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Intro
If we look at a technical chart of Shoe Carnival, Inc. (NASDAQ:SCVL), shares are now down 30%+ from their all-time highs printed in November of last year. The selling actually intensified after the release of the company´s fourth-quarter numbers last week which may have caught many investors by surprise considering that the recent fourth quarter which ended in January was the best quarter in the company´s history.
Being chartists, however, we believe that the technicals tell us the full story with respect to the known fundamentals of Shoe Carnival at this moment in time. In fact, from a core technical standpoint, now that the stock´s 50-day moving average has crossed below the 200 and both averages are now above Shoe Carnival´s share price, there is every possibility that the $20 support level gets tested if this current down move gains traction. Again, investors may be surprised by the $20 target, but this is what happens (lack of support) when a company rallies more than 300% in the space of 20 months. Investors should also be aware that Shoe Carnival´s short interest now comes in at about 10% which again demonstrates that a swift move down could be on the cards here to reset sentiment.
Bearish connotations in Shoe Carnival (Stockcharts.com)
Sentiment May Be Reset
Lack of near-term growth in quality companies always brings opportunity because the market usually reprices the stock to adjust for the fall-off in growth. In fiscal 2021 for example Shoe Carnival reported $5.53 in diluted earnings per share on revenues of $1.33 billion. Although sales are expected to increase by roughly 7% in this present fiscal year, earnings are expected to drop to the $4.10 range which is a sizable 25%+ drop.
Although this may not look all that attractive in the near term, long-term investing is all about sizing up the relationship between the company´s profitability as well as its valuation. When this relationship stacks up (irrespective of negative bottom-line growth over the near term), the probabilities are high that shares will eventually make gains.
Cash Flow Strength
We state the above because Shoe Carnival at present trades with a sales multiple of 0.64 and a book multiple of 1.87. No matter how the short-term lines up for the company, these are low multiples considering EBIT increased by $180+ million in fiscal 2021 due to sales growth of 36%. Suffice it to say, it is all about cash flow and being able to invest through the cycle to ensure earnings growth returns with a vengeance. In fiscal 2021 for example, SCVL reported operating cash flow of $147.9 million of which the majority went towards CAPEX and acquisitions. Given the company´s strong profitability profile and forward cash-flow multiple comes to 7.94, Shoe Carnival will continue to have the necessary cash to keep on acquiring companies, expand its organic store footprint and reward shareholders through buybacks and dividend payments. In fact, at the end of the recent fourth quarter, Shoe Carnival reported over $130 million of cash and ST investments and no outstanding debt. Suffice it to say, when the lion´s share of operating profit can drop to the bottom line, cash flow automatically remains elevated.
Strong Liquidity
Inventory surpassed $285 million at the end of Q4 which was a sizable $50+ million jump over the previous year but the company´s liquidity position remains solid for the following reasons. For one, receivables remain a mere $14 million which demonstrates that these goods (Including new stock from the Shoe Station acquisition) will continue to get paid for promptly. Furthermore, SCVL´s current liabilities only increased by $23 million last year which means the current ratio increased to 2.89.
Value Adding Business
Many industries continue to struggle against inflationary and supply chain headwinds which means now more than ever, the companies which will gain share will be the ones that add the most value. Value is definitely being added in CRM with respect to significantly improving customer engagement, timely inventory management, and a robust e-commerce business. All of these areas tie into each other which is key and management deserves plaudits here in how it has its workforce literally singing off the same hymn sheet. Suffice it to say, we see meaningful improvement to come in the above areas which in the end will result in more repeat business from customers.
Conclusion
Therefore, to sum up, if shares continue to lose value over the next few weeks and beyond which the technicals are insinuating, Shoe Carnival would be a very strong buy if indeed the recent March lows do not hold. We look forward to continued coverage.
Source: https://seekingalpha.com/article/4497535-shoe-carnival-crm-continues-to-turn-the-screw
