SHOE CARNIVAL INC - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended:   February 1, 2020

or

For the transition period from ____________________  to  ____________________

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

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.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

The aggregate market value of the voting stock held by non-affiliates of the registrant based on the last sale price for such stock at August 2, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $257,270,831 (assuming solely for the purposes of this calculation that all Directors and executive officers of the registrant are “affiliates”).

Number of Shares of Common Stock, $.01 par value, outstanding at March 18, 2020 was 14,009,059.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders of the Registrant to be held on June 11, 2020 are incorporated by reference into PART III hereof.

TABLE OF CONTENTS

PART I

PART II

PART III

PART IV

Shoe Carnival, Inc.

Evansville, Indiana

Annual Report to Securities and Exchange Commission

For the Fiscal Year Ended February 1, 2020

PART I

Cautionary Statement Regarding Forward-Looking Information

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, 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: the duration and spread of the COVID-19 outbreak, mitigating efforts deployed by government agencies and the public at large, and the overall impact from such outbreak on the operations of our stores, economic conditions, financial market volatility, consumer spending and our supply chain and distribution processes; general economic conditions in the areas of the continental United States in which our stores are located and the impact of the ongoing economic crisis in Puerto Rico on sales at, and cash flows of, our stores located in Puerto Rico; the effects and duration of economic downturns and unemployment rates; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; our ability to generate increased sales at our stores; our ability to successfully navigate the increasing use of online retailers for fashion purchases and the impact on traffic and transactions in our physical stores; the success of the open-air shopping centers where our stores are located and its impact on our ability to attract customers to our stores; our ability to attract customers to our e-commerce website and to successfully grow our e-commerce sales; the potential impact of national and international security concerns on the retail environment; changes in our relationships with key suppliers; our ability to control costs and meet our labor needs in a rising wage environment; changes in the political and economic environments in, the status of trade relations with, and the impact of changes in trade policies and tariffs impacting, China and other countries which are the major manufacturers of footwear; the impact of competition and pricing; our ability to successfully manage and execute our marketing initiatives and maintain positive brand perception and recognition; our ability to successfully manage our current real estate portfolio and leasing obligations; changes in weather, including patterns impacted by climate change; changes in consumer buying trends and our ability to identify and respond to emerging fashion trends; the impact of disruptions in our distribution or information technology operations; the effectiveness of our inventory management; the impact of natural disasters, other public health crises, political crises and other catastrophic events on our stores and our suppliers, as well as on consumer confidence and purchasing in general; risks associated with the seasonality of the retail industry; the impact of unauthorized disclosure or misuse of personal and confidential information about our customers, vendors and employees, including as a result of a cyber-security breach; our ability to manage our third-party vendor relationships; our ability to successfully execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability to open new stores in a timely and profitable manner, including our entry into major new markets, and the availability of sufficient funds to implement our business plans; higher than anticipated costs associated with the closing of underperforming stores; the inability of manufacturers to deliver products in a timely manner; the impact of regulatory changes in the United States and the countries where our manufacturers are located; the resolution of litigation or regulatory proceedings in which we are or may become involved; continued volatility and disruption in the capital and credit markets; and future stock repurchases under our stock repurchase program and future dividend payments.  For a more detailed discussion of risk factors impacting us, see ITEM 1A. RISK FACTORS of this Annual Report on Form 10-K.

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ITEM 1.    BUSINESS

Our Company

Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers, providing the convenience of shopping at any of our store locations, our mobile app or online.  We offer customers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with an emphasis on national name brands. We differentiate our retail concept from our competitors by our distinctive, fun and promotional marketing efforts. On average, our stores are approximately 10,800 square feet, generated approximately $2.5 million in annual sales in fiscal 2019 and carry inventory of approximately 27,800 pairs of shoes per location.  As of February 1, 2020, we operated 392 stores in 35 states and Puerto Rico and offered online shopping at www.shoecarnival.com.

We are an Indiana corporation that was initially formed in Delaware in 1993 and reincorporated in Indiana in 1996.  References to “Shoe Carnival,” “we,” “us,” “our” and the “Company” in this Annual Report on Form 10-K refer to Shoe Carnival, Inc. and its subsidiaries.

Key Competitive Strengths

We believe our financial success is due to a number of key competitive strengths that make Shoe Carnival a destination of choice for today’s retail consumer.

Distinctive shopping experience  

Our stores combine competitive pricing with a promotional, high-energy in-store environment that encourages customer participation and injects fun and excitement into every shopping experience.  Unique features of our store experience include upbeat music, opportunities for our customer to spin our iconic spin-n-win wheel, and a mic-person who runs specials for customers shopping at our stores.  These specials include contests and games and hot deals of the moment to encourage customers to take immediate advantage of our promotional pricing.  Our staff is dedicated to customer service and assists and educates customers with the features and location of merchandise, as well as finding sizes, styles and colors. We believe our distinctive shopping experience gives us 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.  A similar customer experience is reflected in our e-commerce site and mobile app through special promotions and limited time sales.

