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SHOE CARNIVAL INC - Quarter Report: 2004 October (Form 10-Q)

SCVL 3rd QTR 10-Q 2004

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   October 30, 2004

 

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, 12,837,144 shares outstanding as of November 27, 2004


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

14

 

 

 

 

Signature

15

 

 

 

 

2


SHOE CARNIVAL, INC.
PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited


(In thousands)

October 30,
2004

 

January 31,
2004

 

November 1,
2003

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

Current Assets:

 

 

 

 

 

 

 

 

 

 

   Cash and cash equivalents

 

$

3,789

 

$

4,071

 

$

3,072

 

   Accounts receivable

 

 

2,152

 

 

587

 

 

2,280

 

   Merchandise inventories

 

 

172,375

 

 

165,110

 

 

165,356

 

   Deferred income tax benefit

 

 

684

 

 

1,954

 

 

1,183

 

   Other

 

 

2,076

 

 

6,753

 

 

4,731

 

Total Current Assets

 

 

181,076

 

 

178,475

 

 

176,622

 

Property and equipment-net

 

 

69,683

 

 

69,246

 

 

70,129

 

Total Assets

 

$

250,759

 

$

247,721

 

$

246,751

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

   Accounts payable

 

$

39,095

 

$

53,181

 

$

40,270

 

   Accrued and other liabilities

 

 

9,718

 

 

8,208

 

 

9,334

 

   Current portion of long-term debt

 

 

94

 

 

222

 

 

268

 

Total Current Liabilities

 

 

48,907

 

 

61,611

 

 

49,872

 

Long-term debt

 

 

24,201

 

 

21,956

 

 

36,195

 

Deferred lease incentives

 

 

7,929

 

 

8,033

 

 

8,175

 

Accrued rent

 

 

2,897

 

 

2,808

 

 

2,707

 

Deferred income taxes

 

 

8,080

 

 

7,544

 

 

4,737

 

Other

 

 

1,535

 

 

1,218

 

 

1,106

 

Total Liabilities

 

 

93,549

 

 

103,170

 

 

102,792

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

     shares authorized, 13,363 shares

 

 

 

 

 

 

 

 

 

 

     issued at October 30, 2004, January 31, 2004

 

 

 

 

 

 

 

 

 

 

     and November 1, 2003

 

 

134

 

 

134

 

 

134

 

   Additional paid-in capital

 

 

66,968

 

 

66,252

 

 

66,150

 

   Retained earnings

 

 

93,769

 

 

82,324

 

 

82,211

 

   Treasury stock, at cost 529, 601 and 656 shares at

 

 

 

 

 

 

 

 

 

 

     October 30, 2004, January 31, 2004 and November 1, 2003

 

 

(3,661

)

 

(4,159

)

 

(4,536

)

Total Shareholders' Equity

 

 

157,210

 

 

144,551

 

 

143,959

 

Total Liabilities and Shareholders' Equity

 

$

250,759

 

$

247,721

 

$

246,751

 


See notes to condensed consolidated financial statements.

 

3


SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited




(In thousands, except per share data)

Thirteen
Weeks Ended
October 30,
2004

Thirteen
Weeks Ended
November 1,
2003

Thirty-nine
Weeks Ended
October 30,
2004

Thirty-nine
Weeks Ended
November 1,
2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

162,717

 

 

$

152,365

 

 

$

446,309

 

 

$

423,678

Cost of sales (including buying,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   distribution and occupancy costs)

 

 

 

115,341

 

 

 

107,006

 

 

 

318,227

 

 

 

300,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

47,376

 

 

 

45,359

 

 

 

128,082

 

 

 

123,191

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   expenses

 

 

 

39,149

 

 

 

36,401

 

 

 

108,811

 

 

 

103,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

8,227

 

 

 

8,958

 

 

 

19,271

 

 

 

19,894

Interest expense

 

 

 

138

 

 

 

160

 

 

 

509

 

 

 

502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

8,089

 

 

 

8,798

 

 

 

18,762

 

 

 

19,392

Income tax expense

 

