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

SCVL 2nd 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   July 31, 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, 12,829,605 shares outstanding as of September 1, 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 4.

Submission of Matters to Vote of Security Holders

14

 

 

 

 

 

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)

July 31,
2004

 

January 31,
2004

 

August 2,
2003

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

Current Assets:

 

 

 

 

 

 

 

 

 

 

   Cash and cash equivalents

 

$

12,091

 

$

4,071

 

$

10,190

 

   Accounts receivable

 

 

1,191

 

 

587

 

 

1,772

 

   Merchandise inventories

 

 

190,713

 

 

165,110

 

 

171,979

 

   Deferred income tax benefit

 

 

1,433

 

 

1,954

 

 

909

 

   Other

 

 

4,619

 

 

6,753

 

 

3,388

 

Total Current Assets

 

 

210,047

 

 

178,475

 

 

188,238

 

Property and equipment-net

 

 

69,018

 

 

69,246

 

 

67,701

 

Total Assets

 

$

279,065

 

$

247,721

 

$

255,939

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

   Accounts payable

 

$

62,740

 

$

53,181

 

$

63,906

 

   Accrued and other liabilities

 

 

11,345

 

 

8,208

 

 

10,806

 

   Current portion of long-term debt

 

 

140

 

 

222

 

 

298

 

Total Current Liabilities

 

 

74,225

 

 

61,611

 

 

75,010

 

Long-term debt

 

 

32,484

 

 

21,956

 

 

27,949

 

Deferred lease incentives

 

 

8,009

 

 

8,033

 

 

6,992

 

Accrued rent

 

 

2,884

 

 

2,808

 

 

2,623

 

Deferred income taxes

 

 

7,867

 

 

7,544

 

 

4,440

 

Other

 

 

1,364

 

 

1,218

 

 

927

 

Total Liabilities

 

 

126,833

 

 

103,170

 

 

117,941

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

     shares authorized, 13,363 shares

 

 

 

 

 

 

 

 

 

 

     issued at July 31, 2004, January 31, 2004

 

 

 

 

 

 

 

 

 

 

     and August 2, 2003

 

 

134

 

 

134

 

 

134

 

   Additional paid-in capital

 

 

66,957

 

 

66,252

 

 

66,001

 

   Retained earnings

 

 

88,835

 

 

82,324

 

 

76,712

 

   Treasury stock, at cost 534, 601 and 701 shares at

 

 

 

 

 

 

 

 

 

 

     July 31, 2004, January 31, 2004 and August 2, 2003

 

 

(3,694

)

 

(4,159

)

 

(4,849

)

Total Shareholders' Equity

 

 

152,232

 

 

144,551

 

 

137,998

 

Total Liabilities and Shareholders' Equity

 

$

279,065

 

$

247,721

 

$

255,939

 


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
   July 31, 2004

Thirteen
Weeks Ended
August 2, 2003

   Twenty-six
  Weeks Ended
   July 31, 2004

Twenty-six
Weeks Ended
August 2, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

138,130

 

 

$

134,463

 

 

$

283,592

 

 

$

271,313

Cost of sales (including buying,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   distribution and occupancy costs)

 

 

 

99,869

 

 

 

97,512

 

 

 

202,886

 

 

 

193,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

38,261

 

 

 

36,951

 

 

 

80,706

 

 

 

77,832

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   expenses

 

 

 

34,897

 

 

 

34,309

 

 

 

69,662

 

 

 

66,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

3,364

 

 

 

2,642

 

 

 

11,044

 

 

 

10,936

Interest expense

 

 

 

178

 

 

 

176

 

 

 

371

 

 

 

342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

3,186

 

 

 

2,466

 

 

 

10,673

 

 

 

10,594

Income tax expense

 

 

 

1,242

 

 

 

925

 

 

 

4,162

 

 

 

3,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

1,944

 

 

$

1,541

 

 

$

6,511

 

 

$

6,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

$

.15

 

 

$

.12

 

 

$

.51

 

 

$

.52

   Diluted

 

 

$

.15

 

 

$

.12

 

 

$

.50

 

 

$

.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

 

12,818

 

 

 

12,652

 

 

 

12,803

 

 

 

12,638

   Diluted

 

 

 

13,052

 

 

 

13,018

 

 

 

13,076

 

 

 

12,989


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

 

 

60

 

 

 

 

 

 

 

(41

)

 

 

 

 

417

 

 

 

376

Stock option income tax benefit

 

 

 

 

 

 

 

 

 

 

704

 

 

 

 

 

 

 

 

 

704

Employee stock purchase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   plan purchases

 

 

7

 

 

 

 

 

 

 

42

 

 

 

 

 

48

 

 

 

90

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

6,511

 

 

 

 

 

 

6,511

Balance at July 31, 2004

13,363

 

(534

)

 

$

134

 

 

$

66,957

 

$

88,835

 

$

(3,694

)

 

$

152,232


See notes to condensed consolidated financial statements.

