100 basis points versus fiscal 2024's 35.6% and the fifth consecutive year of gross margin has exceeded 35% Merchandise margin for the full year expanded approximately 180 basis points compared to fiscal 2024.

I want to spend a moment on that merchandise margin expansion because it is an essential context for understanding our fiscal 2026 guidance. In Q2 of fiscal 2025, the company made a deliberate decision to raise retail prices in anticipation of tariff-driven cost increases. At the time of that price increase, tariff-affected product had not yet entered our cost stream. Our average unit costs were still based on pre-tariff inventory. The result was a period during which we were selling at higher prices before our cost increase, generating a temporary but meaningful benefit to merchandise margin. This dynamic contributed significantly to the 180 basis point merchandise margin expansion and the full year 100 basis point gross margin improvement. This decision was appropriate given the information available and the tariff environment at the time.

It materially supported fiscal 2025 results. However, it creates a challenging comparison of fiscal 2026 when tariff costs arrived in our cost of sales while our ability to raise prices further is constrained by competitive dynamics. This timing mismatch is the primary driver of gross margin compression in our fiscal 2026 guidance. Full year SG&A was $348.4 million or 30.7% of net sales versus $337.6 million and 28.0% in fiscal 2024. The 2.7 percentage point increase as a share of sales reflects approximately 2.0 points of rebanner investment and the balance from deleveraging on lower revenue. Full year operating income was $66.8 million or 5.9% of net sales. Net income was $52.3 million or $1.90 per diluted share compared to $1.87 consensus estimate, a modest but meaningful beat.

The full year rebanner P&L investment reduced operating income by approximately $24.1 million or $0.66 per diluted share. Our balance sheet remains a genuine competitive advantage. We ended fiscal 2025 with $130.7 million in cash, cash equivalents and marketable securities, an increase of approximately 6% from the end of fiscal 2024. We had no debt outstanding, the 21st consecutive year we have ended the fiscal year debt-free, $100 million of available revolving credit and $50 million remaining under our share repurchase authorization. Operating cash flow for fiscal 2025 was $71.3 million. Capital expenditures were $44.7 million, primarily rebanner related. Merchandise inventories ended fiscal 2025 at $439.6 million, up 14% compared to $385.6 million at the end of fiscal 2024.

As Cliff noted, this elevation was intentional. We made opportunistic pre-tariff buys of seasonal merchandise and in-demand product in advance of expected cost increases. Those purchases directly supported merchandise margin expansion in fiscal 2025 and are expected to partially offset higher tariff affected costs as that inventory is sold in fiscal 2026. Working the inventory position down in fiscal 2026 is an operational priority. That process will involve targeted promotional activity on merchandise that is not of the ongoing assortment and other excess merchandise, which will create a near-term pressure on merchandise margins. That pressure is accounted for in our guidance. As Cliff described, we will complete approximately 21 store rebanners in the first half of fiscal 2026 compared to the 71 stores previously communicated. The financial implications are incorporated in our guidance. Total rebanner P&L investment for fiscal 2026 is expected to be in the range of $10 million to $15 million compared to the $25 million to $30 million previously communicated.

The reduction reflects the lower number of rebanner conversions planned, partially offset by the continuation of customer acquisition and marketing costs for stores converted in fiscal 2025 that are still ramping up. Rebanner capital expenditures for fiscal 2026 are expected to be in the range of $5 million to $7 million compared to the $25 million to $35 million previously guided, consistent with the revised rebanner plan. Regarding inventory reduction, notwithstanding the reduced number of store conversions in fiscal 2026, the company remains committed to reducing merchandise inventory by $50 million to $65 million during the fiscal year.

We will achieve that reduction primarily through the sale of opportunistic pre-tariff and in-demand products purchased in fiscal 2025 and increased promotional activity as we work through excess inventory with the majority of that promotional selling concentrated in the first half of fiscal 2026. As inventory normalizes, promotional intensity is expected to moderate in the second half of the year, which supports the improvement in gross margin trends we expect from the first half to the second half. The inventory reduction is expected to significantly increase our operating cash flow in fiscal 2026 compared to fiscal 2025.

Coupled with the now expected lower capital expenditures, this provides increased flexibility to fund growth investments from cash reserves. I want to frame the fiscal 2026 guidance carefully because the year-over-year comparison requires more context than typical guidance discussion. Our fiscal 2026 guidance excludes CEO transition costs, which will be reported separately as incurred. Net sales are expected to be down 1% to up 1% versus fiscal 2025.

Comparable store sales are expected to decline in the first half as the fleet composition remains similar to the latter part of fiscal 2025. As 21 stores complete conversion before back-to-school and Shoe Station's e-commerce and store momentum continues, we expect comparable store trends to improve in the second half. The full year comparable store sales results is expected to show improvement versus the 5.6% decline in fiscal 2025. Gross profit margin is expected to be approximately 34%, a decline of approximately 260 basis points compared to fiscal 2025.

Let me walk through the 3 components of that compression directly. First, tariff-driven cost increases. As pre-tariff inventory is sold and replaced with higher cost tariff-affected goods, average unit cost increase. This is the cost side of the equation. Second, the nonrecurrence of the fiscal 2025 price increase benefit. As I described in the full year results section, we raised prices in early Q2 fiscal 2025 before the cost increased. That benefit, higher prices, lower costs does not repeat in fiscal 2026.

In fact, our retail pricing may be moderated, not increased, given the competitive environment our customers are shopping in. Third, promotional inventory reduction activity. Working through the excess merchandise requires promotional selling, which compresses merchandise margin in the near term. I want to offer an important frame for these factors in aggregate. Our fiscal 2026 gross profit guidance reflects a decline of approximately 260 basis points from fiscal 2025. The compression we are reporting versus fiscal 2025 is primarily the unwinding of a timing benefit that was always temporary, plus modest net headwinds from tariffs and promotional activity.

In fiscal 2027, we expect to return to a more historically typical gross margin of better than 35%. On expenses, SG&A costs are expected to decrease approximately $12 million to $14 million versus fiscal 2025. The decline is primarily due to lower banner costs from the reduced conversion plan and ongoing operational discipline across the organization. Pulling it together, net sales down 1% to up 1%, gross margin of approximately 34% and expenses down $12 million to $14 million produces expected operating income in the range of approximately $47 million to $55 million. After interest income and taxes at an expected rate of approximately 26%, we expect EPS in the range of $1.40 to $1.60, excluding CEO transition costs compared to $1.90 in fiscal 2025. From a quarterly cadence perspective, the first half will carry more of the gross margin pressure as we sell through elevated inventory and execute rebanner conversion.

The second half benefits from improved comparable store sales trends as newly converted Shoe Stations locations ramp, the stabilization of inventory levels and moderation of promotional activity. We will provide more specific quarterly perspective when we report Q1 fiscal 2026 results in late May. The fiscal 2026 guidance reflects an honest and fully supported assessment of the gross margin environment, the work required to normalize inventory and the more measured pace of the rebanner program. The expense reductions are real and operational. The balance sheet is strong and expected to grow stronger with normalizing inventory.

Shoe Station continues to grow in both its stores and e-commerce channels. The EPS step down from $1.90 to the $1.40 to $1.60 range is significant, but it has clear and explicable cause. The multiyear gross margin context I provided demonstrates that fiscal 2026 represents a return toward historical norms, not a structural deterioration of this business. I will now open the call for questions.

Your first question comes from Mitch Kummetz with Seaport Research.

Cliff, welcome back. I've got a few. Let me start with -- you guys talked about some variability of the Shoe Station in-store performance. Could you just explain what's going on there? Is that a function of the demographics, household income, assortment, lack of awareness of the concept in certain markets? Can you just help us understand why you're seeing that variability across stores?

Mitch, to be back. Good to hear from you. S the best way for me to answer that is a little bit of everything you mentioned. We rebannered stores in Shoe Carnival locations and where Shoe Carnival customers shop, where Shoe Carnival co-tenancy is. And we may have raised the assortment level a little too high for that consumer. So we need to go back and it's part of what we're doing now.

We're just digging into each one of those stores to understand the customer that's there to understand the demographics within the range of the store so that we can make the corrections from a product standpoint and get the comps to perform once again. The the first few stores that we opened up were in great locations that serve a customer with a higher income level, higher demographics.

And then we started converting Shoe Carnival stores. And I believe that we converted them too quickly before we did the -- too quickly before we did the research on the individual stores. So I think it's a fixable problem.

It's something that we're working very hard on. I believe that my goal is that by back-to-school, we have the assortments adjusted in those stores so that we can enjoy a better second half.

And then just as a follow-up on the rebannering. I think you said you're at 144 Shoe Station stores now. Is it reasonable to think that maybe some of those need to be converted back to Shoe Carnival stores? And when you think about the business longer term, under the prior CEO, there was talk about Shoe Station eventually being essentially the entire fleet. Kind of where you guys sit today, are you rethinking that? And is the go-forward strategy maybe that there's reason to have 2 banners instead of just Shoe Station down the road?

So let me take your first question first. No, we're not absolutely not going to rebanner a Shoe Station store back to a Shoe Carnival store. We are going to adjust the product mix in those stores, especially where the demographics demand that so that we can get the customer that was shopping in those stores to shop in the Shoe Station stores. As far as the second question, we absolutely will -- I hate to put an absolute to it, but our goal at this point is to operate 2 banners.

We think that the diversity of our customers, especially as we enter into the Midwest and North-midwest and South, we should operate those stores as Shoe Carnival stores. And Shoe Station will then be operated in the appropriate areas where the demographics call for the kind of product mix that we won't Shoe Station to carry.

And is it too early at this point to say kind of what that might look like long term operating 2 banners? I mean, is there an opportunity to have 2 national chains under the company? Or how do you think about that?