Broad merchandise assortment

Our objective is to be the destination retailer-of-choice for value-priced, on-trend branded 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.  Our average store carries shoes in four general categories – women’s, men’s, children’s and athletics, as well as a broad range of accessories such as socks, belts, shoe care items, handbags, hats, sport bags, backpacks and wallets.  Footwear is organized by category and brand, creating strong brand statements within the aisles.  These brand statements are underscored by branded signage on endcaps and in-line signage throughout the store.  Our signage may highlight a vendor’s product offerings or sales promotions, or may highlight seasonal or lifestyle statements by grouping similar footwear from multiple vendors.  Our e-commerce site offers customers a large assortment of products in all categories of footwear with an increased depth of sizes and colors that may not be available in all stores.

Value pricing for our customers

Our customer is primarily a moderate income, value-conscious consumer seeking name brand footwear across all ages.  We believe that by offering a wide selection of popular styles of name brand and private label merchandise at competitive prices, we generate broad customer appeal. Additionally, the time-conscious customer appreciates the convenience of one-stop shopping for the entire family, whether this occurs at any of our store locations, online at www.shoecarnival.com or through our mobile app.  Our fun and promotional shopping environment adds to our value-priced reputation.

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Efficient store level cost structure

Our cost-efficient store operations and real estate strategy enable us to price products competitively.  We achieve low labor costs by housing merchandise directly on the selling floor in an open stock format, allowing customers to serve themselves, if they choose.  This reduces the staffing required to assist customers and reduces store level labor costs as a percentage of sales.  We locate stores predominantly in open-air shopping centers in order to take advantage of lower occupancy costs and maximize our exposure to value-conscious shoppers.

Heavy reliance on information technology

We have invested significant resources in information technology.  Our proprietary inventory management and advanced point-of-sale (“POS”) systems provide corporate management, buyers and store managers with the timely information necessary to monitor and control all phases of operations.  The POS provides, in addition to other features, full price management (including price look-up), promotion tracking capabilities (in support of the spontaneous nature of the in-store price promotions), real-time sales and cost of sales by product category at the store level and customer tracking.  Using the POS, store managers are able to monitor sales and cost of sales on a real-time basis throughout the day.  Reacting to sales trends, our mic-people use the POS to choose from among a number of product promotions supplied by our centralized merchandising staff.  

Our centralized network connects our corporate office to our distribution center and retail stores via a wide area network, providing up-to-date sales and inventory information as required.  Our data warehouse enables our merchandising and store operations staff to analyze sales, margin and inventory levels by location, by day, down to the size of shoe.  Using this information, our merchandise managers meet regularly with vendors to compare their product sales, gross margins and return on inventory investment against previously stated objectives.  We believe timely access to key business data has enabled us to drive annual comparable store sales increases, manage our markdown activity and improve inventory turnover.

In fiscal 2019, we began developing and deploying new processes underlying our traffic management (“TMS”), warehouse management (“WMS”) and order management (“OMS”) systems in order to build a more efficient supply chain, position us for long-term growth and ultimately enhance customer satisfaction and convenience in an increasingly competitive environment.  We believe that the expected enhancements to these systems will enable us to meet the complex demands of multi-channel fulfillment, but they will require significant investments in infrastructure and technology.  We have partnered with a third-party developer to provide a hosted solution for the deployment of the necessary software and tools to implement these improvements.  We expect these systems to go live in mid-fiscal 2020.

Growth Strategy

Store portfolio

Increasing market penetration by opening new stores has historically been a key component of our growth strategy, and we continue to focus on generating positive long-term financial performance for our store portfolio.  We opened one new store in fiscal 2019 and expect to open a limited number of new stores in existing markets in fiscal 2020.  We expect to pursue opportunities for brick-and-mortar store growth across large and mid-size markets as we leverage customer data from our Customer Relationship Management (“CRM”) program and more attractive real estate options become available.  Further, our future store growth may continue to be impacted by the current economic uncertainty associated with the COVID-19 pandemic.  Our CRM program is more fully described below under “Multi-Channel Strategy – Customer Relationship Management.”  

Our ability to cluster stores has been critical to the success of opening new stores in larger markets or geographic areas.  In large markets (populations greater than 400,000), clustering involves opening two or more stores at approximately the same time.  In smaller markets that can only support a single store, clustering involves seeking locations in reasonably close proximity to other existing markets.  This strategy creates cost efficiencies by enabling us to leverage store expenses with respect to advertising, distribution and management costs.  We believe the advantages of clustering stores in existing markets will lead to cost efficiencies and overall incremental sales gains that should more than offset any adverse effect on sales of existing stores.

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We have continuously analyzed our portfolio of stores, with a concentration on underperforming stores, to meet our long-term goal of increasing shareholder value through increasing operating income. Our objective is to identify and address underperforming stores that produce low or negative contribution and either renegotiate lease terms, relocate or close those stores.  Based on this analysis, we closed six stores in fiscal 2019 and expect store closures to occur in fiscal 2020. Even though store closings could reduce our overall net sales volume, we believe this strategy will realize long-term improvement in operating income and diluted net income per share.

