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SHOE CARNIVAL INC - Quarter Report: 2003 November (Form 10-Q)

SCVL 3rd QTR 10-Q 2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X]

  

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended   November 1, 2003

 

or

[   ]

  

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ____________________  to  ____________________

Commission File Number:

0-21360

 

Shoe Carnival, Inc.

(Exact name of registrant as specified in its charter)

 

       

 

Indiana

 

35-1736614

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer Identification Number)

 

 

 

8233 Baumgart Road
Evansville, IN

 

47725

(Address of principal executive offices)

 

(Zip code)

(812) 867-6471

(Registrant's telephone number, including area code)

 

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

[X]

Yes

 

[  ]

No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

[X]

Yes

 

[  ]

No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value, 12,755,246 shares outstanding as of December 10, 2003


SHOE CARNIVAL, INC.
INDEX TO FORM 10-Q

 

 

 

Page

Part I

Financial Information

 

 

Item 1.

Financial Statements (Unaudited)

 

 

      Condensed Consolidated Balance Sheets

3

 

      Condensed Consolidated Statements of Income

4

 

      Condensed Consolidated Statement of Shareholders' Equity

5

 

      Condensed Consolidated Statements of Cash Flows

6

 

      Notes to Condensed Consolidated Financial Statements

7 - 8

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

9 - 13

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

13

 

 

 

 

 

Item 4.

Controls and Procedures

13

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

14

 

 

 

 

Signature

15


SHOE CARNIVAL, INC.
PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

November 1,

 

February 1,

 

November 2,

 

(In thousands)

2003

 

2003

 

2002

 

 

 

Unaudited

 

 

 

 

Unaudited

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

Current Assets:

 

 

 

 

 

 

 

 

 

 

   Cash and cash equivalents

 

$

3,072

 

$

5,782

 

$

3,969

 

   Accounts receivable

 

 

2,280

 

 

1,134

 

 

2,577

 

   Merchandise inventories

 

 

165,356

 

 

146,091

 

 

147,909

 

   Deferred income tax benefit

 

 

1,183

 

 

901

 

 

385

 

   Other

 

 

4,731

 

 

1,890

 

 

2,040

 

Total Current Assets

 

 

176,622

 

 

155,798

 

 

156,880

 

Property and equipment-net

 

 

70,129

 

 

63,477

 

 

63,601

 

Total Assets

 

$

246,751

 

$

219,275

 

$

220,481

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

   Accounts payable

 

$

40,270

 

$

49,847

 

$

42,794

 

   Accrued and other liabilities

 

 

9,334

 

 

9,276

 

 

10,290

 

   Current portion of long-term debt

 

 

268

 

 

427

 

 

482

 

Total Current Liabilities

 

 

49,872

 

 

59,550

 

 

53,566

 

Long-term debt

 

 

36,195

 

 

15,503

 

 

25,438

 

Deferred lease incentives

 

 

8,175

 

 

5,262

 

 

5,002

 

Accrued rent

 

 

2,707

 

 

2,458

 

 

2,350

 

Deferred income taxes

 

 

4,737

 

 

4,971

 

 

4,467

 

Other

 

 

1,106

 

 

640

 

 

611

 

Total Liabilities

 

 

102,792

 

 

88,384

 

 

91,434

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

   Common stock, $.01 par value, 50,000

 

 

 

 

 

 

 

 

 

 

     shares authorized, 13,363 shares

 

 

 

 

 

 

 

 

 

 

     issued at November 1, 2003, February 1, 2003

 

 

 

 

 

 

 

 

 

 

     and November 2, 2002

 

 

134

 

 

134

 

 

134

 

   Additional paid-in capital

 

 

66,150

 

 

65,828

 

 

65,427

 

   Retained earnings

 

 

82,211

 

 

70,091

 

 

68,422

 

   Treasury stock, at cost 656, 746 and 765 shares at

 

 

 

 

 

 

 

 

 

 

     November 1, 2003, February 1, 2003 and November 2, 2002

 

 

(4,536

)

 

(5,162

)

 

(4,936

)

Total Shareholders' Equity

 

 

143,959

 

 

130,891

 

 

129,047

 

Total Liabilities and Shareholders' Equity

 

$

246,751

 

$

219,275

 

$

220,481

 


See notes to condensed consolidated financial statements.


SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited

 

Thirteen

Thirteen

Thirty-nine

Thirty-nine

 

Weeks Ended

Weeks Ended

Weeks Ended

Weeks Ended


(In thousands, except per share data)

November 1, 2003

November 2, 2002

November 1, 2003

November 2, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

152,365

 

 

$

137,703

 

 

$

423,678

 

 

$

391,713

Cost of sales (including buying,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   distribution and occupancy costs)

 

 

 

107,006

 

 

 

97,238

 

 

 

300,487

 

 

 

276,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

45,359

 

 

 

40,465

 

 

 

123,191

 

 

 

115,308

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   expenses

 

 

 

36,401

 

 

 

32,376

 

 

 

103,297

 

 

 

92,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

8,958

 

 

 

8,089

 

 

 

19,894

 

 

 

23,298

Interest expense-net

 

 

 

160

 

 

 

161

 

 

 

502

 

 

 

625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

8,798

 

 

 

7,928

 

 

 

19,392

 

 

 

22,673

Income tax expense

 

 

 

3,299

 

 

 

2,973

 

 

 

7,272

 

 

 

8,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

5,499

 

 

$

4,955

 

 

$

12,120

 

 

$

14,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

$

.43

 

 

$

.39

 

 

$

.96

 

 

$

1.13

   Diluted

 

 

$

.42

 

 

$

.38

 

 

$

.93

 

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

 

12,684

 

 

 

12,595

 

 

 

12,654

 

 

 

12,545

   Diluted

 

 

 

13,062

 

 

 

12,967

 

 

 

13,014

 

 

 

12,982


See notes to condensed consolidated financial statements.


SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unaudited

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

Retained

 

Treasury

 

 

 

 

(In thousands)

Issued

 

Treasury

 

Amount

 

 

Capital

 

Earnings

 

 

Stock

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 1, 2003

13,363

 

(746

)

 

$

134

 

 

$

65,828

 

$

70,091

 

$

(5,162

)

 

$

130,891

Exercise of stock options

 

 

80

 

 

 

 

 

 

 

262

 

 

 

 

 

554

 

 

 

816

Employee stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   plan purchases

 

 

10

 

 

 

 

 

 

 

60

 

 

 

 

 

72

 

 

 

132

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

12,120

 

 

 

 

 

 

12,120

Balance at November 1, 2003

13,363

 

(656

)

 

$

134

 

 

$

66,150

 

$

82,211

 

$

(4,536

)

 

$

143,959


See notes to condensed consolidated financial statements.


SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

 

Thirty-nine

 

Thirty-nine

 

Weeks Ended

 

Weeks Ended

(In thousands)

November 1, 2003

 

November 2, 2002

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

   Net income

$

12,120

 

 

$

14,171

 

   Adjustments to reconcile net income to net

 

 

 

 

 

 

 

     cash provided by operating activities:

 

 

 

 

 

 

 

     Depreciation and amortization

 

10,287

 

 

 

9,164

 

     Stock option income tax benefit

 

202

 

 

 

675

 

     Loss on retirement of assets

 

435

 

 

 

128

 

     Deferred income taxes

 

(516

)

 

 

308

 

     Other

 

378

 

 

 

226

 

     Changes in operating assets and liabilities:

 

 

 

 

 

 

 

       Accounts receivable

 

(1,362

)

 

 

(1,061

)

       Merchandise inventories

 

(19,265

)

 

 

(12,261

)

       Accounts payable and accrued liabilities

 

(9,531

)

 

 

2,567

 

       Other

 

(2,822

)

 

 

(209

)

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(10,074

)

 

 

13,708

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

   Purchases of property and equipment

 

(17,532

)

 

 

(15,799

)

   Lease incentives

 

3,251

 

 

 

1,135

 

   Other

 

367

 

 

 

0

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(13,914

)

 

 

(14,664

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

   Net borrowings (payments) under line of credit

 

20,875

 

 

 

(1,925

)

   Payments on capital lease obligations

 

(343

)

 

 

(708

)

   Proceeds from issuance of stock

 

746

 

 

 

2,099

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

21,278

 

 

 

(534

)

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,710

)

 

 

(1,490

)

Cash and cash equivalents at beginning of period

 

5,782

 

 

 

5,459

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

$

3,072

 

 

$

3,969

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

   Cash paid during period for interest

$

476

 

 

$

765

 

   Cash paid during period for income taxes, net of refunds

$

9,694

 

 

$

6,731

 

   Capital lease obligations incurred

$

0

 

 

$

47

 


See notes to condensed consolidated financial statements.