We're still in the process of studying that. We -- I'm not prepared today to give you that answer. But I hope by the next call that we can flesh that out a little further for you so that you understand what the growth aspirations are for each one of those banners. I do think the growth opportunity for Shoe Station is still strong. I just think we need to look at market areas that have, as I said before, higher income demographics and the consumer that's looking for the brands that we carry in the premium brands that we carry in Shoe Station.

Okay. And then last one for me. Kerry, as far as the guidance goes, and I do appreciate the additional color. It sounds like -- and it sounds like you're actually going to give more color on the next call. But from what you said, I think both from a sales and then especially from a margin -- gross margin standpoint, it looks like more pressure in the first half than the back half. Is there anything more explicitly you can say about the first quarter in terms of comp, in terms of margins and earnings?

We're not going to give any details on the per quarter. But I'll give you some -- but you're right about the margin 2026 and the guidance is really a margin story. And it gets back to in Q2 of last year, we made a conscious decision to raise our pricing prior to the tariff costs entering our inventory. And what we saw was an elevated merchandise margin beginning in Q2.

In fact, the merch margin in Q2 was almost up 400 basis points, whereas in Q1 of '25, it was up about 50 basis points. So the compare is very difficult and the hardest compares in Q2, and that's where we're seeing the most pressure we're going to see is in the first quarter. So we're helping understand that those temporary increases, we knew going into it that the cost was going to catch up to us on the tariff side of it, but it'd be mainly in 2026.

And that 180 basis point merchandise margin increase that we had in '25, we're saying we're going to give that back. And then -- you add that some additional pressure due to reducing inventories, et cetera, and that accounts for the full 260 basis points of margin pressure we've built into our guidance.

Your next question comes from Sam Poser with Williams Trading.

I guess welcome back, Cliff, and welcome back Kerry, and it's good to have...

I heard Carl coming back next week. Is that...

Carl only comes back to have lunch.

I guess, well, I hope he has a good lunch.

Anyway, the... Question -- I want to follow up on -- I want to get some idea. You're down 260 -- you're saying down 260 for the year. Could you give us some help as to -- is the first half of the year going to be down 350 and then the second half, the balance in the second half. Can you just direct us on the gross margin so we can at least be in some kind of ballpark?

Well, I would tell you to look at, particularly in the first half, the increase that we had in our merch margin, and I just gave you the numbers on that. We're expecting that to fully reverse in our '26 because that was gained artificially. And then the additional pressure of the markdowns and the tariff costs coming into our inventory, which obviously we're seeing today, that's going to put -- that's the pressure we're talking about.

So I get that.

I mean, I guess -- so in Q2, you had 390 basis points of merchandise margin increase last year and then you delevered your BD&O. I assume you're expecting BD&O deleverage on top of that big increase. So I mean, we could be looking at Q2 in the down what 450, 500 point range for gross margin. Is that -- am I thinking about that right?

Well, directionally, yes. And like I said, we're not giving quarterly. On an annual basis, BD&O is relatively flat from a leverage standpoint in our guidance. The tier effect on an annual basis is really coming out of the merch margin for the aforementioned issues that we talked about.

And on the merch margin, I would think that the biggest pressures on the merch margin from a tariff perspective would be Q2 and Q3. And then Q1 has some pressure there, but more pressure on markdowns.

Well, keep in mind, the biggest pressure in the year is the temporary increases we took in 2025. That's the biggest part of the whole thing. And that was -- the tariff costs were not dramatic in our inventory in 2025. That pressure we're going to see flow through into 2026. So the 180 basis point improvement that we saw in 2025 was really the pricing that we increased starting in Q2 that we just can't repeat in 2026.

In fact, we'll see pricing pressure likely because of the economic environment. We can't continue to increase prices, and we're going to probably have to reduce some of those prices to reflect the market.

I mean I think that's exactly what I said. I mean, forget about the pricing, you took the prices last year and you benefited from that big in Q2 and Q3. Q1, you hadn't taken the prices yet and you hadn't taken the prices yet in Q1.

So you're getting the benefit from the price in Q1, but that's going to be offset by promotional activity. And then in Q2 and Q3, you have the flow-through of the tariffs and you're lapping those price increases that you took. So Q2 and Q3 from a tariff/price increase comparison should be the worst, but then you'll sell more full price goods in Q3, which is the offset. But in Q1, you would -- so I mean, Q1 and Q3 look like they'd probably be similar from a year-over-year basis for different reasons as far as the change.

Well,Q1 in '26 won't be as hit -- won't have as much margin pressure because we still have the pre-tariff inventory that we're going to be -- that we've talked about all year. That's the purpose of carrying the higher level of inventory for most of the year is the benefit, and we'll see that benefit in Q1. So even though -- so the comparisons margins were only -- merch margins were only up 50 basis points in Q1 last year.

We're going to -- so we're -- and we'll have the benefit of selling pre-tariff goods inventory. So in Q2, we'll have less of a benefit of that -- we also have a very difficult compare where our merch margins were up almost 400 basis points. That's why we're saying Q2 is the most difficult margin compare for the year, and it will be the most decline on a year-over-year basis.

All right. And then let's move on to Shoe Station. The -- you mentioned that -- could you -- you mentioned the comp was for the quarter -- for the year, it was up low singles. And for the quarter, it was down low singles. Can -- but you've said that your e-commerce -- like how do the stores do versus e-commerce? I mean, like it sounds like the stores are lagging e-commerce. So that 1,000 basis point difference for the year in the comp, how much of that was driven through by the e-commerce versus the stores versus compared to Shoe Carnival?

Sam, e-commerce business at Shoe Station was incredibly strong across markets, this is one of the reasons we're still convinced that Shoe Station is the banner that is going to continue to grow as the e-commerce business was phenomenal across market areas where we didn't even have Shoe Station stores. So really pleased with that. However, you are correct that the rebanner stores are not performing the way we expected them to perform.

In fact, the rebanner stores were down high single digits and the legacy stores down mid-singles. And that's the -- and that is the reason we've decided to put a hold on any additional stores until we can determine exactly what's going on in the brick-and-mortar stores and get that corrected. And that's our #1 priority. We're working hard to -- with all the data that we have. And as you know, we have a lot of data. And we're going to figure the problem out and get those stores turned around.

And then lastly, in the -- this goes back to the margin and everything else.

You converted how much of the gross -- within the promotional activity, I mean, how much of how many of these converted stores of the 101 stores you converted last year, do you really believe were opened putting their best foot forward, so to speak, with the mix that you intended?

I'm not saying it was the right mix versus having too much carryover just to get the conversion done, but you had too much of the old Shoe Carnival assortment in the store. And now you have to clear that out to really find out what really could have been. I mean, because in what I -- I haven't been to a Shoe Station store, but from what I hear, there's -- it looked like, yes, you brought in HOKA and other -- some of the other good stuff, but it was lost in the sea of leftovers from the old Shoe Carnival stores. And that may have hurt the comps.

Yes. I don't -- that did not happen, Sam. What we did, as I understand it and we've got a room full of people here.

And if I say something wrong, they correct me. But we cleaned the Shoe Carnival inventory out of the converted stores, sent them to the Shoe Carnival stores so that we could open up the rebannered stores with clean, what we consider to be clean Shoe station type merchandise. And so I don't know where you heard that from. I think -- I don't know who's visited the store and saw old inventory, but that is the way we converted the stores. And it worked in the first few stores, but it did not work as well as we anticipated as we continue to open up stores.

And I think the issue with that primarily is that we took Shoe Carnival locations with Shoe Carnival co-tenancy, and we opened up Shoe Station stores and maybe we elevated the product higher than the consumer was ready for. And that's what we're studying today to make sure that we're right on that, and we'll make those corrections. But that's why I think the Shoe Station stores are not performing to the plan that we had.

I just was handed a note if whoever you were speaking to was speaking of Rogan's, that we didn't make a lot of inventory adjustments in Rogan's because their customer base was completely different. It was a work shoe-based, blue-collar based retailer.

Your next question comes from Jim Chartier with Monness, Crespi & Hardt.

So as we just talked about your Shoe Station comps turned negative in fourth quarter. The expectation was that Shoe Station will be the dominant banner and those stores will be comping positive and that will lead to an overall comp in the second half of '26. So in light of the sales slowing at Shoe Station and turning negative in fourth quarter, what gives you the confidence that sales turn positive in the back half of this year?

Well, Jim, thank you for the question. What we're doing is we're going through each individual store and their assortment what's working, what's not working. One of the things we did at Shoe Carnival, and you followed us for a while, so you know we built assortments based on the consumer or a customer that was shopping each store. And so the assortment was slightly different based on the customer.

We did not, in my opinion, do that very well for Shoe Station. So the merchants are going in, we have all the demos. We have all the Shoe Perks data that we're looking at on who's buying the product. And we are making those adjustments. from an assortment standpoint in our stores. And we think that we can get those adjustments, as you know, it takes -- you can't decide today to make adjustments in product and get the product in tomorrow, it takes about 6 months.

So we believe that those adjustments will be in place by back-to-school, and that should, based on all the information we have through our Shoe Perks program and the demographics of each individual store, we should start seeing an improvement in the second half of the year.

Okay. Was there a conversion problem then? Was traffic okay and then the consumer walked in the store and just didn't see what she wanted and then said that conversion was softer?

The conversion rate was actually flat. And I think the reason for that is that in the beginning, when the customer came in, that was previously a Shoe Carnival customer and saw the elevated product, that customer just did not come back a second time. And I believe that's why as we work through those stores and they became more and more mature throughout the year, we saw a decline in purchases. Jim, one other thing I'd like to add to that. We also saw a decline in the average unit per transaction.

So that just tells us that they were coming in and they were only purchasing one pair. Some of that could have to do with the economy and some of that could have to do with the fact that maybe we were not promotional enough in those stores to get them to buy that second pair.