As of February 1, 2020, we operated 392 stores located across 35 states and Puerto Rico.  Our stores averaged approximately 10,800 square feet, ranging in size from 4,000 to 26,000 square feet.  New store sizes typically depend upon location and population base, and our stores are predominantly located in open-air shopping centers.  Our traditional store prototype typically utilizes between 8,000 and 12,000 square feet of leased area.  During the past several years, we began to roll out scalable store prototypes that reflect the diverse population densities of our markets.  These scalable prototypes utilize a wide range of leased space based on sales potential and opportunistic space availability.  The sales area is approximately 85% of the typical gross store footprint.

The following table identifies the number of our stores in each state and Puerto Rico as of February 1, 2020:

We lease all store locations, as we believe the flexibility afforded by leasing allows us to avoid the inherent risks of owning real estate, particularly with respect to underperforming stores.  Before entering a new market, we perform a market, demographic and competition analysis to evaluate the suitability of the potential market.  Potential store site selection criteria include, among other factors, market demographics, traffic counts, tenant mix, visibility within the center and from major thoroughfares, overall retail activity of the area and proposed lease terms.  The time required to open a store after signing a lease depends primarily upon the property owner’s ability to deliver the premises.  After we accept the premises from the property owner, we can generally open a turnkey store within 60 days and

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open an “as-is” store in up to 115 days.  A turnkey store is generally available for immediate use from the landlord, as the landlord performs nearly all aspects of construction and delivers the store in a condition ready for fixtures.  There are typically minimal tenant improvement allowances negotiated with landlords for turnkey stores.  An “as-is” store typically requires more significant capital investment by us, as the landlord performs minimal construction and delivers the space “as-is” while representing that the location is free of hazardous materials.  There are typically significant tenant improvement allowances negotiated with landlords for “as-is” stores.  

To do our part in helping to prevent the rapid spread of COVID-19 and to align with the evolving guidance from federal, state and local governments and health officials, we temporarily closed our stores across the United States and Puerto Rico effective March 19, 2020 until April 2, 2020.  Our website and mobile app are continuing to take e-commerce orders, which are generally being fulfilled at our store locations.  Store associates are being paid as scheduled during this timeframe.  As guidance and mandates from governments and health officials continue to evolve, closures to some, or all, of our operations will need to extend beyond the announced closure period.

Multi-Channel Strategy

Our goal is to be a world class multi-channel retailer.  The foundation of our multi-channel strategy is connecting customers with our wide assortment of store inventory through multiple channels, while maintaining a personalized, seamless customer service experience.  Our customer’s shopping journey bridges multiple devices and touchpoints.  We are committed to providing an incomparable customer experience across all channels and believe that our ongoing multi-channel initiatives represent the cornerstone for our long-term growth and are aligned with rapidly changing consumer behavior.  These initiatives are an integral part of expanding our multi-channel footprint and creating opportunities to connect with our customers in new ways.  

Customer Relationship Management

In fiscal 2019, we continued to invest in CRM and completed the launch of our new, upgraded CRM platform in the third quarter of fiscal 2019.  This new platform includes a new production CRM database for a single source of customer information, identity resolution for multiple customer records, a new loyalty management platform and a new campaign management solution.

This new CRM platform provides our marketing, merchandising, analytics and real estate teams with a holistic view of our customer’s shopping behaviors and forms the foundation of our digital marketing efforts and our Shoe Perks loyalty program (“Shoe Perks”).  Our improved view into customer data allows us to more effectively communicate with our customers on a segmented basis through all owned and paid media channels and tailor the merchandise mix down to a store level. Through transaction data, we are gaining useful insights into our customers’ shopping habits, including where, when and how they shop our stores and navigate our online presence. Additionally, we are gaining a deeper understanding of the brands and categories that our high-value customers consistently purchase so that we can continue to deliver strong performance at a geographic and store level.

CRM allows us to drive customer retention by delivering each customer more individualized shopping opportunities and experiences and aids in gaining a better understanding of our existing customer base as well as identifying new customers.  We expect segmentation and activation of our high-value customers through data analysis and targeting the broader market of ‘look-a-like’ customers to play a key role in our growth.  

Customers who enroll in our Shoe Perks loyalty program or register on our website receive personalized e-mail communications from us.  These communications afford us additional opportunities to highlight our broad product assortment and promotions. Our Shoe Perks loyalty program provides customers with a heightened shopping experience, which includes exclusive offers and rewards that are earned by making purchases either in-store or online and through participating in other point earning opportunities that facilitate engagement with our brand.  

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We remain highly focused on expanding our Shoe Perks enrollment. In fiscal 2019, we added 2.4 million new members, which brought total loyalty membership to 23.9 million members at the end of fiscal 2019, an 11% increase over fiscal 2018.   Purchases from Shoe Perks members were approximately 70% of our comparable net sales.  We believe our Shoe Perks program affords us tremendous opportunity to communicate, build relationships, and engage with our most loyal shoppers and increase our customer touch points, which we believe will result in long-term sales gains.  Our most loyal customers, those who qualify for our Gold tier, receive additional rewards and incentives. The Gold tier represents approximately 15% of our members, and the average transaction value for these customers was 38% higher than non-Gold Shoe Perks members in fiscal 2019.  In fiscal 2019, we added 454,000 new Gold tier Shoe Perks members, which brought total Gold tier membership to 3.5 million members at the end of fiscal 2019, a 15% increase over fiscal 2018.  