5


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



(In thousands)

Twenty-six
Weeks Ended
July 31, 2004

 

Twenty-six
Weeks Ended
August 2, 2003

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

   Net income

$

6,511

 

 

$

6,621

 

   Adjustments to reconcile net income to net

 

 

 

 

 

 

 

     cash provided by operating activities:

 

 

 

 

 

 

 

     Depreciation and amortization

 

7,256

 

 

 

6,808

 

     Stock option income tax benefit

 

704

 

 

 

106

 

     Loss on retirement of assets

 

61

 

 

 

147

 

     Deferred income taxes

 

844

 

 

 

(539

)

     Other

 

(193

)

 

 

246

 

     Changes in operating assets and liabilities:

 

 

 

 

 

 

 

       Accounts receivable

 

(604

)

 

 

(854

)

       Merchandise inventories

 

(25,603

)

 

 

(25,888

)

       Accounts payable and accrued liabilities

 

12,697

 

 

 

15,577

 

       Other

 

2,131

 

 

 

(1,478

)

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

3,804

 

 

 

746

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

   Purchases of property and equipment

 

(7,088

)

 

 

(11,337

)

   Lease incentives

 

392

 

 

 

1,936

 

   Other

 

0

 

 

 

367

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(6,696

)

 

 

(9,034

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

   Net borrowings under line of credit

 

10,575

 

 

 

12,575

 

   Payments on capital lease obligations

 

(129

)

 

 

(259

)

   Proceeds from issuance of stock

 

466

 

 

 

380

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

10,912

 

 

 

12,696

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

8,020

 

 

 

4,408

 

Cash and cash equivalents at beginning of period

 

4,071

 

 

 

5,782

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

$

12,091

 

 

$

10,190

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

   Cash paid during period for interest

$

365

 

 

$

291

 

   Cash paid during period for income taxes, net of refunds

$

281

 

 

$

4,961

 

 

 

 

 

 

 

 

 


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
July 31, 2004

Thirteen
Weeks Ended
August 2, 2003

Twenty-six
Weeks Ended
July 31, 2004

Twenty-six
Weeks Ended
August 2, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares

 

12,818

 

 

12,652

 

 

12,803

 

 

12,638

 

Dilutive effect of stock options

 

234

 

 

366

 

 

273

 

 

351

 

Diluted shares

 

13,052

 

 

13,018

 

 

13,076

 

 

12,989

 

For the quarters ended July 31, 2004 and August 2, 2003, 320,500 and 299,400 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 six months ended July 31, 2004 and August 2, 2003, 310,700 and 300,400 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 July 31, 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

7


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:



(In thousands, except per share data)

Thirteen
Weeks Ended
July 31, 2004

Thirteen
Weeks Ended
August 2, 2003

Twenty-six
Weeks Ended
July 31, 2004

Twenty-six
Weeks Ended
August 2, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

$

1,944

 

$

1,541

 

$

6,511

 

$

6,621

 

Deduct:  Stock-based

 

 

 

 

 

 

 

 

 

 

 

 

   compensation expense determined under

 

 

 

 

 

 

 

 

 

 

 

 

   fair value based method for all awards,

 

 

 

 

 

 

 

 

 

 

 

 

   net of related tax effects

 

(266

)

 

(302

)

 

(504

)

 

(558

)

Pro forma net income

$

1,678

 

$

1,239

 

$

6,007

 

$

6,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

 

 

 

 

 

 

 

 

 

 

   As reported

$

.15

 

$

.12

 

$

.51

 

$

.52

 

   Pro forma

$

.13

 

$

.10

 

$

.47

 

$

.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

 

 

 

 

 

 

 

 

 

 

 

   As reported

$

.15

 

$

.12

 

$

.50

 

$

.51

 

   Pro forma

$

.13

 

$

.10

 

$

.46

 

$

.47

 

The weighted-average fair value of options granted was $8.43 for the six months ended July 31, 2004 and $6.91 for the six months ended August 2, 2003. The fair value of these options was estimated at grant date using Black-Scholes option pricing model with the following weighted average assumptions:

 

July 31, 2004

August 2, 2003

 

 

 

 

 

 

 

Risk free interest rate

 

2.8%

 

 

2.6%

 

Expected dividend yield

 

0.0%

 

 

0.0%

 

Expected volatility

 

59.8%

 

 

62.2%

 

Expected term

 

5 Years

 

 

5 Years

 

Note 4 - Subsequent Event

On September 2, 2004, we filed a Form 8-K to provide timely disclosure on items relative to Section 1 - Registrant's Business and Operations and Section 2 - Financial Information. These disclosures were made under the new rules related to the "real time issuer disclosure" directive of Section 409 of the Sarbanes-Oxley Act of 2002 that went into effect on August 23, 2004.