Okay. And then Kerry, just trying to understand what next year, FY '27 should look like, right? So you're going to have a negative impact this year from selling pre-tariff inventory at post-tariff prices, but that should be normalized this year. And then you've got -- I guess, what is the impact from the discounting and promotions you're going to have to run to work down inventories levels this year?

And then in terms of like rebanner investments for next year in '27, is it going to be similar to '26 at this point, do you think? And then how should we think about the synergy benefits that you expected from operating primarily as a single banner? Is that no longer in the cards?

Jim, those are great questions, but that is part of the evaluation Cliff was talking about that we are doing right now and looking back and letting the data tell us exactly what needs to happen, unsure how many stores will we rebannered from the standpoint of in the Shoe Station because we really need to take a tighter look and understand what hasn't -- the stores that haven't met our expectations, what are the causes behind that and then extrapolate those causes into future Shoe Carnival stores and understand the opportunity we have.

We no longer believe that 90% of our stores will be rebannered to Shoe Station because as Cliff says, it looks like the demographics don't always support the Shoe Station banner. Now that's what will be over the next several quarters as we get through that data analysis, be able to give you better guidance on how that will work. What we were trying to say in '27 and talk about the margin that we think 2026 is a transition period to give back those artificial gains, the -- I should say the temporary gain we had in 2025 back in our margin and we will be -- have a little compression because of some clearance, tariff goods. But we think 2027 from a margin perspective, at this stage, we don't see any reason that we wouldn't be back to more historical gross profit margins in the 35%. So we're trying to give some comfort from the standpoint that '26 is a transition year, then we get back to normal.

Now on the Shoe Station, whether they're rebanners or new store growth, those are the type of things we're going to be talking about in the next several quarters.

Okay. And then just there's been a lot of talk about tax refunds being bigger this year. Just curious if you're seeing anything in the business related to tax refunds.

Well, between the tax refunds, the war and the economy rising prices, it's difficult to say our business is trending the way it's trending because of tax refunds. There's just a lot going on with the economy today.

Your next question is a follow-up from Mitch Kummetz with Seaport Research.

Yes. I was just hoping to clarify something. In terms of your comp guide for 2026, Kerry, I think in your prepared remarks, you said that it should be better than the minus 5.6%. But could you be a little bit more specific in terms of kind of what comp you're looking for? And then also, I believe you've explicitly said that it would be negative in the first half, but then improvement in the second half. I think there's sort of an assumption that it turns positive in the second half. I don't know if that's actually accurate or not. So can you just help me out on those 2 items.

We here again, we'll be more qualitative than quantitative on this. But -- so we're primarily comp right now. So we stated our total sales will be -- our guide is minus 1% to up 1%. Comp is directionally very similar to that. And yes, we expect to have a better second half from a sales perspective than the first half. And that's as explicit -- so that's a definite improvement over what we did in '25.

There are no further questions at this time. I'll now turn the call back over to Mr. Sifford for any closing remarks.

Thank you for joining us today. I am thrilled to be back and for the opportunity to work with this talented team. I look forward to speaking to you all again in May. Thank you again.

This concludes today's conference call. Thank you for participating. You may now disconnect.

good morning, and welcome to Shoe Carnival's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. and is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

Management's remarks today may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual results to be materially different from those projected in such statements.

Forward-looking statements should also be considered in conjunction with the discussion of risk factors including in the company's SEC filings and today's earnings press release. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date.

The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements discussed on today's conference call or contained in today's press release to reflect future events or developments.

I will now turn the call over to Mr. Mark Worden, President and CEO of Shoe Carnival, for opening remarks. Mr. Warden, you may begin.

Good morning, everyone, and thank you for joining us today. With me are Kerry Jackson, our Chief Financial Officer; and Tanya Gordon, our Chief Merchandising Officer.

This is a pivotal moment for our company. Last week, we announced that our Board of Directors unanimously approved changing our corporate name to Shoe Station Group Inc., subject to the approval of the name change for our shareholders at our annual meeting to be held in June 2026. That decision reflects our board's conviction about where this company is headed. We're building a stronger more focused and more profitable company.

Today, I'll walk you through our third quarter performance, update you on where we are in executing the strategy and provide context for fiscal 2026 and 2027.

Let's start with the quarter. We delivered a strong third quarter, EPS of $0.53 and net sales of $297.2 million, both exceeded consensus expectations. Gross profit margin expanded 160 basis points to 37.6%, driven by disciplined pricing and our continued shift toward the higher income [ testation ] customer.

We achieved positive comparable sales during August back-to-school with margin expansion. That's significant, given the promotional intensity across family footwear retail and the continued pressure on lower-income households.

Athletics represented 51% of total sales in the quarter and delivered low single-digit growth overall. At Shoe Station specifically, our focus on premium brands and higher transaction values drove double-digit athletic growth in both Q3 and year-to-date. Our nonathletic categories represented 43% of Q3 total sales with a mid-single-digit comp decline overall.

Similar to prior quarters, Shoe Station outperformed in every major category versus Shoe Carnival. The story beneath these numbers is what matters most. Our two banners delivered very different results in the third quarter. Shoe Station net sales grew 5.3%. Shoe Station product margins expanded 260 basis points. Meanwhile, Shoe Carnival net sales declined 5.2%, reflecting continued pressure on lower-income households earning under $40,000 annually. That's a 10.5 percentage point performance gap between our two banners.

This divergence isn't new, we've been discussing it for quarters. What's different now is the scale of the gap and our conviction that it will persist. Shoe stations core customer, median household income $60,000 to $100,000, is choosing premium product, see elevated service and responding to our brand positioning.

The traditional Shoe Carnival customer is under economic pressure. And the competitive response in that segment is driving margins down across the industry. This quarter, we maintained pricing discipline instead of propping up traffic from a lower-income customer. a segment we are strategically shifting away from. As a result, Carnival also expanded product margin. We are not chasing unprofitable sales.

Third quarter EPS included a $0.22 impact from planned rebanner investments. Year-to-date, that's $0.58 per share. These are planned investments to convert underperforming locations into the Shoe Station format that's demonstrably winning. We expect to recover these investments within 2 to 3 years following each store's conversion.

Let me give you the numbers on our progress. We completed 101 store rebanners during fiscal 2025. We now operate 428 stores, 144 Shoe Station locations and 284 Shoe Carnival locations. This evolution started with test and learn, move to scaling across the Southeast and is now a full chain rollout.

We acquired Shoe Station in December 2021 with 21 stores. We started this fiscal year with Station representing just 10% of our fleet. Today, Station is 34% of the total store fleet. By back-to-school 2026, it will be 51%. That 51% threshold is the inflection point. When Shoe Station becomes the majority of this business, and we expect to return to comparable sales growth.

Based on what we have learned through 101 store conversions this year, we now expect that well over 90% of our fleet will operate a Shoe Station before the end of fiscal 2028. The remaining locations will be evaluated for rebannering outlet repositioning for closure.

Why consolidates 1 brand? Running 2 distinct banners with different customer targets, different merchandising strategies and different operating models is inefficient. Every quarter this year, the sales performance gap between Shoe Station and Shoe Carnival has exceeded 10 percentage points. We're leaving value on the table by maintaining dual infrastructure when one banner is clearly winning.

What makes Shoe Station different comes down to three things: the customer. Stations serve the American median income household, $60,000 to $100,000, stable everyday workers value conscious, but not price-driven. Carnival serves a value-focused customer facing economic pressure; the product approach, station offers premium brand access, higher transaction values and strong full-price selling. Carnival focuses on opening price points and a promotional model.

The experience; station is modern and approachable, low-profile merchandising, easy to shop, service-oriented. Carnival is high energy, treasure hunt promotional intensity.

Both models work for their customers, but consumer preferences are shifting towards best brands, premium product and quality over lowest price. That's the Shoe Station customer. Consolidating to one brand creates significant structural advantages.

By the end of fiscal 2027, we expect $20 million in annual cost savings and operating efficiencies. We expect comparable sales growth to resume as Shoe Station becomes the dominant [ fan ]. And we're executing this on a foundation of financial strength. We're debt-free with over $100 million in cash and securities, funding this entire program from operating cash flow, just as we have funded operations and growth for 20 consecutive years. We're building 1 team, 1 infrastructure, 1 P&L.

Now turning to inventory and the value we're unlocking. We bought heavy this year to derisk tariff volatility. It worked. We delivered positive comps during back-to-school. We're fully loaded for fall, holiday and spring. Now we plan to sell through this extra tariff-related inventory and move to the next phase.

By the end of fiscal 2027, we'll free up $100 million in working capital. This isn't about cutting corners, it's a fundamentally different operating model. Shoe Station unlocks this capital through superior merchandising, Station presents product clearly, curated, organized, easy to browse and shop. Station generates higher transaction values, which means we need fewer units to deliver strong sales performance.

The Carnival model is stack it high and let it fly, requiring deep inventory to maintain powering displays and promotional volume. Shoe Station delivers a superior customer experience with less inventory per store. Better merchandising drives better turns, better margins and capital efficiency. That's $100 million we plan to deploy toward growth.

Let me walk you through what's ahead in the key milestones. Fiscal 2026 is our inflection year. We're converting 70 stores to reach the critical 51% Shoe Station threshold by back-to-school. That's the milestone, when station becomes the majority of this business and the dominant driver of our results.

First half of 2026, we'll see similar dynamics to 2025 as we work through rebanner conversions. Second half, we crossed 51% and expect to return to comparable sales growth. This requires P&L investment in fiscal 2026. One brand synergies begin, but the full benefit comes toward the end of fiscal 2027.

The end of fiscal 2027 is when the full picture comes together. We expect $20 million in cost savings million free from inventory reduction, comparable sales growth restored and EPS expanding.