E-commerce and Mobile

Our e-commerce and mobile storefronts are designed to improve the customer’s journey and allow us to provide a more relevant and personalized shopping experience for our customers. We continue to build upon this foundation and added new functionality in fiscal 2019, including mobile payment options and the ability to shop from a specific Shoe Carnival store location.  Due to our multi-channel retailer strategy, we view our e-commerce and mobile sales as an extension of our physical stores.

Given our desire to connect with customers anywhere and anytime, our mobile strategy is an important component of the customer’s journey and our overall multi-channel strategy. A majority of our customers are accessing our e-commerce site on their mobile devices, and we continue to enhance our mobile web experience to better serve the unique needs of each of our customers. In addition, our mobile app offers native e-commerce functionality directly from the app and provides Shoe Perks members easy access to their rewards.  When in physical stores, customers can use their mobile devices to scan bar codes that access product ratings and reviews and find extended sizes.  

Ship-From-Store

Our Ship-From-Store program is a core element of our multi-channel strategy.  This program allows stores to fulfill online orders and has been implemented on a chain-wide basis (with limited exceptions).  By fulfilling e-commerce orders from our store level inventory, we are able to minimize out-of-stocks, offer our customers an expanded online assortment and leverage store level inventory and overhead.  E-commerce orders are also fulfilled from our distribution center in Evansville, Indiana.

Vendor Drop-Ship Program

We maintain a vendor drop-ship program with select business partners.  This program offers our customers an expanded online assortment of styles and colors that we do not carry in-store.  While our customers benefit from expanded item assortment, the functionality of this program is seamless, and our customers’ online experience is not impacted by the vendor drop-ship fulfillment option.  We benefit from this program by not having to make a capital investment in the expanded inventory assortment, which is carried and fulfilled by our business partners participating in this program.  

Buy Online, Pick Up In Store

Another key element of our multi-channel strategy is our “buy online, pick up in store” program.  Not only can our customers choose to pick up their e-commerce orders in-store, but they can now shop their favorite or nearby stores online and only see the product that is available in any given store. This program provides the convenience of local pickup for our customers with the added benefit of driving traffic back to our stores.  

Shoes 2U

Our Shoes 2U program enables us to ship product from any store to a customer’s home or store of their choice if they are unable to find the size, color or style of a shoe in the store in which they are shopping.  This creates an endless aisle experience for our customers in which our chain-wide inventory is accessible to any store customer.  

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Order Management System

In fiscal 2020, we will launch a new hosted OMS, which we expect will enhance the operational efficiency of our direct-to-consumer programs. Combined with our new WMS capabilities, we will have the ability to optimize the allocation of e-commerce and Shoes 2U orders and further leverage our distribution center.  Moreover, with our new OMS, we will have increased insight into customer transactions, enhanced visibility as to availability of inventory and seamless orchestration of orders across the Company.

Merchandise

Critical to our success is maintaining fresh, fashionable merchandise at moderate prices.  Our buyers stay in touch with evolving fashion trends and adjust growth strategies based on these trends.  This is accomplished by subscribing to an industry leading trend service, shopping fashion-leading markets, attending national trade shows, gathering vendor input and monitoring the current styles shown in leading fashion and lifestyle magazines.

Our buyers and planners have years of experience and in-depth knowledge of our customers and the markets in which we operate.  This helps us select our assortment and quantities in order to manage and allocate inventories at the store level.  The mix of merchandise and the brands offered in a particular store reflect the demographics of each market, climate and seasonality, among other factors.  Management encourages store operations personnel to provide input to our merchandising staff regarding market specific fashion trends.  Our e-commerce site offers customers an opportunity to choose from a large selection of products in all of the same categories of footwear and introduces our concept to consumers who are new to Shoe Carnival, in both existing and new markets.  

Our stores and e-commerce site offer a broad assortment of current-season, name brand footwear, supplemented with private label merchandise.  Our stores carry complementary accessories such as socks, belts, shoe care items, handbags, hats, sport bags, backpacks and wallets, while our e-commerce site offers certain handbags, sport bags and backpacks.  We purchase merchandise from approximately 160 footwear vendors.  Management of the purchasing function is the responsibility of our Executive Vice President – Chief Merchandising Officer.  Our buyers maintain ongoing communication with our vendors and provide feedback to our vendors on sales, profitability and current demand for their products.  We adjust future purchasing decisions based upon the results of this analysis.  In fiscal 2019, two branded suppliers, Nike, Inc. and Skechers USA, Inc., collectively accounted for approximately 41% of our net sales.  Nike, Inc. accounted for approximately 30% and Skechers USA, Inc. accounted for approximately 11% of our net sales, respectively.  Name brand suppliers also provide us with cooperative advertising and visual merchandising funds.  A loss of any of our key suppliers in certain product categories or our inability to obtain name brand or other merchandise from suppliers at competitive prices could have a material adverse effect on our business.  As is common in the industry, we do not have any long‑term contracts with our suppliers.  