 

 

3,155

 

 

 

3,299

 

 

 

7,317

 

 

 

7,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

4,934

 

 

$

5,499

 

 

$

11,445

 

 

$

12,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

$

.38

 

 

$

.43

 

 

$

.89

 

 

$

.96

   Diluted

 

 

$

.38

 

 

$

.42

 

 

$

.88

 

 

$

.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

 

12,831

 

 

 

12,684

 

 

 

12,812

 

 

 

12,654

   Diluted

 

 

 

13,008

 

 

 

13,062

 

 

 

13,053

 

 

 

13,014


See notes to condensed consolidated financial statements.

 

4


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 January 31, 2004

13,363

 

(601

)

 

$

134

 

 

$

66,252

 

$

82,324

 

$

(4,159

)

 

$

144,551

Exercise of stock options

 

 

62

 

 

 

 

 

 

 

(44

)

 

 

 

 

428

 

 

 

384

Stock option income tax benefit

 

 

 

 

 

 

 

 

 

 

708

 

 

 

 

 

 

 

 

 

708

Employee stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   plan purchases

 

 

10

 

 

 

 

 

 

 

52

 

 

 

 

 

70

 

 

 

122

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

11,445

 

 

 

 

 

 

11,445

Balance at October 30, 2004

13,363

 

(529

)

 

$

134

 

 

$

66,968

 

$

93,769

 

$

(3,661

)

 

$

157,210


See notes to condensed consolidated financial statements.

 

5


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



(In thousands)

Thirty-nine
Weeks Ended
October 30, 2004

 

Thirty-nine
Weeks Ended
November 1, 2003

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

   Net income

$

11,445

 

 

$

12,120

 

   Adjustments to reconcile net income to net

 

 

 

 

 

 

 

     cash provided by operating activities:

 

 

 

 

 

 

 

     Depreciation and amortization

 

10,828

 

 

 

10,287

 

     Stock option income tax benefit

 

708

 

 

 

202

 

     Loss on retirement and impairment of assets

 

341

 

 

 

435

 

     Deferred income taxes

 

1,806

 

 

 

(516

)

     Other

 

(226

)

 

 

378

 

     Changes in operating assets and liabilities:

 

 

 

 

 

 

 

       Accounts receivable

 

(1,606

)

 

 

(1,362

)

       Merchandise inventories

 

(7,266

)

 

 

(19,265

)

       Accounts payable and accrued liabilities

 

(12,575

)

 

 

(9,531

)

       Other

 

4,672

 

 

 

(2,822

)

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

8,127

 

 

 

(10,074

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

   Purchases of property and equipment

 

(11,620

)

 

 

(17,532

)

   Lease incentives

 

529

 

 

 

3,251

 

   Other

 

59

 

 

 

367

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(11,032

)

 

 

(13,914

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

   Net borrowings under line of credit

 

2,300

 

 

 

20,875

 

   Payments on capital lease obligations

 

(183

)

 

 

(343

)

   Proceeds from issuance of stock

 

506

 

 

 

746

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

2,623

 

 

 

21,278

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(282

)

 

 

(2,710

)

Cash and cash equivalents at beginning of period

 

4,071

 

 

 

5,782

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

$

3,789

 

 

$

3,072

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

   Cash paid during period for interest

$

533

 

 

$

476

 

   Cash paid during period for income taxes, net of refunds

$

111

 

 

$

9,694

 


See notes to condensed consolidated financial statements.

 

6


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 January 31, 2004.