Bottom line, we're investing through 2025, all of 2026 and into 2027. We see modest gains beginning in 2027 and meaningful acceleration in 2028. Kerry will give you more specifics on fiscal 2026 and 2027.

Let me bring this together. The performance gap tells the story. Shoe Station outperformed Shoe Carnival by more than 10 percentage points this quarter. Station margins expanded 260 basis points. The industry is declining, but we're growing where the consumer is headed, premium brands, better experience, customers who value quality.

We're executing this from a position of strength, debt-free over $100 million in cash and securities, 20 consecutive years of self-funding our growth. We have the financial flexibility to invest through this transformation and build for the long term.

When our Board approved changing the corporate name to Shoe Station Group, it wasn't about branding, it was about conviction, conviction that this strategy is right for long-term value creation and building a stronger company. This isn't a rebrand, it's a repositioning of this entire company around what's winning.

I'll now turn the call over to Kerry for the detailed financials, our fiscal 2025 outlook in perspective on '26 and 2027. After Kerry remarks, I'll have a brief closing comments before we open for questions. Kerry?

Thank you, Mark, and good morning, everyone. Let me start with the quarter performance. Let me walk you through our outlook and the financial framework for fiscal 2026 and 2027.

Net sales totaled $297.2 million, down 3.2%, versus $306.9 million last year. Comparable store sales declined 2.7%, including approximately 0.5 percentage point of headwind from the 56 stores rebannered during the quarter. The banner divergence Mark described is the critical story. Shoe Station net sales grew 5.3% with mid-single-digit comparable sales growth. Shoe Carnival net sales declined 5.2% with mid-single-digit comparable sales decline. Rogan's generated $21 million in net sales consistent with our integration plan.

Three category highlights worth noting. First, men's and women's athletics, 35% of our business delivered breakeven comps overall, but Shoe Stations athletic business grew high teens.

Second, kids footwear, 22% of Q3 sales delivered low double-digit athletic growth at stations. Overall, for the company, kids was down low singles for the quarter due to weakness in kids nonathlete footwear.

Third, the boot season started modestly, but we were well positioned with inventory dip as we move into the heart of the season.

Rounding out the categories, men's and women's nonathletic categories both declined mid-single digits compared to Q3 last year. Athletics across our men's, women's and kids categories, with 51% of our business in the quarter, up from 49% in Q3 last year and was key to our overall comp positive results in back-to-school August.

Shoe Station's athletic sales have strong comparable store growth every quarter this year as our premium brands continue to resonate with higher-income consumers that the Shoe Station banner attracts. Nonathletic was 43% of our total sales in Q3, down 1% from last year, again reflecting the strong athletic cycle we are in.

Gross profit margin expanded 160 basis points to 37.6% and exceeding the high end of our guidance. Merchandise margins increased 190 basis points, driven by disciplined pricing, favorable mix shift towards Shoe Station's higher-income consumers and our strategic inventory investments. This more than offset 30 basis points of deleverage in our buying, distribution and occupancy costs.

SG&A was $93.2 million or 31.3% of sales compared to $85.9 million or 28% of sales last year. The 3.3 percentage point increase breaks down as follows: 2.5 points reflects banner reinvestments, including store closing costs, new store construction depreciation and customer acquisition costs. The remaining 0.8 points is deleveraging on lower sales.

The rebanner P&L investment in Q3 was approximately $8 [ million ]. Year-to-date, we've invested $20 million in operating income or $0.58 per share towards this transformation. Net income for Q3 was $14.6 million or $0.53 per diluted share compared to $19.2 million or $0.70 per share last year. This year-over-year decrease of $0.17 primarily reflects our rebanner investments, which we estimate impacted Q3 by $0.22 per share. In the quarter, our EPS otherwise grew by $0.05.

The 2- to 3-year payback of these rebanner investments, we've consistently discussed, remains on track. Shoe Station's net sales were up 3.8% year-to-date compared to Carnival's net sales down 8.5%. Said differently, year-to-date through Q3, Shoe Stations net sales growth has outperformed Shoe Carnival by 12.3 percentage points.

These results support the One Banner strategy time line Mark just outlined, and our view of the long-term profit potential from doing so.

Our balance sheet continues to strengthen. We ended the quarter with over $107 million in cash, cash equivalents and marketable securities, up 18.2% versus last year. And we remain debt-free with $100 million of available credit.

Based on strong Q3 results and continued to rebanner momentum, we updated our full-year outlook. We are reaffirming our net sales guidance and continue to expect net sales of $1.12 billion to $1.15 billion. We are raising the EPS guidance range to $1.80 to $2.10, increasing the low end by $0.10. We continue to expect gross profit margin of 36.5% to 37.5% and now expect SG&A in the range of $350 million to $355 million, down $5 million from previous guidance.

For Q4 specifically, we are forecasting net sales of $240 million to $270 million, ranging from down 7% to up 2% compared to Q4 last year, with a midpoint down 3%, consistent with Q3 trends. Our Q4 net sales range is wider than typical, given macroeconomic volatility, consumer behavior in nonevent periods and fourth quarter weather uncertainty.

We expect Q4 EPS in the range consistent with consensus prior to our earnings release in the range of $0.25 to $0.30. Q4 EPS in that range targets full-year EPS at the lower end of our annual outlook. The higher end of our outlook assumes stronger holiday selling and improvement in lower-income consumer spending.

Regarding our One Banner strategy, we've rebannered 101 stores in fiscal 2025, including 56 in Q3 and 1 additional store after quarter end. We anticipate no further rebanners this year. Rogan's acquisition is now fully integrated in the shoe station. And beginning in Q4, we'll report Rogan's results as a part of the Shoe Station banner.

Year-to-date, rebanner CapEx is approximately $31 million with minimal additional CapEx expected for the remainder of the year. Full-year P&L investment remains on track at approximately $25 million. For Q4, we expect rebanner investments of $0.10 to $0.12 per share, bringing the full-year impact to $0.68 to $0.70 per share.

Looking ahead, our fiscal 2026 and 2027 framework, while we're not providing detailed fiscal 2026 guidance today, that will come in March; we can provide transparency on what to expect. As Mark has clearly identified, it's critical for our financial success to reach the milestone of 51% of our stores banner at Shoe station or inflection point.

To achieve that goal, fiscal 2026 will be a year of continued investment. We believe that next year's investments will lead to a return to sales and earnings growth in fiscal 2027 and further accelerating in fiscal 2028 as we complete the rebannering program.

Let me detail our future expectations for sales SG&A and inventory reductions. Sales trends will mirror what we've seen in fiscal 2025. The first half will be challenging as Shoe Carnival's mid- to high single-digit declines more than offset Station's growth. The inflection comes in the second half when Station process 51% of fleet. We expect flat to very low single-digit growth in the back half.

Overall, for fiscal 2026, we expect net sales and comparable sales will be down. but improved compared to the 6% year-to-date declines we have seen so far this year.

With respect to SG&A for fiscal 2026, we expect rebanner investments to range from $25 million to $30 million for the entire year. Given the timing of the rebanners in fiscal 2026, we do expect costs in fiscal 2026 to be more front loaded. In addition, we continue to recognize costs associated with stores re-bannered in fiscal 2025, as we continue to educate customers to -- in those markets and as CapEx investments made in fiscal 2025 are depreciated.

As a result, we currently see significant SG&A investment in Q1 and Q2 of fiscal 2026 compared to 2025. And we expect those headwinds to moderate post back-to-school as fiscal 2025 costs become comparable and the $20 million of expected synergies and efficiencies from implementation of the One Banner strategy begin to be realized. Overall, we do not expect SG&A to decline in fiscal 2026 compared to fiscal 2025 and may increase.

Given the impacts on sales and SG&A, we expect fiscal 2026 EPS to be lower than fiscal 2025, with more significant decreases in Q1 and Q2 compared to the prior year.

Now for more insight on expected inventory reductions driven by the One Banner strategy. We expect higher inventory for the remainder of fiscal 2025 and for inventory at the end of fiscal '25 to be flat to up from the Q3 balance inclusive of additional buys in Q4 to support launching new athletic assortments in styles next year.

The level of inventory we are carrying this year has been intentional, given the tariff backdrop and the optimistic buy of seasonal merchandise and in-demand product. These opportunistic purchases were key to our 160 basis point gross profit margin increase in Q3 and 270 basis increase in Q2.

We expect our inventory position will also drive a margin increase in Q4 of over 100 basis points. We expect tariff-related increases in our inventory to moderate in fiscal 2026, assuming there is more tariff certainty.

As Mark stated, we are planning for more dramatic shifts in inventory as Shoe Station becomes our dominant banner, which is expected to free up $100 million of cash through inventory reduction over the next 2 years. This inventory reduction comes from Shoe Station's fundamentally different operating model, which requires 20% to 25% less inventory per store compared to Carnival's model.

Where we get to 51% of our stores operating the shoe station model, we expect a $50 million to $60 million reduction by the end of fiscal 2026. As we transition the inventory model, we expect some near-term gross margin pressure from selling through legacy carnival inventory, partially offset by the lower-cost opportunistic purchases we made in fiscal 2025.

This inventory reduction will more than fully fund our rebanner capital needs over the course of the year, maintaining our debt-free position at year-end. We expect rebanner capital expenditures between $25 million and $35 million to be concentrated in Q1 and Q2, while inventory reductions may be more gradual and more focused on the back half of the year. The payoff comes in fiscal 2027 and accelerates into fiscal 2028.

By the end of fiscal 2027, we expect to see the full $20 million in annual cost savings from reduced dual-brand complexity, the full $100 million in working capital freed from inventory reduction, a return to annual comparable sales growth and EPS growth resumes in fiscal 2027 and expand significantly in fiscal 2028. We'll provide more specific fiscal 2026 and and 2027 guidance in our March earnings call.

With that, I'll turn the call back to Mark for closing remarks before we open the call for questions.