Initial pricing levels are typically established in accordance with the manufacturer’s suggested retail pricing structure.  Subsequent to this initial pricing, our buying staff manages our markdown cadence based on product-specific sell-through rates to achieve liquidation of inventory within the natural lifecycle of the product.  We emphasize our value proposition to customers by combining current season name brand products with marketing promotions.  These promotions include both advertised limited time sale offerings in addition to in-store and online timed specials.

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The table below sets forth our percentage of merchandise sales by product category.

Women’s, men’s and children’s non-athletic footwear categories are further divided into dress, casual, sport, sandals and boots.  We classify athletic shoes by functionality, such as running, basketball or fitness shoes.

Building Brand Awareness

Our goal is to communicate a consistent brand image across all aspects of our operations and throughout our marketing mix of paid, owned and earned channels.  We highlight brands, as well as specific styles of product, using lifestyle and product imagery to showcase the product. The use of digital media continues to grow in importance in our marketing mix, particularly as we leverage data that comes directly from our customers as part of our CRM solution, allowing us to directly communicate with our core customers.  For fiscal 2019, approximately 48% of our total advertising budget was directed to digital media, television and radio.  Print media (including inserts, direct mail and newspaper advertising) and outdoor advertising accounted for the balance of our total advertising budget.    

We strive to make each store opening a major retail event.  Major promotions during grand openings and peak selling periods feature contests and prize giveaways.  We believe our grand openings help establish a high-energy, promotional atmosphere that develops a loyal, repeat customer base and generates word of mouth advertising.  

Distribution

We operate a single 410,000 square foot distribution center located in Evansville, Indiana.  Our facility is leased from a third party and can support the processing and distribution needs for up to 460 stores based on our current configuration.  We have the right to expand the facility by 200,000 square feet, which would provide us processing capacity to support approximately 650 stores.  

Our distribution center is equipped with state-of-the-art processing and product movement equipment.  The facility utilizes cross docking/store replenishment and redistribution methods to fill store product requirements.  These methods may include count verification, price and bar code labeling of each unit (when not performed by the manufacturer), redistribution of an order into size assortments (when not performed by the manufacturer) and allocation of shipments to individual stores.  Throughout packing, allocating, storing and shipping, our distribution process is essentially paperless.  Merchandise is typically shipped to each store location once per week.  For stores within the continental United States, a dedicated carrier, with occasional use of common carriers, handles the majority of shipments.  Our shipments to Puerto Rico are loaded for containerized overseas shipment, with final delivery by a third-party provider.  

We are in the process of enhancing our current configuration and the key processes underlying our supply chain and distribution systems in order to optimize our supply chain and drive warehouse efficiency.  These new processes will allow us to modernize our distribution center to keep pace with the customers’ needs.  These enhancements are hosted solutions that will be integrated with our existing systems and require significant investment, including the payment of hosting fees long-term.  

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Competition

The retail footwear business is highly competitive.  We believe the principal competitive factors in our industry are merchandise selection, price, fashion, quality, location, shopping environment and service.  We compete with department stores, shoe stores, sporting goods stores, e-commerce retailers and mass merchandisers.  Our specific competitors vary from market to market.  We compete with most department stores and traditional shoe stores by offering competitive prices.  We compete with off-price retailers, mass merchandisers and discount stores by offering a wider and deeper selection of merchandise.  Many of our competitors are significantly larger and have substantially greater resources than we do.  However, we believe that our distinctive retail format, in combination with our wide merchandise selection, competitive prices and low operating costs, enables us to compete effectively.

Store Operations

Management of store operations is the responsibility of our Executive Vice President - Chief Retail Operations Officer, who is assisted by divisional vice presidents, district managers and individual store general managers.  Generally, each store has a general manager and up to three store managers, depending on sales volume.  Store operations personnel make certain merchandising decisions necessary to maximize sales and profits primarily through merchandise placement, signage and timely clearance of slower selling items.  Administrative functions are centralized at the corporate headquarters.  These functions include accounting, purchasing, store maintenance, information systems, advertising, human resources, distribution and pricing.  Management oversight for e-commerce is also located at our corporate headquarters.

Employees

At February 1, 2020, we had approximately 5,100 employees, of which approximately 2,900 were employed on a part-time basis.  The number of employees fluctuates during the year primarily due to seasonality.  No employees are represented by a labor union.

We attribute a large portion of our success in various areas of cost control to our inclusion of virtually all management level employees in incentive compensation plans.  We contribute all or a portion of the cost of medical, disability and life insurance coverage for those employees who are eligible to participate in Company‑sponsored plans.  Additionally, we sponsor retirement plans that are open to all employees who have met the minimum age and work hour requirements.  All employees are eligible to receive discounts on purchases from our stores.  We consider our relationship with our employees to be satisfactory.

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 and closing underperforming stores.  Non-capital expenditures, such as advertising and payroll incurred prior to the opening of a new store, are expensed.  The timing and actual amount of expense recorded in closing a store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout.  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 or incur closing costs related to the closure of existing stores.  

We have three distinct peak selling periods: Easter, back-to-school and Christmas.  To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year.  Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively affect our profitability.  Our operating results depend significantly upon the sales generated during these periods.

