Shareholders of Shoe Carnival would probably like to forget the past six months even happened. The stock dropped 36.9% and now trades at $25.49. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Shoe Carnival, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Even though the stock has become cheaper, we don't have much confidence in Shoe Carnival. Here are three reasons why you should be careful with SCVL and a stock we'd rather own.

Why Is Shoe Carnival Not Exciting?

Known for its playful atmosphere that features carnival elements, Shoe Carnival (NASDAQ: SCVL) is a retailer that sells footwear from mainstream brands for the entire family.

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 6.9% annual declines.

2. Fewer Distribution Channels Limit its Ceiling

With $1.22 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. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Shoe Carnival historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 14%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Final Judgment

Shoe Carnival isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 26.9× forward EV-to-EBITDA (or $25.49 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.

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