Even though Shoe Carnival (currently trading at $18.90 per share) has gained 8.7% over the last six months, it has lagged the S&P 500’s 23.8% return during that period. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Shoe Carnival, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Do We Think Shoe Carnival Will Underperform?
We're cautious about Shoe Carnival. Here are three reasons you should be careful with SCVL and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Shoe Carnival’s demand has been shrinking over the last two years as its same-store sales have averaged 6% annual declines.
2. Fewer Distribution Channels Limit its Ceiling
With $1.15 billion in revenue over the past 12 months, Shoe Carnival is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Shoe Carnival’s margin dropped by 6 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.
Final Judgment
We see the value of companies helping consumers, but in the case of Shoe Carnival, we’re out. With its shares lagging the market recently, the stock trades at 11.8× forward EV-to-EBITDA (or $18.90 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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