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Trademarks

We own the following federally registered trademarks and service marks:  Shoe Carnival^® and associated trade dress and related logos, The Carnival^®, Donna Lawrence^®, Innocence^®, Y-NOT?^®, UNR8ED^®, Solanz^®, Cabrizi^®, Shoe Perks^®, SC Work Wear^®, When You Want To 2^®, A Surprise In Store^®, Shoes 2U^®, Laces for Learning^® and Princess Lacey’s Laces^®.  We believe these marks are valuable and, accordingly, we intend to maintain the marks and the related registrations.  We are not aware of any pending claims of infringement or other challenges to our right to use these marks.

Environmental

Compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had a material effect upon our capital expenditures, earnings or competitive position. We believe the nature of our operations have little, if any, environmental impact. We therefore anticipate no material capital expenditures for environmental control facilities for our current fiscal year or for the near future.

Available Information

We make available free of charge through the investor relations portion of our website at www.shoecarnival.com our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.  We have included our website address throughout this filing as textual references only.  The information contained on, or accessible through, our website is not incorporated into this Annual Report on Form 10-K.

This Annual Report on Form 10-K filed with the Securities and Exchange Commission, including the financial statements and schedules thereto, without the accompanying exhibits, is available without charge to shareholders, investment professionals and securities analysts upon written request.  Requests should be directed to Investor Relations at our corporate address.  A list of exhibits is included in this Annual Report on Form 10-K, and exhibits are available from us upon payment to us of the cost of furnishing them.

Information about our Executive Officers

Mr. Weaver has served as Chairman of the Board since March 1988.  From 1978 until February 2, 1993, Mr. Weaver had served as President and Chief Executive Officer of Nine West Group, Inc., a designer, developer and marketer of women’s footwear.  He has over 50 years of experience in the footwear industry.  Mr. Weaver is a former Director of Nine West Group, Inc.  Mr. Weaver served as Chairman and Chief Executive Officer of Jacksonville Jaguars, LTD, a professional football franchise, until January 2012.  Mr. Weaver previously served two terms as a Director of Stein Mart, Inc., a publicly traded chain of off-price retail stores, from June 2014 until March 2016 and from November 2000 until April 2008.

Mr. Sifford has been employed as Vice Chairman since September 2019 and has served as Chief Executive Officer and a Director since October 2012.  Mr. Sifford also served as President from October 2012 to September 2019.  Mr. Sifford served as Chief Merchandising Officer from October 2012 to March 2016.  From June 2001 to October 2012, Mr. Sifford served as Executive Vice President – General Merchandise Manager and from April 1997 to June 2001, Mr. Sifford served as Senior Vice President – General Merchandise Manager.  Prior to joining us, Mr. Sifford served as Merchandise Manager – Shoes for Belk, Inc.

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Mr. Worden has been employed as President and Chief Customer Officer since September 2019. From September 2018 to September 2019, Mr. Worden served as Executive Vice President – Chief Strategy and Marketing Officer. Prior to joining us, Mr. Worden led the Northern European region for S. C. Johnson & Son, Inc. (“SC Johnson”), a manufacturer of household cleaning supplies and products, and was responsible for revenue and share growth objectives across six countries from May 2014 to July 2018. Prior to that, Mr. Worden served as Assistant to the Chairman and Chief Executive Officer of SC Johnson from May 2012 to May 2014 and as a Senior Marketing Director from 2009 to 2012. Mr. Worden also served as a Senior Brand Manager at Kimberly-Clark Corporation and held multiple marketing roles across their flagship brands during his tenure there from 2003 through 2009.

Mr. Jackson has been employed as Senior Executive Vice President, Chief Financial and Administrative Officer and Treasurer since September 2019. From October 2012 to September 2019, Mr. Jackson served as Senior Executive Vice President – Chief Operating and Financial Officer and Treasurer.  From August 2004 to October 2012, Mr. Jackson served as Executive Vice President – Chief Financial Officer and Treasurer.  From June 2001 to August 2004, Mr. Jackson served as Senior Vice President – Chief Financial Officer and Treasurer.  From September 1996 to June 2001, Mr. Jackson served as Vice President – Chief Financial Officer and Treasurer.  From January 1993 to September 1996, Mr. Jackson served as Vice President – Controller and Chief Accounting Officer.  Prior to January 1993, Mr. Jackson held various accounting positions with us.  Prior to joining us in 1988, Mr. Jackson was associated with a public accounting firm.  He is a Certified Public Accountant.

Mr. Baker has been employed as Executive Vice President – Chief Retail Operations Officer since September 2019. From June 2001 to September 2019, Mr. Baker served as Executive Vice President – Store Operations.  From March 1994 to June 2001, Mr. Baker served as Senior Vice President – Store Operations.  From May 1992 to March 1994, Mr. Baker served as Vice President – Store Operations.  Prior to that time, he served as one of our regional managers.  From 1983 to June 1989, Mr. Baker held various retail management positions with Payless ShoeSource.

