Stock Mart: Shoe Carnival

Shoe Carnival (SCVL) may not be a mere sideshow for much longer.

The retailer's concept incorporates most aspects of the midway except the geek biting the heads off live chickens. Teamed with a new merchandising strategy and aggressive expansion plans, that idea is prompting analysts and investors to call the stock, which dipped as low as 7 in the past year, a bargain.

"It's a very unique retail experience at an underserved price point," says Jeff Hershey, an analyst at Awad & Associates, which owned 136,000 shares on June 30, according to data tracker Technimetrics. "They've got word of mouth, and that's what retail is all about."

Customers walking into one of Shoe Carnival's 111 stores are met with neon signs, brightly colored carpets and fixtures and, most notably, the "mike man" (or woman), a barker-like figure who talks up merchandise, discounts and special promotions from the center of the store. Games -- a "spin 'n win" wheel and musical chairs, for example -- give customers the chance to win further discounts or coupons. The entertainment value, say analysts, differentiates it from competitors like Brown Group's (BG) Famous Footwear chain.

While the atmosphere appears chaotic, there's a definite method behind the craziness: The mike person can promote closeout merchandise or, for example, call attention to women's shoes if a group of females come in on their lunch break. "What looks like spontaneous promotions are actually a highly effective way to clear out inventory," says Steven Richter, an analyst with Tucker Anthony who rates the company a strong buy. His firm hasn't performed underwriting for Shoe Carnival.

Those spontaneous-seeming promotions also make people want to spend. On Thursday, the Evansville, Ind.-based company reported January same-store sales increased 5.9%, more than the company had expected given the harsh weather in the first part of the month. Analysts expect that earnings in fiscal year 1999, which ended Jan. 30, rose to 76 cents per share from 56 cents the previous year, according to First Call.

Based on that consensus, Shoe Carnival's price-to-earnings ratio is 13 for fiscal 1999, and it trades at a P/E of 10.4 on its fiscal 2000 First Call consensus of 95 cents a share. Its price-to-sales ratio is roughly 0.5, and its price-to-book ratio is about 1.6, both within the value investor's range.

Shoe Carnival shares closed Friday at 10, unchanged from Thursday's close.

"It's an outstanding bargain," says Harry Ikenson, an analyst at Hambrecht & Quist, which hasn't performed underwriting for Shoe Carnival. Ikenson initiated coverage with a strong buy in December, with a share-price target of 19.

Mark Lemond, Shoe Carnival's president and chief executive, emphasizes that the shopping-as-fun concept goes only so far. "People shop us for the selection of merchandise moreso than the entertainment," he says. Lemond spearheaded a new merchandising strategy after he was promoted to his current position in 1996. (Before that, he was chief financial officer and chief operating officer.) Reversing the company's previous tack, he shifted from cheaper private-label merchandise to men's, women's and children's name brands like Nike (NKE), Liz Claiborne (LIZ), Esprit, Skechers and Timberland (TBL). Private-label merchandise now accounts for only about 25% of sales, while most shoes sell for $20 to $40. Athletic shoes, which make up about 35% of sales, run $45 to $65. That puts Shoe Carnival somewhere between department stores and deep discounters like Payless (PSS).

H&Q's Ikenson says the company also is moving away from manmade materials and toward pricier natural materials. "This should result in better-quality products, a higher initial markup, approximately a $10 improvement in the average selling price of leather products over manmade products and further improvement in gross margins," he wrote in a recent research note.

Because Shoe Carnival stores are bigger than the competition's -- averaging around 12,000 square feet, though flagship locations run as large as 22,000 square feet -- they have room for a wider variety of styles and sizes. Unlike Payless, Shoe Carnival's merchandise isn't stuck in boxes on the rack but is openly displayed.

So far, the company has outlets in 18 states in the Midwest and South, which are located mainly in strip malls. And it's expanding. Shoe Carnival will open 25 to 30 new stores in 1999. "We would like to grow this chain at about a 25% clip per year," says Lemond. Analysts say that while it may not be right for every major metro area, it certainly has the potential to go national.

Investors' unfamiliarity with the company and its shtick may be a drag on the share price, say analysts. Moreover, Shoe Carnival's progress comes against the background of less-than-stellar growth in the shoe industry -- about 2% to 3% per year.

"In a year where there was nothing but turmoil in the industry, this company registered very sharp increases in sales and earnings," says Jeffrey Stein, an analyst with McDonald & Co. Investments in Cleveland. Stein, whose company has performed underwriting for Shoe Carnival, rates the stock an aggressive buy.

Lately, pricey athletic shoes have fallen out of favor. But Nike's and Reebok's (RBK) woes may be in Shoe Carnival's favor. "We've been able to obtain closeout product at a very good price," says Lemond. Casual nonathletic shoes, also referred to as brown shoes, are seeing sluggish sales as well, so the company may be positioned to pick up bargains in that market, too, says Ikenson.

Now that the company has taken a new direction, its shares look ready to do the same. Even without the geek.

Recent Stock Mart Inventory Stock Story Date Initial Price Thurs. Close % Change % Chg. of S&P 500, Russell 2000 Elcor (ELK:NYSE) 1/22 34 7/8 34 1/4 +1.1% +1.9%, -1.1% Central Garden & Pet (CENT) 1/15 14 3/4 15 5/16 +3.8% +0.4%, -2.2% Brunswick (BC:NYSE) 12/18 21 1/16 23 1/8 +9.8% +5.1%, +5.1% CompUSA (CPU) 12/11 13 5/16 13 7/8 +4.2% +7%, +5.7% Heilig-Meyers (HMY:NYSE) 12/4 7 9/16 6 3/4 -11% +6.1%, +4.9% Dress Barn (DBRN) 11/20 16 15 15/16 -0.4% +7.3%, +6% Wabash National (WNC) 11/13 17 5/16 14 3/8 -17% +11%, +7.3% Interstate Bakeries (IBC) 11/6 26 9/16 25 1/16 -5.6% +9.4%, +4.4% Liberty Financial (L) 10/30 25 1/8 24 3/8 -3% +14%, +11% Fresh Foods (FOOD) 10/23 8 5 3/4 -28% +17%, +14%

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