Before we open for questions, let me flip this quarter in this transformation in context. We're not at the beginning of this journey. We're at the acceleration point. Show Station was 10% of our company when we started this fiscal year. Today, it's 34%. 8 months from now, it will be 51%, the inflection point where this business returns to comparable sales growth. Now we're scaling Shoe station across the fleet.

This transformation unlocks significant value, $20 million in annual cost savings by the end of fiscal 2027, 100 million in working capital freed from inventory reductions. We're building a company positioned for sustained growth while funding this entire transformation from a debt-free balance sheet with over $100 million in cash.

The performance gap between our 2 banners continues. Station outperformed Carnival by more than 10 percentage points every quarter this year. Station margins are 260 basis points higher than Q3 last year. Consumer preferences are shifting toward premium brands and quality over price. We're aligning our entire company with where the market is headed.

Our Board's approval to change the corporate name the Shoe Station Group reflects conviction about this path. We're investing through fiscal 2025, 2026 and into 2027 to capture gains that begin in 2027 and accelerate into 2028. This isn't a rebrand, it's a repositioning of this entire company around what's winning.

Now I'd like to open up the call for questions.

[Operator Instructions] Your first question comes from the line of Mitch Kummetz with Seaport Research.

And welcome back, Kerry. You guys provided a lot of color around the rebannering and kind of the cadence of those impacts. I was hoping you might be able to boil it down a little bit more. So I think you said that for this year, the drag on earnings is $0.68 to $0.70. Can you say what the additional drag will be next year?

And then help us kind of think through what happens in 2027 and '28. How much of that do you get back in '27? And by '28, will all of that kind of flow back to the P&L? And I've got a few follow-ups.

Well, what we said -- Mitch, thank you for the welcome back. I appreciate it. It's good to be back with my friends. We said $25 million to $30 million in rebanner expenses are expected next year to kind of help you understand what those are going to be. And we said they're going to be front loaded because we're going to be doing approximately 70 stores in the rebanner of those stores next year.

The effect of that, we will continue to have rebanner cost as we have store closing costs, the depreciation on the investments of this CapEx in the stores, along with customer acquisition costs will continue as we go through those multiple years.

However, an important point on that is that when we look at each store individually in the time frame that we make those investments, we're seeing -- we're expecting to get those monies back in a 2- to 3-year time frame in the profitability of those stores post conversion.

When I think about -- so just from like a core earnings standpoint, like pro forma earnings, if I were to try to adjust out some of these rebannering expenses, is it fair to say that you'll -- like 2026, you'll see stronger earnings growth than 2025, like if I strip these things out? I mean, I kind of get there just because it sounds like you'll perform better from a comp standpoint. So I think that would go a long way towards better earnings growth next year on a kind of -- in terms of the growth rate this year versus -- or I'm sorry, next year versus this year?

No. Let me unpack a little bit of what I said. What we want next year, we're going to be in an investment year. So in the first half of the year, what we're saying is Shoe Carnival is still going to be the dominant brand. We expect it to be down mid-single digits in sales. And that's going to override any gains we get out of Shoe Station. So we expect sales to be down in the first half.

Now once -- at back-to-school, once we hit that 51% threshold where a Shoe Station is the dominant brand, we expect to see a flat to slight positive sales gain in the second half. Having said that, we also expect that as we transitioned our stores, we might see some margin pressure longer term in the second half of the year from the rebanners, as we have less Shoe Carnival stores to transition the inventory to.

And so in '25, we had significant amounts. So when we converted a store, if we had remaining -- so Carnival stores, we could transfer those products to other stores. As we have fewer of the stores available, we may see some margin pressure on clearing out the non-go for Shoe Carnival inventory.

We also expect to see significant pressure, particularly in Q1 and Q2 on our SG&A line because of the rebanner expenses. And we expect that SG&A next year will be flat and possibly up. So while we're not in a position to give full guidance as we will in March on '26 numbers, you can see that, that will be a down earnings year when you take into account lower sales, a little margin pressure from clearance and then flat to up SG&A.

. I was just trying to think about it in terms of stripping out some of these sort of extraneous events. But a couple of last ones for me. One, I think it was mentioned that boots started slowly I think that was more of a Q3 comment.

Have you seen any improvement in the boot business early in the fourth quarter? And kind of what is your outlook there? And then I have one last one.

Mitch, it's Tonya. And yes, boots did start a little bit slow. But as we got our inventory in, again, just based on some delayed deliveries, as we moved into October, we saw nice double-digit increases. So it bodes well as we move into fourth quarter, and we really saw it balanced across all categories. So Tileshaft boots, booties, combat looks and for doing very well.

Okay. That's helpful. And then last one for you, Mark. On the station side, you talked about how it's a higher-income consumer and more premium brand access and more service-oriented stores.

I'm curious, is there an opportunity to further elevate the assortment there? Like Tanya, you just mentioned the Furbo business. I mean you guys you sell in athletic, but -- I'm sorry, I hope on athletic, but you don't sell Hawk. Can you get or even across your athletic business you sell the courts, but not so to or you sell core visions, not Air Force 1s? I mean as Shoe Station becomes a bigger player in the industry? Is there an opportunity to get even more elevated product versus just the elevation that you see going from a Carnival to the Station, but there more elevation opportunity within state going forward?

Mitch, absolutely. We believe that maybe the most exciting part of the Shoe Station model. And the key reason of why we're proceeding publicly now with our move to the shoe station group is so that Tanya and I can be working transparently long term with our partners to build out those new assortments and new brand launches and more premium topics.

And so now we're having those great fully multiyear discussions with the best of the best brands in the world. And we're getting very enthusiastic partnership meetings of where we could go together.

I think it's that core element of serving the middle-income American household that working every day American consumer that values all of the activities that get life done. So absolutely. And Tanya's team is doing a great job. We'll see new assortments, new styles coming in Q1.

Your next question comes from the line of Sam Poser with Williams Trading.

All right. So I just would like to to dig into the comp that you talked about for Shoe Station. So as I understand, at the end of the third quarter last year, I believe there were 42 Shoe Station stores. And today, they're 144. Is that correct?

The 144 is correct. I'll have to double check -- the 42 is approximately, right?

What was the comp -- so the comp that you're comparing to is the comp versus Shoe Carnival. So the question I have is, what were the comp on those 42 stores like on like-for-like shoe station last year vs. Shoe Station this year's store?

I know it's not a big picture, but that is the cleanest view of how existing station store a year ago as compared to existing Shoe Station store today.

Well, Sam, we're not going to break down the banners into smaller components -- we've been breaking down the rebanner stores to help you understand what happens when they transition from one to another.

But we've got enough critical mass that in future quarters, we're going to talk about the banners exclusively in the total numbers.because they tell the right story right there. They tell you the information you need to know to understand what the underlying fundamentals of the business.

We think the exciting part of the business is the overall brand. And honestly, within the full banner, there's a range of outcomes, but the range of outcomes comes down to be a very positive number, particularly when you look at the Shoe Carnival. On a like-for-like, you're seeing that they're continuing to decline, but we're seeing the increases.

Now I hate to try to parse out the various pieces of it just for the fact that it will the noise may take away from the real story.

Okay. And then the inventory decrease, you talked a little bit about this on the call to bring the inventory down $50 million to $60 million next year and the margin. So within the -- within getting the inventory down $50 million to $60 million next year and then another $40 million to $50 million in '27, there's different ways to do it. There's a return -- you can return goods to vendors. You can take -- you could have lower margins, which would then increase your cost and you can bring in less product.

How should we think about the breakdown of that? You talked a little bit about -- and how much gross margin pressure should we anticipate in fiscal '26, in that what you brought up about not being able to shuffle inventory around as there are less Carnival stores?

Sam, it's Mark. Let me take that first, and Tim can build on it.

I think aside from the new assortments will be opened up to Shoe Section, the structural change to how we service the customers, the area I'm probably most excited about. And when we think of a Carnival store, as I like to describe it, they're powering displays that promotional products above person's arm length unless your [indiscernible], Shoe Station has a very structural difference that our vision and where we're progressing towards, curated product, lower profile, accessible, the customer can see and easily navigate and by nature of that, significant change of where we're heading, we have in that 20% to 25% reduction of units on hand in the stores when we get to right that end point.

Now that gets us along with selling through the tariff inventory at accretive margins that gets us the $100 million reduction that Tanya and I and Kerry are talking about. We're going to get there quickly. but we need to do it in conjunction with our partners through those means you have just mentioned, Sam.

So all of those things are going to a car that you just said. The most strategic of it will be, as Tanya and I worked through our buys from back-to-school of this year forward. We will be buying with intentionality to meet where Station is and where the rest of the company is going now that we're not in test and learn.

Now Kerry touched on a point that's super important. And we're not going to hold on to the Carnival product that's stranded past the season. So as we get past boot season, for example, this year, we're having a good start, as Tanya said, we've got the right product. But if you get to the end of boot season, we're going to clear it. We're not going to carry it. If it's not a go forward into shoestation, That will have some margin pressure.

It's the right thing to do. We're not going to hang on to that for a year, and we've got the financial balance sheet to clear that out. So there will be some margin pressure as we liquidate non-go-forward Shoe Carnival product from boot season, for example.

For the 51% of the stores, that will be shoe station by back-to-school. There will be non-go-forward brand styles and assortments. And same thing, we'll be liquidating that. I think we'll be able to do a much better job as we get into our formal guidance in March to unpack the specificity of that. But our intent today is to let the stakeholders understand that's where we're heading, significant structural advantage clearance of the tariff-related product at full strong accretive margins and then liquidation of non-go-forward products because I have talked many times, Sam, why would you want to carry that forward? We don't. So there will be some pressure.

I don't know, Kerry, if you have any bills or Tanya?