Under Item 1.01, "Entry into a Material Definitive Agreement", we disclosed a stock option grant made in connection with the promotion of an executive officer. This disclosure incorporated by reference the full text of the stock option plan and provided as exhibits the Form of Notice of Grant of Stock Option and Option Agreement for incentive and non-qualified stock option grants. Under Items 2.05 and 2.06, "Costs Associated with Exit or Disposal Activities" and "Material Impairments", we disclosed the recent closing of a store and the plan to close another store. The expected closing expenses and cash outlay for both stores are $460,000 and $339,000, respectively. Both closings are expected to be recorded in the third quarter.

Note 5 - 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 and fastest-growing family footwear retailers. As of July 31, 2004, we operated 250 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Stores

 

  Store Square Footage

 

Comparable

 

 

Beginning

 

 

 

 

 

End of

 

   Net

 

    End

 

Store Sales

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)%

Year-to-date

 

237

 

13

 

0

 

250

 

136,000

 

2,888,000

 

(2.8)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)%

Year-to-date

 

207

 

24

 

2

 

229

 

250,000

 

2,651,000

 

(4.3)%

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

 

Thirteen
Weeks Ended
July 31, 2004

Thirteen
Weeks Ended
August 2, 2003

Twenty-six
Weeks Ended
July 31, 2004

Twenty-six
Weeks Ended
August 2, 2003

Net sales

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

Cost of sales (including buying,

 

 

 

 

 

 

 

 

 

 

 

 

   distribution and occupancy costs)

 

72.3

 

 

72.5

 

 

71.5

 

 

71.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

27.7

 

 

27.5

 

 

28.5

 

 

28.7

 

Selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

   administrative expenses

 

25.3

 

 

25.5

 

 

24.6

 

 

24.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

2.4

 

 

2.0

 

 

3.9

 

 

4.0

 

Interest expense

 

.1

 

 

.1

 

 

.1

 

 

.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

2.3

 

 

1.9

 

 

3.8

 

 

3.9

 

Income taxes

 

.9

 

 

.8

 

 

1.5

 

 

1.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1.4

%

 

1.1

%

 

2.3

%

 

2.4

%

 

 

10


Net Sales

Net sales increased $3.6 million to $138.1 million in the second quarter of 2004, a 2.7% increase over net sales of $134.5 million in the comparable prior year period. The increase was attributable to the sales generated by the 42 new stores opened since May 3, 2003 (net of seven store closings), partially offset by a comparable store sales decrease of 3.7%.

Net sales increased $12.3 million to $283.6 million in the first half of 2004, a 4.5% increase over net sales of $271.3 million in the comparable prior year period. The increase was attributable to the sales generated by the 50 new stores opened in fiscal 2003 and the first half of 2004 (net of seven store closings), partially offset by a 2.8% decrease in comparable store sales.

We believe net sales for the second quarter were negatively impacted by slower consumer spending in June and July in addition to sales tax free holidays in several states being shifted from the end of July last year to the beginning of August this year. The aforementioned, combined with the effect of our first quarter shift in advertising strategies and the decision to reduce the number of entire stock "buy one, get one at half price" promotions, resulted in the year to date sales for both comparable stores and new stores to be below our expectations.

Gross Profit

Gross profit increased $1.3 million to $38.3 million in the second quarter of 2004, a 3.5% increase over gross profit of $37.0 million in the comparable prior year period. Our gross profit margin increased to 27.7% from 27.5%. As a percentage of sales, the merchandise gross profit margin increased 0.9%, but due to lower sales productivity during the quarter we deleveraged our buying, distribution and occupancy costs by 0.7%.

Gross profit increased $2.9 million to $80.7 million in the first half of 2004, a 3.7% increase over gross profit of $77.8 million in the comparable prior year period. Our gross profit margin decreased to 28.5% from 28.7% for the first six months of 2003. As a percentage of sales, the merchandise gross profit margin increased 0.5%, but buying, distribution and occupancy costs increased 0.7% as a result of lower sales productivity.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $588,000 to $34.9 million in the second quarter of 2004 from $34.3 million in the comparable prior year period. As a percentage of sales, these expenses decreased to 25.3% from 25.5% last year. During the second quarter of 2004, we opened two stores as compared to 11 stores opened in the second quarter of 2003. Total pre-opening costs in the second quarter of 2004 were $147,000 or 0.1% of sales, as compared to $828,000 or 0.6% of sales, for the second quarter of 2003. As a percentage of sales, store selling expenses increased 0.1% despite a 0.5% reduction in pre-opening costs. However, we were able to leverage general and administrative expenses as a percentage of sales by 0.3% by holding actual expenses to a level below that of the prior year comparative period.