SHOE CARNIVAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note 1 - Basis of Presentation

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position and the results of our operations and our cash flows for the periods presented. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted according to the rules and regulations of the Securities and Exchange Commission, although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for fiscal year ended February 1, 2003.

Note 2 - Net Income Per Share

Net income per share of common stock is based on the weighted average number of shares and common share equivalents outstanding during the period. The following table presents a reconciliation of our basic and diluted weighted average common shares outstanding as required by Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share":

 

Thirteen

 

Thirteen

 

Thirty-nine

 

Thirty-nine

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

November 1,

 

November 2,

 

November 1,

 

November 2,

(In thousands)

2003

 

2002

 

2003

 

2002

Basic shares

12,684

 

12,595

 

12,654

 

12,545

Dilutive effect of stock options

378

 

372

 

360

 

437

Diluted shares

13,062

 

12,967

 

13,014

 

12,982

For the quarters ended November 1, 2003 and November 2, 2002, 294,557 and 306,615 options, respectively, were not included in the computation of diluted shares because the options' exercise prices were greater than the average market price for the period. For the nine months ended November 1, 2003 and November 2, 2002, 299,468 and 4,143 options, respectively, were not included in the computation of diluted shares because the options' exercise prices were greater than the average market price for the period.

Note 3 - Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation", requires that companies either recognize compensation expense for grants of stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income and net income per share in the notes to the financial statements. At November 1, 2003, we had three stock-based compensation plans: the 1993 Stock Option and Incentive Plan, the Outside Directors Stock Option Plan and the 2000 Stock Option and Incentive Plan. We account for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, no compensation cost has been recognized under SFAS No. 123 for our stock option plans. Had compensation cost for the awards under those plans been determined based on the grant date fair values, consistent with the method required under SFAS


No. 123, our net income and net income per share would have been reduced to the pro forma amounts indicated below:

 

Thirteen

 

Thirteen

 

Thirty-nine

 

Thirty-nine

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

November 1,

 

November 2,

 

November 1,

 

November 2,

(In thousands, except per share data)

2003

 

2002

 

2003

 

2002

Net income as reported

$

5,499

 

$

4,955

 

$

12,120

 

$

14,171

 

Deduct:  Stock-based

 

 

 

 

 

 

 

 

 

 

 

 

   compensation expense determined

 

 

 

 

 

 

 

 

 

 

 

 

   under fair value based method for

 

 

 

 

 

 

 

 

 

 

 

 

   all awards, net of related tax effects

 

(299

)

 

(214

)

 

(852

)

 

(625

)

Pro forma net income

$

5,200

 

$

4,741

 

$

11,268

 

$

13,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

 

 

 

 

 

 

 

 

 

 

   As reported

$

.43

 

$

.39

 

$

.96

 

$

1.13

 

   Pro forma

$

.41

 

$

.38

 

$

.89

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

 

 

 

 

 

 

 

 

 

 

 

   As reported

$

.42

 

$

.38

 

$

.93

 

$

1.09

 

   Pro forma

$

.40

 

$

.37

 

$

.87

 

$

1.04

 

The weighted-average fair value of options granted was $6.91 for the nine months ended November 1, 2003 and $9.62 for the nine months ended November 2, 2002. The fair value of these options was estimated at grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

November 1,

 

November 2,

 

2003

 

2002

Risk free interest rate

 

2.6%

 

 

4.7%

 

Expected dividend yield

 

0.0%

 

 

0.0%

 

Expected volatility

 

62.2%

 

 

61.3%

 

Expected term

 

5 Years

 

 

5 Years

 

Note 4 - New Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. We have determined that the adoption of this statement did not have an impact on our consolidated financial statements.