I agree. Mark. Right now, we need to get through the inventory further along. We'll know in March better how those stores, what their position of their inventories are on the stores we're going to be rebannering and therefore, the potential for the inventory that might be clearance at this stage is too early. We need to see some sales through of those products.

Okay. And just a follow-up. I mean, so I'm backing in, and again, I know it's not a clean number, but receipt of this year of around -- to get to slightly above, I'm a little bit higher, but call it, $770 million of receipts this year versus down from last year a bit. But next year, to get to where you want to get to on my numbers means that your total receipts even with margins off a little bit, would probably have to be down in the inventory receipts probably in the range of $100 million.

Is that -- am I thinking about that properly? That's probably a better Tanya question, but am I thinking about that process?

Well, let me start out with that and then Tanya can build on it.

The idea -- and you got to remember that we have pre-bought goods for the spring season. So the opportunistic buys and the tariff product, we're going to carry that type of product into season of the spring. So therefore, we have front-loaded those purchases, so there will be a reduction in the overall. So directionally, you're right about purchases.

Yes. Just to build on that, Sam. Based on the pre-tariff goods that we're bringing in, those are sitting in our current inventory today. And then based on our go-forward model, rebannering the Shoe Station, our [ payers ] have to come down. Our [ payers ] are coming down in that model and our AURs are going up. So the new model, our [ payers ] have to come down significantly. So that's what's going to get us back to the inventory levels that we need to be at

Okay. And then -- but that -- but when you front load a lot of spring products and you're buying it well ahead of time to do it, I mean, the consumer wants what the consumer wants, and you're buying a lot of that stuff probably earlier in the discounts that may not be -- you might not be able to realize the margin.

But how -- I mean when we think about reducing -- I guess, let me just break it out, when you say you're going to get conceptually down 40 to 50 million 50 to 60 million next year, what percent of that is less receipts, what percent of that do you foresee as TVs? And what percent of that do you think is is just going to be higher cost of goods, lower gross margin. I mean, how do you think about that concept?

Sam, is me again. Sam, it's Mark. You're not thinking about it wrong in general terms. We're not ready to provide firm guidance the thinking about receipts coming down next year in a range around $100 million is not the wrong way to think about it right now. We'll get tighter at Q1.

But I don't want to dance it. You're thinking about it similar to how we're thinking about it. will get tighter as we fine-tune some of those elements we've talked about. But spot on, our model requires less receipts.

And then lastly, if one of the things is that if you're -- the comps at Shoe Carnival have remained tough and are difficult, and you're anticipating that they will remain that way, why not just -- if the consumer is not showing up right now, one, why not get more aggressive while the DUCs are flying during holiday to just get really clean, especially in the 70 or so stores? You're not going to -- that are going to convert with that product that won't go forward in the stores, which I'm gathering, it's about -- would I be right in like the 50% range that between brands and styles that that are the same or different for that matter between Shoe Carnival and Shoe Station, be it from Nike, Sketchers, Adidas and so on, while like with the Burford stock, you carry some of the same product, but you got the big buckle at Shoe Station that doesn't go to Carnival, but then that will go into Carnival?

So but there's a good deal of it, still a big chunk of product that won't go forward won't go forward. So how aggressive are you being? And then in the plan to possibly create clearance stores, why not start to do that earlier to give yourself an out so you can earn some of these Carnival stores in the clearance stores ahead of time to help yourself out through liquidation?

Those are three great questions. This is Mark again. Let me answer them all.

The first, it's not wrong to think 40% to 60% of the Carnival inventory does not go forward into Shoe station. There's variability, but the range you're talking about is the right way to think about it.

Second, the 70 stores that are Shoe Carnivals today and will be Shoe Stations, that product that does not go forward will be liquidated aggressively, totally agree with your point, it will be gone. And that's what we're alluding to. You said it better than we may have communicated it. That's what we're alluding to when we say there will be margin pressure.

In the past when it was test and learned, it was easy to reallocate 10 stores. And then it was still easy to do it when now that it's not test and learn, and it's a full corporation rollout. Now we need to clear that product out because it makes no sense to move it around. We'll be doing that for those 70 stores, full stop.

Sorry, you might have had a third or fourth point, but hopefully that answers your question, Sam.

Your next question comes from the line of Jim Chartier with Manesar.

You previously talked about getting to 80% of stores rebannered by March of 2027. Is that still the plan? Or is that pushed back?

Jim, it's Mark. What I tried to say in the speech today is we will be well over 90% before we finish 2028, and we will surpass the critical point of 51% this summer. We're not putting any intermediary dates in there because we think it's far more important that we focus on delivering that experience. that inventory transformation we've just talked about and unlocking the $20 million of synergies.

As we get closer, we're going to learn a lot more and we can provide better guidance on those intermediary dates of '27 as we get much closer. Where they really focused on the tight 2026. here's what we know, We're doing 70. We'll get to 51%, and we turned that pivotal quarter this year. We'll do more in '27, but we want to lock into 2028 versus an intermediary date. Now that's not test and learn, and it's a full company rollout.

Okay. Makes sense. And then on the $20 million of savings, how much of that do you expect flows to the bottom line versus like go toward reinvestment? And then, how should we invest the timing of those is?

Yes. As we get into 2028, we think it flows. We may choose to invest more in brand building for the corporation or other activities. But when you look at SG&A, this year versus SG&A that year, excluding advertising expense, I would see it would flow in 2028.

Kerry did a nice job saying it's not going to manifest in 2026 because there's other investment costs here. but Kerry can build on that, if you like.

That's the key right there. So in 2026, is an investment year. We're going to be rebannering significant stores, and we'll just be starting to get the benefit of that $20 million in 2026. But it might mitigate some of the rebanner costs, but it's not going to offset them. Like Mark said that once the rebanner costs are diminished in 28, and we have that full benefit of that $20 million savings, that's when we can start to realize it.

That concludes our Q&A session. I would now like to turn the call back over to Mark Gordon for closing remarks.

Thank you all for joining us today. As we said, it's a pivotal moment for the company as we move towards Shoe Station Group, becoming our new corporate name, pending shareholder approval next summer, the majority of our fleet next summer. And we progressed towards 1 brand, unlocking significant value.

I want to thank you all so much for your time and wish each of you and your families a happy Thanksgiving and holiday season ahead. I hope to see you in the markets or a shoe Station store between now and then. Take care.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Good morning, and welcome to Shoe Carnival's Second Quarter 2025 Conference Call. Today's conference call is being recorded and is also being broadcast via webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

Management's remarks today may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company's actual results to be materially different from those projected in such statements. Forward-looking statements should also be considered in conjunction with the discussion of risk factors included in the company's SEC filings and today's earnings press release.

Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements discussed on today's conference call or contained in today's press release to reflect future events or developments.

I will now turn the conference over to Mr. Mark Worden, President and CEO of Shoe Carnival, for opening remarks. Mr. Worden, you may begin.

Good morning, everyone, and thank you for joining us today for Shoe Carnival's Second Quarter 2025 Earnings Conference Call. Joining me on today's call are Patrick Edwards, Chief Financial Officer; and Tanya Gordon, Chief Merchandising Officer.

Our second quarter results demonstrate meaningful progress on our corporate strategy. We beat earnings consensus by over 20% and expanded gross margins 270 basis points to 38.8%, our strongest Q2 margin in years.

Our rebanner strategy is exceeding targets. EPS declined year-over-year from our planned rebanner investments, as expected, but margins expanded faster than planned, driving our strong earnings beat for the quarter.

Since our last call, we've completed our back-to-school season, the period that defines our year. Fiscal August represents less than 8% of our days, but drives approximately 25% of our annual profits.

As we moved into back-to-school in August, we achieved a significant milestone. The company returned to positive comparable sales growth for this must-win period. Shoe Station grew sales high single digits and expanded margins. Shoe Carnival delivered positive children's category comp sales growth and margin growth. Rogan's expanded both comparable sales and margins. Every banner stepped up when it mattered most.

Let me walk through what drove these results and why it matters for our future. Three strategic decisions shaped our quarter in back-to-school success. First, we prioritized margin dollars over pursuing lower-quality, lower-profit sales. Second, we invested in inventory depth to improve availability for back-to-school. Third, we continued investing in our rebanner program despite market uncertainty.

These choices are paying off. Q2 gross margins reached 38.8%. That 270 basis point expansion came from disciplined pricing, improved mix and better inventory availability, not from deep discounting.

The rebanner strategy contribution was significant. Shoe Station outperformed Shoe Carnival by over 10% on merchandise sales during Q2 and back-to-school. Beyond top line sales gains, we're seeing a shift in demographics from Carnival's sub-$30,000 household towards Shoe Station's over $50,000 range. This evolution and customer mix is driving improved economics across the portfolio and reducing the corporation's exposure to economic downturns.

These new Shoe Station households shop differently. They purchase premium brands and build higher-priced baskets. The result, product margins expanded 280 basis points at Shoe Station in Q2 plus fiscal August versus the prior year.

Carnival and Rogan both expanded margins, too. But the new customer buying higher-priced premium brands at Shoe Station is the big strategic win to highlight. All of this delivered $0.70 in EPS, beating expectations and giving us the confidence to raise our annual profit guidance range today.

Turning to back-to-school. August was our first real test of Shoe Station at scale, and we passed convincingly. We ran one campaign idea across 3 banners with ruthless simplicity. We have the brands families want at prices that make sense, heavy digital, strategic social, surgical television and rebanner markets.

The fiscal August numbers were strong. Shoe Station grew comparable sales high single digits overall, driven by the children's category growing sales high singles with margin expansion and the adult athletics category growing sales in the low 20s, also with margin growth. Notably, Shoe Carnival delivered positive children's comp sales and margin growth for fiscal August back-to-school also, despite a challenging environment to the lower-income customer.