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":




(In thousands)

Thirteen
Weeks Ended
October 30,
2004

 

Thirteen
Weeks Ended
November 1,
2003

 

Thirty-nine
Weeks Ended
October 30,
2004

 

Thirty-nine
Weeks Ended
November 1,
2003

Basic shares

12,831

 

12,684

 

12,812

 

12,654

Dilutive effect of stock options

177

 

378

 

241

 

360

Diluted shares

13,008

 

13,062

 

13,053

 

13,014

For the quarters ended October 30, 2004 and November 1, 2003, 642,300 and 294,600 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 thirty-nine weeks ended October 30, 2004 and November 1, 2003, 315,600 and 299,500 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 October 30, 2004, 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

 

7


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




(In thousands, except per share data)

Thirteen
Weeks Ended
October 30,
2004

 

Thirteen
Weeks Ended
November 1,
2003

 

Thirty-nine
Weeks Ended
October 30,
2004

 

Thirty-nine
Weeks Ended
November 1,
2003

Net income as reported

$

4,934

 

$

5,499

 

$

11,445

 

$

12,120

 

Deduct:  Stock-based

 

 

 

 

 

 

 

 

 

 

 

 

   compensation expense determined

 

 

 

 

 

 

 

 

 

 

 

 

   under fair value based method for

 

 

 

 

 

 

 

 

 

 

 

 

   All awards, net of related tax effects

 

(272

)

 

(299

)

 

(776

)

 

(852

)

Pro forma net income

$

4,662

 

$

5,200

 

$

10,669

 

$

11,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

 

 

 

 

 

 

 

 

 

 

   As reported

$

.38

 

$

.43

 

$

.89

 

$

.96

 

   Pro forma

$

.36

 

$

.41

 

$

.83

 

$

.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

 

 

 

 

 

 

 

 

 

 

 

   As reported

$

.38

 

$

.42

 

$

.88

 

$

.93

 

   Pro forma

$

.36

 

$

.40

 

$

.82

 

$

.87

 

The weighted-average fair value of options granted was $7.14 for the nine months ended October 30, 2004 and $6.91 for the nine months ended November 1, 2003. The fair value of these options was estimated at grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

October 30, 2004

 

November 1,
2003

Risk free interest rate

 

3.2%

 

 

2.6%

 

Expected dividend yield

 

0.0%

 

 

0.0%

 

Expected volatility

 

58.3%

 

 

62.2%

 

Expected term

 

5 Years

 

 

5 Years

 

Note 4 - Reclassifications

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

 

8


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

Overview

Shoe Carnival, Inc. is one of the nation's largest family footwear retailers. As of October 30, 2004, we operated 255 stores in 24 states in the Midwest, South and Southeast regions of the United States. We offer a distinctive shopping experience, a broad merchandise assortment and value to our customers while maintaining an efficient store level cost structure.

Our stores combine competitive pricing with a highly promotional, in-store marketing effort that encourages customer participation and creates a fun and exciting shopping experience. We believe this highly promotional atmosphere results in various competitive advantages, including increased multiple unit sales; the building of a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell through of in-season goods. Our objective is to be the destination store-of-choice for a wide range of consumers seeking moderately priced, current season name brand and private label footwear. Our product assortment includes dress and casual shoes, sandals, boots and a wide assortment of athletic shoes for the entire family. We believe that by offering a wide selection of both athletic and non-athletic footwear, we are able to reduce our exposure to shifts in fashion preferences between those categories. Our ability to identify and react to fashion changes is a key factor in our sales and earnings performance.

Our marketing effort targets middle income, value-conscious consumers seeking name brand footwear for all age groups. We believe that by offering a wide selection of popular styles of name brand merchandise at competitive prices, we generate broad customer appeal. Our cost-efficient store operations and real estate strategy enable us to price products competitively and earn attractive store level returns. Low labor costs are achieved by housing merchandise directly on the selling floor in an open-stock format, enabling customers who choose to serve themselves. This reduces the staffing required to assist customers and reduces store level labor costs as a percentage of sales. We prefer to locate stores predominantly in strip shopping centers in order to take advantage of lower occupancy costs and maximize our exposure to value-oriented shoppers.

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 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.

