Investment Analysis: The of Shoe Carnival, Inc - Case Study Example

Investment Analysis: The case study of Shoe Carnival, Inc. In this study, an analysis of financial performance based on published data fromannual report of the Shoe Carnival Inc. is prepared as a tool for investment decision. The four -year financial data from 2006 to 2009 is compared to see fluctuations in growth in terms of profitability. Ratios are also measured up to competitors to see relative positioning of the company. Findings of the study showed Shoe Carnival Co. is in a healthy financial condition and is able to compete with giants in the industry. Key words: Shoe Carnival, performance, profitability Investment Analysis: The case study of Shoe Carnival, Inc. Introduction This study discusses the financial performance of Shoe Carnival, Inc. on the point of view of an investor. An investor is always interested to look at the financial performance of the company when he/she is investigating opportunities for investment. An investor generally weighs company growth movements based on the historical data; and contrast its past and present performance to see significant growth actions. It is also important to compare the ratios obtained from its competitors in the industry to see its relative performance and positioning. This method gives a picture of the total performance of the company measuring its growth, profitability, financial performance and efficiency. Data used in the study are gathered from the published annual reports of the company (shoe carnival.com) and financial highlights from Analysts reports (msn Money Central n.d.) Discussions Overview of Shoe Carnival, Inc. Shoe Carnival, Inc. is a publicly listed company in the United States, incorporated in 1978. It employs 3,770 in its 317 stores located in 30 states in the Midwest, South and Southeast regions of the United States. (Form 10-Q. for Shoe Carnival, Inc.10 Dec. 2009). The company is one of the largest family footwear retailers in the country. Its marketing strategies are done by offering a “distinctive shopping experience, a broad merchandise assortment and value to our customers while maintaining an efficient store level cost structure.” (yahoo.com] As a marketing strategy, its Quarterly Report as cited by Yahoo Finance, said their competitive pricing come together with fun shopping experience that is incorporated in the promotional mood in their stores. The company believes that these shopping experiences have created for them loyal customers who come again for repeat purchases, and positive word of mouth advertisements. Funding Universe (n.d.) reports in the company history of Shoe arnivaal,the over-all marketing plan, upon which, the Shoe Carnival hopes to become a “destination-store-of-choice” for customers who are seeking for a moderately priced name brand and private label footwear. The store offers an assortment dress, shoes, sandals, boots and a wide assortment of athletic shoes for the family. Product display and selling is done on a floor format, more on a serve yourself style. This strategy lessens cost of services and labor cost as a percentage of sales. (Fundin Universe, n.d.) Shoe Carnival stores are located in large shopping centers to take advantage of the lower occupancy costs and the presence of value customers. The stores are company owned and have no franchise. (Funding Universe) Future performance. The forward looking statements found in the Quarterly report of the company, as cited by Yahoo, stated that their projections of profitability in the future are also subject to risks and uncertainties that are not totally controlled. This will depend, according to the report, on a number of factors such as the state of the economy and the general conditions in the area where the company stores are operating. It also depends on the credit market which up to now has been tight and is dependent on how long is the effect of the economic downturn. In the light of these economic changes, problem that affects operation is how to increase sales and profitability. As a retail establishment, the store depends on its relationship with the suppliers chain that is also subject to fashion trends, changes and government restrictions and policies For instance, the Q-10 reported company’s operation is subject to changes in the natural and political environment of its suppliers from the People’s Republic of China, Brazil, Spain and East Asia, the largest shoe manufacturers in the world, and trade relations with U.S. Competition. Competitors of Shoe Carnival are the Brown Shoe Company, Inc., Collective Brands, Inc., Foot Locker, INC. and the industry composed of apparel stores. In terms of capitalization, the company has the lowest capitalization. (Yahoo Finance) Analysis of operation Data used in analysis came from the Shoe Carnival Annual Report. Financial highlights of MSN Money Central and Yahoo Finance. Ratios of growth, profitability, financial condition and efficiency have been calculated to show fluctuations. Ratios