Buy Shoe Carnival On Post-Earnings Weakness Shoe Carnival (NASDAQ: SCVL) reported its Q1 report, sent shares into freefall and we can't understand why. The company had a game-changing quarter that points to a sustained uptick in business, increased cash flow, growth, dividends

Shoe Carnival Has Game-Changing Quarter

Shoe Carnival (NASDAQ: SCVL) reported its Q1 report, sent shares into freefall and we can't understand why. The company had a game-changing quarter that points to a sustained uptick in business, increased cash flow, growth, dividends, and dividend growth. What this means for us is another chance to buy into this story with the possibility of triple-digit gains still to come. With today's decline, the stock is trading at a mere 14X the FIRST HALF guidance which makes it quite the value indeed. Assuming the second half of the year is only half as good as the first this stock can be had for less than 10X earnings. The only thing we can fault the company for is its low 1.0% dividend, but we think that might change soon too.

Shoe Carnival Has A Blow Out Quarter, Guides Higher

Shoe Carnival had more than a blow quarter as revenue grew 30% sequentially, 122.7% from last year, and 30% over the past two years. The gains are against a relatively easy comp to last year, but that is offset by the fact revenue beat the consensus by 2000 basis points and set an all-time record. To put this into an even better perspective, the beat is on top of a consensus figure that's up 48% since the low set last summer. On a comp-store basis, sales grew 125.8% but were offset by a slightly lower store count. Within that, eCommerce sales grew 11.8% versus the entire F2020 period and 191.3% versus F2019 proving the company's digital strategy is working.

Moving down the report, the company was able to fully leverage demand by removing promotional activity from the roster. This added 1000 basis points to the 1800 basis point gain in gross margin. The gross margin came in at 39.6% and also set a company record. Looking forward, the company is expecting the margin gains to persist due to high demand and cost-leveraging of fixed expenses. Margin gains carried through to the bottom line as well driving GAAP earnings to another company record. The GAAP $3.02 in earnings is $1.62 better than the consensus and more than the company earned over the past 6 quarters.

While guidance assumes a sequential downtick in revenue it's to be expected with stimulus checks and tax-season spending running out. Regardless, the for forecast $268 to $278 in revenue is strong and well above the consensus estimates. The 2Q EPS forecast of $1.00 to $1.20 brings the first-half total to about 105% of the FY consensus with the second half of the year still ahead. Based on the 10% gain in rewards customers we think the guidance could be light. The takeaway for us is that this company is ringing the cash register and trading at a ridiculously low multiple.

Shoe Carnival Is Going To Make A Big Dividend Increase

Shoe Carnival just upped its dividend payment with the last declaration so it might be a while until the next. That said, based on the last increase, the balance sheet, the Q1 results, and the outlook, we think the next increase is going to double-digits and possibly high-double-digits at that. The last increase was worth 55% to shareholders and comes out to about 14% of the first-half earnings. Assuming strength continues the payout ratio for the year will be sub-8% and the balance sheet is a fortress. The company has no debt, ample cash and large amounts of free cash flow to sustain the current payout and continue increasing it for many years to come.

The Technical Outlook: Shoe Carnival Plummets In Early Trading

Like we said before, shares of Shoe Carnival are plummeting in early trading and we can't figure out why. Our best guess is the 14% short interest and if so, we don't think the sell-off will last very long. With these kinds of results and outlook, we view the pullback in Shoe Carnival as a top-tier buying opportunity and one that the market is going to act upon. The risk is support at the $58 level. If the $58 level breaks down this market may be in for a deeper correction.

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