 

9


Deferred Income Taxes - We calculate income taxes in accordance with Statement of Financial Accounting Standards 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, and prior year taxable income during loss carryback periods, will be able to recover the full amount of deferred tax assets. Our effective tax rate considers our judgment of expected tax liabilities in the various taxing jurisdictions within which we are subject to tax. We have also been involved in 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 1, 2004

 

237

 

11

 

0

 

248

 

114,000

 

2,866,000

 

(2.2)%

July 31, 2004

 

248

 

2

 

0

 

250

 

22,000

 

2,888,000

 

(3.7)%

October 30, 2004

 

250

 

6

 

1

 

255

 

50,000

 

2,938,000

 

0.4%

Year-to-date

 

237

 

19

 

1

 

255

 

186,000

 

2,938,000

 

(1.5)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)%

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

 

Thirteen
Weeks Ended
October 30,
2004

 

Thirteen
Weeks Ended
November 1,
2003

 

Thirty-nine
Weeks Ended
October 30,
2004

 

Thirty-nine
Weeks Ended
November 1,
2003

Net sales

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

Cost of sales (including buying,

 

 

 

 

 

 

 

 

 

 

 

 

   distribution and occupancy costs)

 

70.9

 

 

70.2

 

 

71.3

 

 

70.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

29.1

 

 

29.8

 

 

28.7

 

 

29.1

 

Selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

   administrative expenses

 

24.1

 

 

23.9

 

 

24.4

 

 

24.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

5.0

 

 

5.9

 

 

4.3

 

 

4.7

 

Interest expense

 

.1

 

 

.1

 

 

.1

 

 

.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

4.9

 

 

5.8

 

 

4.2

 

 

4.6

 

Income taxes

 

1.9

 

 

2.2

 

 

1.6

 

 

1.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3.0

%

 

3.6

%

 

2.6

%

 

2.9

%

 

10


Net Sales

Net sales increased $10.3 million to $162.7 million in the third quarter of 2004, a 6.8% increase over net sales of $152.4 million in the comparable prior year period. The increase was primarily attributable to the 39 stores opened since the end of the second quarter of fiscal 2003 (net of six store closings) and to a lesser extent the 0.4% increase in comparable store sales.

Net sales increased $22.6 million to $446.3 million in the first nine months of 2004, a 5.3% increase over net sales of $423.7 million in the comparable prior year period. The increase was attributable to the sales generated by the 56 new stores opened in fiscal 2003 and the first nine months of 2004 (net of eight store closings) partially offset by a 1.5% decrease in comparable store sales.

Sales were driven by our athletic business with boot and other fall product sales lagging warmer-weather merchandise until the end of the quarter. Even though changes to our marketing plan late in the first half of this year started to take hold in the third quarter, sales for both comparable stores and new stores trended below our expectations.

Gross Profit

Gross profit increased $2.0 million to $47.4 million in the third quarter of 2004, a 4.4% increase over gross profit of $45.4 million in the comparable prior year period. Our gross profit margin was 29.1% compared with 29.8% last year. As a percentage of sales, the merchandise gross profit margin decreased 0.3% and buying, distribution and occupancy costs increased 0.4% as compared to the same period last year. The merchandise gross profit margin decline was primarily due to lower margins realized on athletic footwear as a result of the promotional environment during the back-to-school selling season in the mid-tier retail sector. The increase in buying, distribution and occupancy costs as a percentage of sales was due to a lack of sales leverage on occupancy costs.

Gross profit increased $4.9 million to $128.1 million in the first nine months of 2004, a 4.0% increase over gross profit of $123.2 million in the comparable prior year period. Our gross profit margin decreased to 28.7% from 29.1% 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 0.6%. The increase in buying, distribution and occupancy costs as a percentage of sales was primarily due to a lack of sales leverage on occupancy costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $2.7 million to $39.1 million in the third quarter of 2004 from $36.4 million in the comparable prior year period. As a percentage of sales, these expenses increased to 24.1% from 23.9% last year primarily due to higher advertising expenses. Store closing and impairment expenses in the third quarter were $425,000 as compared with $330,000 incurred in the third quarter last year. During the third quarter of 2004, we opened six stores as compared with 11 stores in the third quarter of 2003. Total new store pre-opening costs in the third quarter of 2004 were $456,000 or 0.3% of sales, as compared to $646,000, or 0.4% of sales, for the third quarter of 2003.