Selling, general and administrative expenses increased $2.8 million to $69.7 million in the first half of 2004 from $66.9 million in the comparable prior year period. As a percentage of sales, these expenses decreased to 24.6% from 24.7% last year. Total pre-opening costs in the first half of 2004 were $876,000 or 0.3% of sales, as compared to $1.6 million or 0.6% of sales, in the first half of 2003. Thirteen stores were opened in the first half of 2004 and 24 stores were opened in the first half of 2003.

Interest Expense

Net interest expense increased to $178,000 in the second quarter of 2004 from $176,000 in the second quarter of the prior year. For the first six months of 2004, net interest expense increased to $371,000 from $342,000 for the first six months of 2003. The increase experienced in both periods was primarily as a result of higher average borrowings.

 

11


Income Taxes

The effective income tax rate for the second quarter and the first six months of 2004 increased to 39.0% from 37.5% for the same time periods in 2003 due to higher state income taxes.

Liquidity and Capital Resources

Our primary sources of funds are cash flows from operations and borrowings under our revolving credit facility. Net cash provided by operating activities was $3.8 million for the first six months of 2004 as compared with $746,000 for the first six months of 2003.

Working capital increased to $135.8 million at July 31, 2004 from $113.2 million at August 2, 2003. The current ratio at July 31, 2004 was 2.8 as compared to 2.5 at August 2, 2003. Long-term debt as a percentage of total capital (long-term debt plus shareholders' equity) at July 31, 2004 was 17.6% as compared to 16.8% at August 2, 2003.

The increase in working capital was primarily due to the increase in merchandise inventories. Merchandise inventories increased $18.7 million to $190.7 million at July 31, 2004 compared with $172.0 million at August 2, 2003. While this represents a 10.9% increase to merchandise inventories it resulted in only a 1.6% increase on a per store basis.

Capital expenditures, net of lease incentives of $392,000, were $6.7 million in the first half of 2004. Of these expenditures, $3.4 million was incurred for new stores, $1.8 million for store remodeling and relocation and all other expenditures totaled $1.5 million.

During the first half of 2004, we opened 13 new stores with two of these opening in the second quarter, bringing the total stores in operation to 250 at July 31, 2004. We anticipate opening nine stores in the second half of the current fiscal year. Of the 24 stores opened during the first half of 2003, 11 stores were opened in the second quarter.

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 $310,000. 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 $80,000 per store for fiscal year 2004 with individual stores experiencing variances in expenditure levels based on the specific market.

The actual amount of cash requirements for capital expenditures depends in part on the number of new stores we open, the amount of lease incentives, if any, received from landlords and the number of stores relocated and remodeled. The opening of new stores will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending in areas we target for expansion.

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 July 31, 2004 were $32.5 million and $9.8 million, respectively. As of July 31, 2004, $27.7 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.

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 of 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 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 under 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 $128,000 for the first six months of 2004 and $109,000 for the first six months of 2003.

ITEM 4.  CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of July 31, 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 July 31, 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 4.  Submission of Matters to Vote of Security Holders

The annual meeting of our common shareholders was held June 11, 2004.

Election of Directors

Messrs. Mark L. Lemond and James A. Aschleman were elected at the annual meeting to serve as our Directors for a three-year term. Mr. Lemond received 10,434,364 votes in favor, no votes were cast against and 989,493 abstentions were recorded with respect to such appointment. Mr. Aschleman received 10,112,300 votes in favor, no votes were cast against and 1,311,557 abstentions were recorded with respect to such appointment.

In addition, the following Directors continue in office until the annual meeting of shareholders in the year indicated:

J. Wayne Weaver
Gerald W. Schoor
William E. Bindley
Kent A. Kleeberger

2005
2005
2006
2006

Other Matters Voted Upon at the Meeting

Our 2000 Stock Option and Incentive Plan was amended to increase the number of shares of Common Stock subject to issuance under the plan from 1,000,000 to 1,500,000. Votes of 8,527,677 were cast in favor, 916,889 votes were cast against, 62,218 abstentions were recorded, and 1,917,073 broker non-votes were recorded.

The appointment of Deloitte & Touche LLP as our auditor for 2004 was ratified. Votes of 11,351,970 were cast in favor, 70,282 votes were cast against, 1,605 abstentions were recorded, and no broker non-votes were recorded with respect to such ratification.

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:  September 8, 2004

SHOE CARNIVAL, INC.
(Registrant)           

 

 

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

 

15