Each banner contributed differently during back-to-school. Station attracted new higher-income shoppers. Carnival competed effectively without sacrificing economics. Rogan started its rebannering efforts toward Shoe Station and migration toward the more accretive pricing strategy. Based on encouraging sales growth results during the Rogan's rebanner start, we extended the campaign into fall.

Now let me review the latest details on our rebanner rollout progress because this is where our strategy becomes reality.

We acquired Shoe Station's 21 stores at the end of 2021. We entered fiscal 2025 with double the store count since the acquisition with 42 Shoe Station stores, approximately 10% of our fleet. Through relentless execution, we're now at 87 Shoe Station stores, approximately 20% of the company. By the end of fiscal 2025, we'll operate 145 Shoe Station stores, approximately 1/3 of our entire fleet.

By back-to-school 2026, we'll surpass 215 stores, 51% of the current fleet at Shoe Stations. That's the tipping point where growth begins to overtake the climb, and we become a different company.

The performance gap is developing as we anticipated. Shoe Station rebanners sales are up 8% year-to-date through August, while Carnival comps declined high singles. The Shoe Station rebanners are generating product margins 270 basis points above prior year through August year-to-date. Importantly, we are growing sales with a more affluent target we aim to attract to Shoe Station, with sales now growing in the core demographic of over $50,000 household income.

Shoe Station's back-to-school taught us valuable lessons. We won in athletics. We expanded margins across categories. We sharply grew our children's category penetration. But despite the growth achieved, we left sales on the table in the children's category, too conservative on depth, not prominent enough in key store areas. Valuable insights captured, now we know how to grow the children's category even higher next back-to-school.

Rogan's continues to exceed expectations. August sales and product margin growth surpassed the metrics we set. Our response was decisive. Finished the rebanner process at all Rogan's locations to Shoe Station this year. The station model works, the economics are proven. Wisconsin becomes our next Shoe Station stronghold to expand from.

Let me address to Carnival directly as transparency here is important. Carnival Q2 comps declined high single digits, though we saw sequential improvement from Q1 and sharp improvement at quarter end as back-to-school began. August showed further progress, delivering low single-digit [ declines ], with growth in children's categories and solid athletic performance. The sub-$30,000 income consumer faces ongoing pressure.

While we could pursue more aggressive promotions to drive traffic, we believe maintaining margin discipline is the right long-term decision versus propping up this customer segment, we are strategically shifting away from. We're managing the Carnival banner as a cash generator during our transition to Shoe Station.

Over each upcoming quarter, Carnival's percentage of our portfolio declined systematically. By back-to-school 2026, it will represent less than 49% of our company. This deliberate shift reduces our exposure to a more volatile consumer segment while we diversify our customer base by building our premium banner.

Our financial position gives us advantages many competitors do not have. As of fiscal August end, cash and securities are up double digits year-over-year at nearly $150 million, debt is zero. While others navigate covenants and credit line, we invest from strength. We are investing approximately $25 million this year in our rebanner strategy with an expected 2- to 3-year ROI payback, a strong payback model and currently our highest profit return for our cash flow.

We continue to evaluate acquisitions in a disciplined fashion. Our aim is to elevate our customer demographics, expand into new markets and do so at a fair valuation.

As announced after the Q1 call, I asked Kerry Jackson to return to my executive leadership team. Kerry's 35 years with the company and over 25 years as our CFO is a great asset to have back up by side. I'm excited about this extra horsepower supporting our strategic growth initiatives.

On inventory, yes, we're heavy. This is strategy reflecting the macroeconomic volatility, not accident. Our intentional inventory investment delivered sharply improved in-stock rates on key items during back-to-school versus last year. When demand spiked in August, we captured it and drove comp sales growth with accretive margins. That availability at a lower cost basis was a key element that drove our margin expansion and our Q2 earnings beat.

We expect to normalize inventory levels in 2026, with completion timing dependent on tariffs and supply chain clarity. But understand this, with our balance sheet and our margin profile, carrying extra inventory that's selling profitably is a luxury problem. We'd rather have it and sell it than miss the sale entirely.

Looking forward, our confidence is building on multiple fronts. Our rebanner strategy is delivering strong sales and margin growth. Gross profit margins are robust and on pace to exceed our high [ side ] guidance, given current trends. We tightened sales guidance to reflect Station's and Rogan's growth in Carnival's reality. Overall, we raised our annual EPS guidance range to reflect the Q2 profit beat and fiscal August comp growth results.

Importantly, we can see the inflection point approaching. When Station hits 51% of our fleet next year, the math flips. Station growth begins to overtake Carnival decline, median income customers overtake deep discount shoppers as our core.

I'll now turn the call over to Patrick to walk through the detailed financials and updated outlook. Patrick?

Thank you, Mark. Good morning, everyone. Let me provide additional detail on our second quarter and back-to-school financial performance and our updated fiscal 2025 outlook.

Starting with our Q2 and August sales results, second quarter net sales were $306.4 million compared to $332.7 million in the prior year. The 7.9% change reflects our strategic focus on higher-margin business as we transform our customer mix and banner portfolio.

Our 7.5% comparable store sales decline includes approximately 100 basis points of impact from the 20 rebanners we completed this quarter. The divergent performance by banner in the quarter reinforces our rebanner strategy. Shoe Station sales grew 1.6% with essentially flat comparable store sales. Through August year-to-date, Station rebanner comps are now up high single digits.

In Q2, Shoe Carnival sales declined 10.1%, as we maintain pricing discipline despite pressure on the low-income consumer. Shoe Carnival's high single-digit comp decline in the quarter was the main driver of our overall comparable store sales decrease. Rogan delivered approximately $20 million in net sales, in line with our integration plans.

Let me now provide some additional color on our performance by major footwear category during August, our highest [ stake ] month of the year. Total company comparable growth was achieved with mid-singles growth in children's and low singles growth in athletics. Shoe Station far outperformed the total company, achieving high singles growth in children's and low 20s growth in men's and women's athletics.

Total company men's and women's nonathletics declined low singles, reflecting the strong athletic cycle we are in, with Station also in the low singles, outperforming Carnival.

Now moving on to gross profit. Our gross profit margin of 38.8% represents a 270 basis point expansion versus last year. Let me break this down. Merchandise margins improved 390 basis points, driven by three factors: disciplined pricing strategy across all banners, favorable mix shift as Shoe Station grows and strategic inventory investments that improved in-stock rates. This more than offset 120 basis points of deleverage in buying, distribution and occupancy costs.

SG&A expenses were $93.6 million or 30.6% of sales compared to 27.1% last year. Approximately 200 basis points of this increase relates to our rebanner investments, with the remainder due to deleverage, partially offset by disciplined cost management.

Our effective tax rate in the quarter was 25.9% versus 26.3% last year. Net income was $19.2 million or $0.70 per diluted share compared to $22.6 million or $0.82 last year. Our Q2 2025 earnings with $0.21 of rebanner investments and otherwise exceeded the prior year by $0.09.

Turning to our balance sheet and cash flow. We ended the quarter with $91.9 million in cash and marketable securities, up from $84.5 million last year. Following our strong August performance, cash and securities exceeded $148 million, up over 10% versus prior year, and we continue to operate debt-free.

Inventory at quarter end was $449 million, up 5% versus last year. This strategic investment delivered the product availability that drove our margin expansion and positive comps during back-to-school. Year-to-date, capital expenditures totaled $24.4 million, with approximately $20 million funding our 44 rebanner conversions.

Let me provide more detail on our rebanner economics. The $0.21 second quarter EPS impact includes store closure costs, 4 to 6 weeks of lost sales during conversion, additional depreciation, customer acquisition costs and grand opening expenses. Year-to-date, we've absorbed $0.36 of EPS impact. We now expect approximately $0.70 for the full year or about $25 million in operating income impact. Given the margin increases and high single-digit comp lifts we are achieving, these investments are a compelling use of our resources.

Now turning to our updated fiscal 2025 outlook. Based on our second quarter outperformance and positive August momentum, we are raising several key metrics. Net sales guidance is now $1.12 billion to $1.15 billion, tightened from our previous range. This implies significant sequential improvement in the back half, with comparable store sales improving from down high single digits in Q2 to down low single digits in the back half of the year.

This improvement reflects a growing Shoe Station mix and strong event period performance, including August positive comparable sales. We're raising the EPS guidance range from $1.70 to $2.10, increasing the low end by $0.10. This reflects our Q2 beat and confidence in sustained margin expansion. The wide EPS range reflects macro uncertainty and expected traffic volatility outside key selling periods.

Gross profit margin guidance increases 150 basis points to 36.5% to 37.5%, reflecting the structural margin improvement from rebanners and disciplined pricing. SG&A is expected to be $355 million to $360 million, including the increased rebanner investment. Capital expenditures are expected to be $45 million to $55 million, with $30 million to $35 million for rebanners. For the third quarter specifically, we expect net sales of $290 million to $300 million and EPS of $0.50 to $0.55.

In closing, we are successfully evolving our business mix toward higher-margin categories and customers. Our rebanner investments are generating strong returns, and our balance sheet provides the flexibility to execute our rebanner strategy while remaining opportunistic on acquisitions.

I'll now turn it back over to Mark for closing remarks.

Before opening for Q&A, let me briefly summarize where we are. We delivered $0.70 EPS in Q2, beating expectations by over 20%, with gross margins at 38.8%, our highest Q2 margin in years. That 270 basis point expansion came from strategic choices that are working. We increased our annual EPS guidance range today, reflecting the Q2 beat and fiscal August results.

Fiscal August delivered something significant. We achieved positive comparable sales growth during back-to-school, our highest stakes period. Shoe Station grew sales high single digits, carnival delivered positive children comps, Rogan grew sales and margins while being rebannered. Every banner contributed when it mattered most.