when compared to historical data will show movements or directions done by management. When compared with competitors, it will show relative position of the company, whether it is a low or high performer in the industry. Ratios will provide significant information for decision making. Shown in Table 1 are the key performances of the company from 2006 to 2009, industry and S & P 500 as benchmark. The first criterion is profitability. The sales growth of the company declined in 2009 and 2008 as compared to 2007. In 2009, sales have slightly recovered but still remains in the negative decline status. It ranks poorly with industry and S & P 500 benchmark. The gross profit margin showed a yearly decline which is far lower than the industry and SP 500 benchmark. Net profit margin of the company is lowest in 2009, with 2007 having the highest rate. There is a big disparity of figure between the company, industry and sector that needs to be reviewed further. In terms of asset turnover, which means how well does the company use its assets to produce revenue, [investorwords]http://www.investorwords.com/291/asset_turnover.html, Shoe Carnival is more efficient than the industry. However, it declined by 2.17% in 2009. The return on equity is lowest in 2009, and even lesser when compared to its competition. The liquidity of the company presents a healthy condition as both its current ratio and quick ratio indicates the company has ability to meet its maturing obligations. This means creditors need not to worry as the 2009 figures are much higher than in 208, and much higher than competitors. The company’s inventory turnover ratio has improved in 2009. An inventory turnover is a ratio that shows how fast the company turns its inventory into cash. Its performance is rather slow Table 2. Key financial data of Shoe Carnival & Competitors Criteria 2009 2008 2007 2006 Industry S & P 500 Profitability Sales growth -2 -3.3715 1.204 - 8.30 10.30 Gross profit margin 26.9 28.2 29.1 24.3 39.3 38.6 Net profit margin 82.13 194.43 348.60 286.60 5.8 10.5 Asset turnover 2.209 2.258 2.190 2.385 1.7 0.8 Return on equity 2.599 6.513 11.308 10.372 15.9 20.6 Liquidity 2009 2008 Current ratio 3.098 2.802 2.7 1.4 Quick ratio 46.389 24.401 1.8 1.2 Management Efficiency Inventory turnover ratio 2.498 2.354 5.5 9.1 Fixed asset turnover ratio 9.222 9.188 Gearing ratio Debt/equity 35.145 39.915 0.33 1.37 Earnings per share 42.874 9.911 P/E ratio 20.0 21.3 21.6 Source of data: Shoe Carnival Annual Report 2008, & msn money central Comparative performance of shoe retailers is attached as Annex 1. As shown, Shoe Carnival is competitively strong in terms of net income, operating margin and EPS. Conclusion Based on the data presented, the company is in a healthy financial condition as liquidity ratios show it can readily pay its maturing obligations. Company has been affected by the falling economy as shown in the decline of sales. Company has a fair share of net profit margin that means company exercises prudent administration of costs, and its assets are efficiently utilized. The ROE took a low turn as a result of sales decline, plunging low from its past records. Company P/E is little bit lower by 4% compared with competition and shows how much the market is willing to pay for the company’s earnings. Share price of its closest competition, the Brown Shoe Company, is $16.01 as compared to $24.18 of Shoe Carnival which shows is overvalued. (Morning Star, 08 April 2010) In this context, it is fair to recommend investment to Shoe Carnival on the grounds that its EPS and P/E is better performing than Brown Shoe Company, considering also that Shoe Carnival has a lower market cap. Annex 1. Comparative performance of shoe retailers SCVL BWS PSS FL Industry Market Cap: 302.37M 676.86M 1.51B 2.44B 970.28M Employ­ees: N/A N/A N/A N/A 3.40K Qtrly Rev Growth (yoy): 8.80% 8.60% N/A N/A 4.10% Revenue (ttm): 682.42M 2.24B 3.31B 4.85B 1.43B Gross Margin (ttm): 28.37% 40.28% 34.67% 38.28% 40.57% EBITDA (ttm): 40.11M 86.68M 307.80M 233.00M 124.69M Oper Margins (ttm): 3.68% 1.94% 4.98% 2.49% 7.96% Net Income (ttm): 15.17M 9.50M 81.50M 47.00M N/A EPS (ttm): 1.198 0.228 1.285 0.307 0.92 P/E (ttm): 20.06 71.36 18.23 50.68 20.95 PEG (5 yr expected): 0.95 2.06 1.16 2.69 1.19 P/S (ttm): 0.44 0.30 0.46 0.50 0.72 BWS = Brown Shoe Co. Inc. PSS = Collective Brands, Inc. FL = Foot Locker, Inc. Industry = Apparel Stores . References Form 10-Q for Shoe Carnival, Inc. (2009). Quarterly Report. Item 2. Management Discussion& Analysis of Financial Condition on and Results of Operations. Retrieved from http://biz.yahoo.com/e/091210/scvl10-q.html Funding Universe. Company History: Shoe Carnival, Inc. Retrieved from http://www.fundinguniverse.com/company-histories/Shoe-Carnival-Inc-Company-History.html MSN Money. (2010) Key Ratios. Shoe Carnival, Inc.. Retrieved from http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=ManagementEfficiency&Symbol=SCVL Morning Star.com. (2010). Stock Price quote- Brown Shoe Company Retrieved from Read More