Note 5 - Reclassifications

Certain amounts in the condensed consolidated financial statements have been reclassified to conform to the current presentation.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS

Critical Accounting Policies

It is necessary for us to include certain judgements in our reported financial results. These judgements involve estimates that are inherently uncertain and actual results could differ materially from these estimates. The accounting policies that require the more significant judgements by us are:

Merchandise Inventories - Merchandise inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. In determining market value, we estimate the future sales price of items of merchandise contained in the inventory as of the balance sheet date. Factors considered in this determination include among others, current and recently recorded sales prices, the length of time product has been held in inventory and quantities of various product styles contained in inventory. The ultimate amount realized from the sale of certain product could differ materially from our estimates. We also estimate a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Valuation of Long-lived Assets - We review long-lived assets whenever events or circumstances indicate the carrying value of an asset may not be recoverable and annually when no such event has occurred. We evaluate the ongoing value of assets associated with retail stores that have been open longer than one year. When undiscounted cash flows estimated to be generated by those assets are less than the carrying value of those assets, impairment losses are recorded. When events such as these occur, the impaired assets are adjusted to estimated fair value and an impairment loss is recorded in selling, general and administrative expenses. Our assumptions and estimates used in the evaluation of impairment, including current and future economic trends for stores, are subject to a high degree of judgement and if actual results or market conditions differ from those anticipated, additional losses may be recorded.

Deferred Income Taxes - We calculate income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. No valuation allowance has been provided for the deferred tax assets. We anticipate that future taxable income will be able to recover the full amount of deferred tax assets. Our effective tax rate considers management's judgment of expected tax liabilities in the various taxing jurisdictions within which we are subject to tax. We have also been involved in domestic tax audits. At any given time, multiple tax years are subject to audit by various taxing authorities.


Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable

 

 

Number of Stores

 

Store Square Footage

 

Store Sales

 

 

Beginning

 

 

 

 

 

End of

 

Net

 

End

 

Increase

Quarter Ended

 

Of  Period

 

Opened

 

Closed

 

Period

 

Change

 

of Period

 

(Decrease)

May 3, 2003

 

207

 

13

 

0

 

220

 

146,000

 

2,547,000

 

(5.5)%

August 2, 2003

 

220

 

11

 

2

 

229

 

104,000

 

2,651,000

 

(3.0)%

November 1, 2003

 

229

 

11

 

2

 

238

 

98,000

 

2,749,000

 

0.3%

Year-to-date

 

207

 

35

 

4

 

238

 

348,000

 

2,749,000

 

(2.6%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 4, 2002

 

182

 

6

 

0

 

188

 

71,000

 

2,175,000

 

1.1%

August 3, 2002

 

188

 

9

 

0

 

197

 

112,000

 

2,287,000

 

(0.5)%

November 2, 2002

 

197

 

10

 

0

 

207

 

114,000

 

2,401,000

 

1.3%

Year-to-date

 

182

 

25

 

0

 

207

 

297,000

 

2,401,000

 

0.7%

The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:

 

Thirteen

 

Thirteen

 

Thirty-nine

 

Thirty-nine

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

November 1,

 

November 2,

 

November 1,

 

November 2,

 

2003

 

2002

 

2003

 

2002

Net sales

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

Cost of sales (including buying,

 

 

 

 

 

 

 

 

 

 

 

 

   distribution and occupancy costs)

 

70.2

 

 

70.6

 

 

70.9

 

 

70.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

29.8

 

 

29.4

 

 

29.1

 

 

29.4

 

Selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

   administrative expenses

 

23.9

 

 

23.5

 

 

24.4

 

 

23.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

5.9

 

 

5.9

 

 

4.7

 

 

5.9

 

Interest expense-net

 

.1

 

 

.1

 

 

.1

 

 

.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

5.8

 

 

5.8

 

 

4.6

 

 

5.8

 

Income taxes

 

2.2

 

 

2.2

 

 

1.7

 

 

2.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3.6

%

 

3.6

%

 

2.9

%

 

3.6

%

Net Sales

Net sales increased $14.7 million to $152.4 million in the third quarter of 2003, a 10.6% increase over net sales of $137.7 million in the comparable prior year period. The increase was primarily attributable to the 49 stores opened since June 2002 (net of four store closings) in addition to the 0.3% increase in comparable store sales.

Net sales increased $32.0 million to $423.7 million in the first nine months of 2003, an 8.2% increase over net sales of $391.7 million in the comparable prior year period. The increase was attributable to the sales generated by the 60 stores opened in 2002 and 2003 (net of four store closings) partially offset by a 2.6% decrease in comparable store sales.

 


 

Gross Profit

Gross profit increased $4.9 million to $45.4 million in the third quarter of 2003, a 12.1% increase over gross profit of $40.5 million in the comparable prior year period. Our gross profit margin was 29.8% compared with 29.4% last year. As a percentage of sales, the merchandise gross profit margin increased 0.6% while buying, distribution and occupancy costs increased 0.2% as compared to the same period last year. The merchandise gross profit margin improvement was primarily due to lower promotional activity during the quarter. The increase in buying, distribution and occupancy costs as a percentage of sales was primarily a result of the inability to leverage these expenditures against a small comparable store sales increase.