Selling, general and administrative expenses increased $5.5 million to $108.8 million in the first nine months of 2004 from $103.3 million in the comparable prior year period. As a percentage of sales, these expenses remained even with last year at 24.4%. Total new store pre-opening costs for the first nine months of 2004 were $1.3 million, or 0.3% of sales, as compared to $2.2 million, or 0.5% of sales, for the first nine months of 2003. Nineteen new stores were opened in the first nine months of 2004 as compared to 35 new stores opened in the first nine months of 2003.

Interest Expense

Lower average borrowings resulted in a net interest expense decrease from $160,000 in the third quarter of 2003 to $138,000 for the third quarter of 2004. For the first nine months of 2004, net interest expense increased to $509,000 from $502,000 for the first nine months of 2003.

 

11


Income Taxes

The effective income tax rate for the third quarter and the first nine months of 2004 increased to 39.0% from 37.5% for the same time periods in 2003 due to higher state income taxes. We expect for the full year of fiscal 2004 our effective income tax rate to approximate 39%.

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 2004, net cash provided by operating activities was $8.1 million compared to net cash used in operating activities of $10.1 million for the first nine months of last year. The change was primarily due to a slowed inventory growth rate which resulted in a decline of cash used in operating activities of $12.0 million coupled with a change in income tax receivable of $6. 8 million. The change in inventory resulted not only from fewer stores opening in the first nine months of fiscal 2004 as compared to the same period in fiscal 2003, but also from a 2.7% decrease in inventory on a per store basis.

Working capital increased to $132.2 million at October 30, 2004 from $126.8 million at November 1, 2003, primarily from an increase in merchandise inventories. The current ratio was 3.7 to 1 at October 30, 2004 as compared with 3.5 to 1 at November 1, 2003. Long-term debt as a percentage of total capital (long-term debt plus shareholders' equity) decreased to 13.3% at October 30, 2004, compared to 20.1% at November 1, 2003.

Capital expenditures, net of lease incentives of $529,000, were $11.1 million in the first nine months of 2004. Of these expenditures, approximately $6.7 million were incurred for new stores, $1.8 million for store remodeling and relocations, with all other expenditures totaling $2.6 million.

During the first nine months of 2004, we have opened 19 new stores, with six of these opening in the third quarter. One store was closed during the third quarter, bringing the total stores in operation to 255. With the anticipation of opening three stores in the fourth quarter of this year and closing an additional three, we expect to finish our 2004 fiscal year with 255 stores. Of the 35 stores opened during the first nine months of 2003, eleven stores were opened in the third quarter.

We currently anticipate opening approximately 15 new stores in 2005 and closing four existing stores. These new stores will be located within our current geographic footprint, targeting existing markets with additional stores or entering new single store markets where we can gain immediate market penetration.

Our current store prototype uses 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 a new store in 2004 are expected to average approximately $350,000. However by excluding two atypical stores, which averaged $640,000, the net capital expenditure for a new store in 2004 would have averaged $320,000 approximating the 2003 fiscal year average. 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 $75,000 per store for fiscal year 2004 with individual stores experiencing variances in expenditure levels based on the specific market.

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 October 30, 2004 were $24.2 million and $7.0 million, respectively. As of October 30, 2004, $38.8 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 and additional term financing relating to our proposed new distribution center, will be sufficient to fund planned expansion and other operating cash requirements for at least the next 12 months.

 

12


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 peak selling periods: Easter, back-to-school and Christmas.

Factors That May Effect Future Results

This report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: 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; changes in our relationships with key suppliers; the impact of competition and pricing; changes in weather patterns, consumer buying trends and 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; 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 the United States and China and other countries which are the major manufacturers of footwear.

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 $169,000 for the first nine months of 2004 and $167,000 for the first nine months of 2003.

ITEM 4.  CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of October 30, 2004, 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 October 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

13


SHOE CARNIVAL, INC.
PART II - OTHER INFORMATION

ITEM 6.   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

 

14


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 2, 2004

SHOE CARNIVAL, INC.
(Registrant)           

 

 

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

 

15