Our rebanner strategy is working. Station outperformed Carnival merchandise sales by over 10% in Q2 and fiscal August. Product margin resulting from our rebanner strategy expanded nearly 300 basis points. We'll operate 145 Shoe Station stores by year-end, on track for majority Shoe Station by next back-to-school.

We set out to build a company that serves median-income families with better brands and better experiences. The company is no longer a concept. It's operating, it's growing, and it's delivering.

With that, Patrick, Tanya, and I would be happy to take your questions. Operator, please open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Mitch Kummetz with Seaport Research Partners.

Going to be a handful. First of all, Mark, I'm curious on the second quarter. Your sales came a little below plan, but obviously, your gross margins were well ahead of plan. You talked about prioritizing margin dollars.

I'm just curious, is there something about the quarter that was a bit unexpected? Or did you kind of change your priorities in the quarter in order to kind of achieve the results that you did that were a bit different than what you kind of laid out 3 months ago?

Mitch, thanks for the question. I think the opportunistic buys and additional inventory that the team brought in performed better than we expected. We captured success at a lower cost basis and strength at a higher-margin run first.

Second, the Shoe Station performance continues to accelerate. And as that grows towards a higher percent of our mix, that's helping us drive our margins higher than we expected.

And third, we continue to see competitors do irrational things related to pricing, and we believe that's not the strategy for us. We've stayed true while others were doing very aggressive profit dilutive activities before back-to-school. We stayed true and steady to our focus of where we're going to be, ready to deliver growth when the customer is ready to shop profitably during back-to-school.

And it delivered, with comparable growth coming in Q3 right away as soon as back-to-school started. It was an exciting period of time.

And then, Patrick, on the third quarter, you gave us guidance in terms of sales and earnings. Is there anything more you can say in terms of kind of what your comp expectations are for the quarter and then also margins gross versus SG&A?

Mitch, thanks for the question. Yes, there's a little bit more detail that we can provide on our third quarter results.

First, our -- on our sales, the $290 million to $300 million range that we've given is down 2 to down 5. So midpoint somewhere in the 3% range, similar to our annual guide in the back half of the year. We don't have any meaningful difference in stores, so our comp would be very similar to our total sales on that front.

With respect to margin, we earned 36% in the quarter last year. We would expect a number that is 100 to 150 basis points above that in Q3 this year. So targeting a number of like 37% to 37.5% would be the thought process. SG&A, I think the best way to think about that is a pure number that is $95 million. So consistent with what we spent in Q2, which was about $94 million.

That's very helpful. And then just as a follow-up to that. I mean, it sounds like August is off to a very good -- or 3Q is off to a very good start, given August. Can you just maybe talk through kind of your expectations for the balance of the quarter in order to get to sales down 2 to 5?

Sure. That would -- that's a pretty easy take to make for us. The low end of our range at $290 million would assume comparable sales and total sales declines in the high singles, consistent with what we've seen in the first half of the year. And then at the low side of it, we see a number that is more flat. But the midpoint is this 3% sort of decline, which is a meaningful improvement from where we've been in the first half of the year.

And then, Mark, you made a comment in your prepared remarks that you're managing Shoe Carnival as a cash generator. Can you just elaborate on that?

Yes. I think that comes back to our margin integrity and not chasing traffic gains at any cost for that sub-$30,000 household. We're seeing the competitive set go after that low-income strap household with very aggressive pricing activity that's eroding margins and delivering different outcomes than we just put up, let's say, our 270 basis point growth in Q2. That was discipline.

We think that's the right thing as we're strategically moving away from that sub-$30,000 households. Instead of propping that up, chasing unprofitable low-quality sales now, we decided, and we'll continue to decide with Shoe Carnival, not to prop up that segment.

So we will expect to see in our guidance, that lower-income customer choosing to shop elsewhere and that median-income household shopper, $50,000 and up, choosing to shop at us. It's profitable, it's where we're heading, and it's a strategic path.

With that, Shoe Carnival throws off very strong cash characteristics and as we shared, cash up sharply as we sit here today, positioning us to fund fully our growth initiatives, to fund fully this transition to Shoe Station, the median customer and to be ready for further strategic initiatives as they arise.

And then maybe last for me. You mentioned that once Shoe Station gets to -- like 51% of your store base kind of the model lifts, that would happen kind of midway through next year. Does that mean that the impact of the rebannering is kind of net neutral to next year's earnings because whatever drag that you see in the first half gets offset by a tailwind in the back half? How should we think about that? I know you're not giving next year guidance yet, but if you could just kind of walk us through that intuitively.

I can give you broad strokes. As you said, we're not ready to provide the full financial thought on it. But you've got it right. We believe when we hit 51% of our fleet is operating a Shoe Station, next back-to-school, we start seeing sustained comp positive versus a sporadic, which we're delivering now in key event periods.

So we think about it in our early planning that the back half of next year is where we start showing a comp positive for the total corporation, for the Q3, Q4 period. Shoe Carnival will still represent a significant percent, and we still expect that will be a headwind from that lower-income customer.

So we're not anticipating high or mid-single digit comp in the back half of the year. But rather, it turns an inflection point to low singles, just barely comp. But that's something to build on as we continue to transition.

Financially, we're not really ready to share broader thoughts on that beyond that comp directional concept. And the rebannering fact of a significant amount in the guide would be rebannered in Q1 and Q2. And those financial implications, we'll provide more guidance as we get further along this year.

Your next question comes from the line of Sam Poser with Williams Trading.

A couple of mine. I'd like to talk to you about the inventory levels and the gross margin guidance and get some color on maybe where inventories are at the end of August. And just looking at the 3Q guidance and the gross margin guidance there, it looks like you'll sell $60 million, $70 million of cost of goods in August, give or take, you have $449 million of inventory on hand.

How do you keep the gross margin guidance as high as it is with all this inventory? Doesn't the rubber have to hit the road sometime?

It's Tanya. Just expand on your question in terms of inventory at the end of August, to answer your question, it's really in line with where we ended Q2, up mid-singles. And we strategically went after inventory to bill for back-to-school, which helped us deliver that comp growth in the month of August.

We also worked through and bought opportunistic buys, which we're carrying in that inventory. So that number that you see in terms of inventory is opportunistic buys that will carry until we get to spring 2026. So that's just carrying through and then the balance where we built -- so we built in sandals and opportunistic buys for 2026.

And then the other place that we're carrying additional inventory is in the athletic business, specifically in kids athletic because we built that for back-to-school, which again helped us deliver that comp growth in the month of August. And those are all in key items, high-margining styles that will carry all the way through the season.

So we recognize we have more inventory than we would like to, but we strategically did that for better margin opportunities and growth as we work through third quarter into the balance of the year.

And then on the margin side of the equation, Mark spoke to that. But again, we continue to see better margins based on the opportunistic buys that we've done, our disciplined pricing, which we will strategically be disciplined through the balance of the year; and the key item position that we have this year and the better key item position that we're in this year than we've ever been.

Just a follow-up. So we know a hard number. The inventory was $449 million. That's a hard number that can tell us what's happening. Is that -- what is the number -- I mean, I don't know, since we don't know what the mid-single-digit increase year-over-year means, is -- what -- I mean, what is the number? Is it higher or lower than $449 million? Is it -- since you had that strong August, is that now at 420? Because it's really what the number is, not what the increase is. It's looking forward, not looking backwards.

Sam, it's Mark. We're not going to give an interim inventory for a right to second, books aren't closed for all of that. We're sharing -- sales are closed for fiscal August, and we're really delighted to be able to give the full back-to-school growth and margins closed. We're really delighted to be able to share that and the category information.

Here's the message on inventory. We have too much, as I said in my speech. And as Tanya said, we have it in places we feel good about delivering strong margins as we work through the fall season, the spring season and the key items.

Next year, once we have complete clarity or better clarity on the supply chain and tariffs, we will be working through and normalizing inventory levels. But we do not see that margin erosion becoming relevant in this fiscal year, and we do not see that product being margin deteriorating next year. It's a good product.

Okay. And then just a little question. Are you guys going to see Jordan product for Spring '26? And with the Shoe Carnival business comping down high singles, could we assume that their brands such as Birkenstock and Skechers and others that were probably significantly better or possibly up, and it was a lot of the real low-end, moderate nonbranded products that really drove the comp down because the -- even the lower-income customers want those sort of high-in-demand brand?

Yes, I'm going to grab that, Sam. We're not going to share with our competitors what new products are coming in. I have great confidence. We have outstanding exciting brands that will be on our sales floor in early 2026, but I'm not going to share what those are with our competitive set to think about that.

On the second part of that question, our higher ticket items, best brands in the world, whether that's a footbed or an athletic in performance, performing outstanding. We've seen those drive the results, we're seeing those lead to capturing the higher-income customer, to delivering sales growth, to delivering margin growth.

Without a doubt it's tight focus on the best brands in select segments and not private label. It's been a winning recipe for us being a retailer and not a manufacturer, and we're seeing that play out incredibly well at this point of time. While others navigate their covenants and manufacturing, we just stay focused on buying the world's best brands and delivering margin growth.

And then lastly, how are you seeing -- like how are the brands in general taking price? What are you seeing from price increases going into the balance of this year and going into next year due to the tariff impact from your wholesale partners?

Sam, just recently, it had been a little quiet because we're on a pause, a 90-day pause with China right now. So China at 30%. But when they came back with the Vietnam with the additional 10, so it was 10 on top of 10, we're starting to get some more increases there. So as we move into spring, we're looking at price increases between 5% and 7% in total based on what we've gotten back thus far.

[Operator Instructions] There are no further questions at this time. I would now like to turn it back over to Mark Worden for closing remarks.

Thank you all for joining us for our second quarter call. We're excited about the progress we're seeing with our growth strategy and look forward to discussing it in greater depth with you at our Q3 call later this year.

That concludes today's conference call. You may disconnect.