Gross profit increased $7.9 million to $123.2 million in the first nine months of 2003, a 6.8% increase over gross profit of $115.3 million in the comparable prior year period. Our gross profit margin decreased to 29.1% from 29.4% last year. As a percentage of sales, the merchandise gross profit margin increased 0.2% from last year while buying, distribution and occupancy costs increased 0.5%. The increase in buying, distribution and occupancy costs as a percentage of sales was primarily due to the deleveraging effect of negative comparable store sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $4.0 million to $36.4 million in the third quarter of 2003 from $32.4 million in the comparable prior year period. As a percentage of sales, these expenses increased to 23.9% from 23.5% last year. During the third quarter of 2003, we opened 11 stores as compared with ten stores in the third quarter of 2002. Total new store pre-opening costs in the third quarter of 2003 were $646,000, or 0.4% of sales, as compared to $870,000, or 0.6% of sales, for the third quarter of 2002. The increase in selling, general and administrative expenditures as a percentage of sales was primarily due to higher health care costs and store closing and relocation costs. Approximately $330,000 was incurred in the third quarter of 2003 to close two stores and relocate one store.

Selling, general and administrative expenses increased $11.3 million to $103.3 million in the first nine months of 2003 from $92.0 million in the comparable prior year period. As a percentage of sales, these expenses increased to 24.4% from 23.5% last year. Total new store pre-opening costs for the first nine months of 2003 were $2.2 million, or 0.5% of sales, as compared to $2.0 million, or 0.5% of sales, for the first nine months of 2002. Thirty-five stores were opened in the first nine months of 2003 and 25 stores were opened in the first nine months of 2002. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to the general deleveraging effect of the negative comparable store sales.

Interest Expense

Net interest expense remained relatively flat with the prior year comparative quarter. For the first nine months of 2003, net interest expense decreased to $502,000 from $625,000 for the first nine months of 2002. The decrease in net interest expense for the first nine months of 2003, as compared with the first nine months of 2002, was primarily a result of a decrease in average borrowings partially offset by a higher effective interest rate.

Income Taxes

The effective income tax rate was 37.5% for the third quarter and the first nine months of 2003 and for the same periods in 2002. The effective income tax rate differed from the statutory federal rates due primarily to state and local income taxes, net of the federal tax benefit.


Liquidity and Capital Resources

Our primary sources of funds are cash flows from operations and borrowings under our revolving credit facility. For the first nine months of 2003, net cash used in operating activities was $10.1 million compared to net cash provided by operating activities of $13.7 million for the first nine months of last year. This decrease in net cash provided by operating activities was primarily attributable to the addition of merchandise inventories for new stores and the change in timing of payment of accounts payable resulting from the earlier receipt of third quarter merchandise as compared to the same period in fiscal 2002.

Working capital increased to $126.8 million at November 1, 2003 from $103.3 million at November 2, 2002 and the current ratio was 3.5 to 1 at November 1, 2003 as compared with 2.9 to 1 at November 2, 2002. Long-term debt as a percentage of total capital (long-term debt plus shareholders' equity) increased to 20.1% at November 1, 2003, compared to 16.5% at November 2, 2002.

The increase in working capital was primarily due to the increase in merchandise inventory and the decrease in accounts payable. Merchandise inventories increased $17.5 million to $165.4 million at November 1, 2003 from $147.9 million at November 2, 2002. During 2003, our key merchandise strategy has centered on lowering merchandise inventory levels of seasonal fashion product in order to increase the merchandise gross profit margin. While the number of stores in operation at the end of the third quarter of 2003 increased 15.0% compared with the end of the third quarter of 2002, merchandise inventories only increased 11.8%. This resulted in a decrease in merchandise inventories on a per-store basis of 2.8%. This per-store decline in inventory is in addition to a 4.8% decrease in merchandise inventories on a per-store basis at the end of the third quarter of 2002.

Capital expenditures, net of lease incentives of $3.3 million, were $14.3 million in the first nine months of 2003. Of these expenditures, approximately $10.4 million was incurred for new stores, $1.6 million for store remodeling, $570,000 to relocate a store, with all other expenditures totaling $1.7 million.