Mr. Scibetta has been employed as Executive Vice President – Chief Merchandising Officer since March 2016. From December 2012 to March 2016, Mr. Scibetta served as General Merchandise Manager.  Prior to joining us, Mr. Scibetta served as Vice President, Divisional Merchandise Manager– Footwear for Belk, Inc. since 2008.  From 2004 to 2007, Mr. Scibetta served as Vice President, Divisional Merchandise Manager – Footwear for Parisian Department Stores.  From 1998 to 2000, Mr. Scibetta served as Vice President, Divisional Merchandise Manager for Shoe Corporation of America.  Mr. Scibetta began his retail career with Wohl Shoe Company in 1980.

Our executive officers serve at the discretion of the Board of Directors.  There is no family relationship between any of our Directors or executive officers.

ITEM 1A.    Risk Factors

Carefully consider the following risk factors and all other information contained in this Annual Report on Form 10-K before making an investment decision with respect to our common stock.  Investing in our common stock involves a high degree of risk.  If any of the following risks actually occur, we may not be able to conduct our business as currently planned and our financial condition and operating results could be materially and adversely affected.  See PART I “Cautionary Statement Regarding Forward-Looking Information” at the beginning of this Annual Report on Form 10-K.

The COVID-19 pandemic may further adversely affect our operations.

Our operations and the markets in which we operate, procure merchandise and raise capital are currently experiencing significant disruption and financial market volatility associated with an outbreak of a novel strain of coronavirus (“COVID-19”).  The World Health Organization has declared COVID‑19 a pandemic. The U.S. Government has taken unprecedented measures to control the virus’ spread and to provide stimulus as an offsetting measure to quickly deteriorating economic conditions and increasing unemployment. Many businesses, schools, and other institutions have closed to further the practice of “social distancing” as a method to slow the outbreak.  While our supply chain has not experienced significant disruption, our operations have been significantly impacted by the temporary closure of our brick-and-mortar stores effective March 19, 2020 to April 2, 2020 and reduced foot traffic and sales prior to such time.  As guidance and mandates from governments and health officials continue to evolve, closures to some, or all, of our operations will need to extend beyond the announced closure period.  Our stock price has significantly declined, as have the stock prices of our peer companies.  The extent of the impact of the COVID‑19 pandemic on our operational and financial performance will depend on future developments, including, but not limited to:

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Should the spread of COVID-19 continue to cause financial market volatility and/or adverse changes in economic conditions and consumer spending or cause periods of temporary closures of our operations to extend beyond the announced closure period or cause increased disruption to our supply chain and distribution processes, our costs may increase, our sales and gross profit may continue to decline and our stock price may further decrease, any of which could negatively impact our results of operations, cash flows, and financial condition.

Economic conditions and unemployment rates may adversely affect consumer spending and may significantly harm our business.  The success of our business depends to a significant extent upon the level of consumer spending.  A number of factors may affect the level of consumer spending on merchandise that we offer, including, among other things:

The merchandise we sell generally consists of discretionary items.  Adverse economic conditions and unemployment rates, and any related decrease in consumer confidence and spending may result in reduced consumer demand for discretionary items.  Any decrease in consumer demand could reduce traffic in our stores, limit the prices we can charge for our products and force us to take inventory markdowns, which could have a material adverse effect on our business, results of operations and financial condition.  Reduced demand may also require increased selling and promotional expenses.  Reduced demand and increased competition could increase the need to close underperforming stores, which could result in higher than anticipated closing costs.  

We face significant competition in our markets, and we may be unable to compete favorably.  The retail footwear industry is highly competitive with few barriers to entry.  We compete primarily with department stores, shoe stores, sporting goods stores, e-commerce retailers and mass merchandisers.  Many of our competitors are significantly larger and have substantially greater resources than we do.  Economic pressures or bankruptcies of our competition could result in increased pricing pressures.  This competition could adversely affect our results of operations and financial condition in the future.

Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business.  Our success and growth are partially dependent on generating customer traffic in order to gain sales momentum in our stores and drive traffic to our website.  Successful marketing efforts require the ability to reach customers through their desired mode of communication, utilizing various media outlets.  Media placement decisions are generally made months in advance of the scheduled release date.  Our inability to accurately predict our customers’ preferences, to utilize their desired mode of communication, or to ensure availability of advertised products could adversely affect our business and results of operations.  In addition, our competitors may spend more on marketing or use different marketing approaches, which could provide them with a competitive advantage.  

Our failure to identify fashion trends could result in lower sales, higher markdowns and lower gross profits.  Our success depends upon our ability to anticipate and react to the fashion tastes of our customers and provide merchandise that satisfies consumer demand.  Our failure to anticipate, identify or react appropriately to changes in consumer fashion preferences may result in lower sales, higher markdowns to reduce excess inventories and lower gross profits.  Conversely, if we fail to anticipate or react to consumer demand for our products, we may experience inventory shortages, which would result in lost sales and could negatively affect our customer goodwill, our brand image and our profitability.  Moreover, our business relies on continuous changes in fashion preferences.  Stagnating consumer preferences could also result in lower sales and would require us to take higher markdowns to reduce excess inventories.