During the first nine months of 2003, we have opened 35 new stores, with 11 of these opening in the third quarter. A total of four stores have been closed during the year, bringing the total stores in operation to 238. With the anticipation of opening two stores in the fourth quarter of the year and closing an additional three, we expect to finish our 2003 fiscal year with 237 stores. Of the 25 stores opened during the first nine months of 2002, ten stores were opened in the third quarter.

We currently anticipate opening 35 to 40 new stores in 2004 and closing four existing stores, with the new store expansion targeting a number of larger markets we have entered in the past few years. We intend to penetrate existing markets with additional store locations and enhance our marketing efforts in these markets. Additionally, we expect that due to the larger store base we will be able to leverage other operating expenses.

Our current store prototype utilizes between 8,000 and 15,000 square feet depending upon, among other factors, the location of the store and the population base the store is expected to service. Net capital expenditures for new stores in 2003 are expected to average approximately $320,000 per store. An updated store design, which has been utilized in all new stores in 2003 and is anticipated to be utilized in future new stores, will lower the cost to build a store by approximately 10% from historical levels. The average inventory investment in a new store is expected to range from $450,000 to $750,000, depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as advertising, salaries and supplies, are expected to average approximately $67,000 per store.

Our unsecured credit facility provides for up to $70 million in cash advances on a revolving basis and commercial letters of credit. Borrowings under the revolving credit line are based on eligible inventory. Borrowings and letters of credit outstanding under the credit facility at November 1, 2003 were $36.1 million and $3.0 million, respectively. As of November 1, 2003, $30.9 million was available to us for additional borrowings under the credit facility.

We anticipate existing cash and cash flow from operations, supplemented by borrowings under the credit facility, will be sufficient to fund planned expansion and other operating cash requirements for at least the next 12 months.


 

Seasonality

Our quarterly results of operations have fluctuated and are expected to continue to fluctuate in the future primarily as a result of seasonal variances and the timing of sales and costs associated with opening new stores. Non-capital expenditures, such as advertising and payroll, incurred prior to opening a new store are charged to expense as incurred. Therefore, our results of operations may be adversely affected in any quarter in which we incur pre-opening expenses related to the opening of new stores.

We have three distinct selling periods: Easter, back-to-school and Christmas.

Factors That May Effect Future Results

This report on Form 10-Q contains certain forward-looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: general economic conditions in the areas of the United States in which our stores are located; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; the potential impact of national and international security concerns on the retail environment; the impact of competition and pricing; changes in weather patterns, consumer buying trends and the our ability to identify and respond to emerging fashion trends; risks associated with the seasonality of the retail industry; the availability of desirable store locations at acceptable lease terms and our ability to open new stores in a timely and profitable manner; higher than anticipated costs associated with the closing of underperforming stores; the inability of manufacturers to deliver products in a timely manner; and changes in the political and economic environments in the People's Republic of China, a major manufacturer of footwear, and the continued favorable trade relations between China and the United States.

ITEM  3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk in that the interest payable on our credit facility is based on variable interest rates and therefore is affected by changes in market rates. We do not use interest rate derivative instruments to manage exposure to changes in market interest rates. A 1% change in the weighted average interest rate charged under the credit facility would have resulted in interest expense fluctuating by approximately $167,000 for the first nine months of 2003 and $142,000 for the first nine months of 2002.

ITEM 4.  CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of November 1, 2003, that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended November 1, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 


SHOE CARNIVAL, INC.
PART II - OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)

 

Exhibits

 

 

31.1   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
        Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002

 

 

31.2   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
         Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002

 

 

32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
           Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
           Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)

 

Reports on Form 8-K

 

 

On November 6, 2003, we furnished a Form 8-K reporting under Item 12 the issuance of a press release announcing our operating and financial results for the month ended November 1, 2003.

 

 

On November 18, 2003, we furnished a Form 8-K reporting under Item 12 the issuance of a press release announcing our operating and financial results for the quarter ended November 1, 2003.


SHOE CARNIVAL, INC.
SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed, on its behalf by the undersigned thereunto duly authorized.

 

 

Date:  December 15, 2003

SHOE CARNIVAL, INC.
(Registrant)           

 

 

By:   /s/ W. Kerry Jackson
W. Kerry Jackson
Senior Vice President and
Chief Financial Officer