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Our failure to effectively manage our real estate portfolio may negatively impact our results of operations.  Effective management of our real estate portfolio is critical to our multi-channel strategy.  All of our stores are subject to leases and, as such, the effective evaluation of the range of considerations that may influence the success of our long-term real estate strategy is essential.  Such considerations include but are not limited to:

If we fail to effectively evaluate these factors or negotiate appropriate terms or if unforeseen changes arise, the consequences could include, for example:

These consequences could have a material adverse effect on our profitability, cash flows and liquidity.  The financial impact of exiting a leased location can vary greatly depending on, among other factors, the terms of the lease, the condition of the local real estate market, demand for the specific property and our relationship with the landlord, and it is difficult for us to influence some of these factors.  In addition to rent, we could still be responsible for the maintenance, taxes, insurance and common area maintenance (“CAM”) charges for vacant properties until the lease commitment expires or is terminated.

Natural disasters, other public health crises, political crises, and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend and could impact our supply chain and consumer spending. Our facilities, including our distribution center, our corporate headquarters and our retail stores, or the facilities of our third-party vendors and service providers could suffer if affected by:

Disasters occurring at our distribution center, our corporate headquarters or our retail stores, or impacting the infrastructure of a key third-party vendor or service provider, also could result in us being unable to deliver products to our stores for a prolonged period and could impact our reputation and our customers’ perception of our brand.  In the event of a severe disruption resulting from such events, we have contingency plans and employ crisis management to respond and recover operations. Despite these measures, if such an occurrence were to occur, our results of operations and financial condition could be materially adversely affected.

Moreover, these types of events could result in economic instability and could impact consumer preferences or spending priorities in the impacted regions or, depending upon the severity, globally, which could adversely impact our results of operations.

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A failure to increase sales at our existing stores may adversely affect our stock price and affect our results of operations.  A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:

In addition, consumers are increasingly using e-commerce retailers for their fashion purchases, shifting sales away from brick-and-mortar stores.  This shift in shopping preference has resulted, and may continue to result, in decreased traffic in our physical stores, which could reduce sales at our physical stores and, in turn, negatively affect our business and financial results.

Our comparable store sales results have fluctuated in the past, and we believe such fluctuations may continue.  The unpredictability of our comparable store sales may cause our revenue and results of operations to vary from quarter to quarter, and an unanticipated decline in revenues or operating income may cause our stock price to fluctuate significantly.

Emerging technologies may create disruption to the retail industry.  New and emerging technology may enable new approaches or choices for how our customers procure goods and services and pay for those goods and services. We may be unable to quickly adapt to rapid change resulting from artificial intelligence, blockchain, Internet of Things (IoT), including voice and smart home devices, and other advanced technologies that may result in changes to our supply chain, distribution channels, and point-of-sale capabilities.

Members in our Shoe Perks customer loyalty program account for a significant portion of our sales, and any material decline in sales from our Shoe Perks members could have an adverse impact on our results of operations.  We believe our Shoe Perks rewards program provides our customers with a heightened shopping experience, which includes exclusive offers and personalized messaging. Rewards are earned by making purchases either in-store or online and through participating in other point earning opportunities that facilitate engagement with our brand. We remain highly focused on expanding our Shoe Perks enrollment. In fiscal 2019, we added 2.4 million new members, and purchases from Shoe Perks members were 70% of comparable net sales. Shoe Perks members on average spent 19% more per transaction than non-members in fiscal 2019.  If our Shoe Perks members do not continue to shop with us, our sales may be adversely affected, which could have an adverse impact on our results of operations.

We would be adversely affected if our information technology systems fail to operate effectively, are disrupted or are compromised.  We rely on our existing information technology systems in operating and monitoring major aspects of our business, including sales, warehousing, distribution, purchasing, inventory control, merchandise planning and replenishment, point-of-sale support and financial systems. We regularly make investments to upgrade, enhance or replace these systems and are currently making investments to upgrade our OMS, TMS and WMS systems, as well as leverage new technologies to support our operational strategies. Any delays or difficulties transitioning to these new systems or integrating them with current systems in an orderly and timely fashion could have a material adverse effect on our operational results, financial position and cash flows.

The reliability and capacity of our information technology systems, and in particular our distribution technology operations, are critical to our continued operations. We currently operate a single, 410,000 square foot distribution center in Evansville, Indiana.  Virtually all merchandise received by our stores is and will be shipped through our distribution center.  We fulfill our e-commerce orders from our store locations and our distribution center.  Our corporate computer network is essential to our distribution process.

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Despite our precautionary efforts, our information technology systems are vulnerable from time to time to damage or interruption from, among other things, natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages or terrorist attack, computer viruses and security breaches, which may require significant investment to fix or replace. If our distribution center is shut down for any reason, if our information technology systems do not operate effectively, or if we are the target of attacks or security breaches, we may suffer the loss of critical data, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores, our ability to operate our e-commerce site and mobile app may be impacted, and we could experience other interruptions or delays to our operations.  Our insurance only covers costs relating to specified, limited matters such as a shutdown due to fire and windstorms, as well as certain cyber-security incidents, but does not cover other events such as acts of war or terrorist attacks.  Even in the event of a shutdown due to covered matters, our insurance may not be sufficient, or the insurance proceeds may not be paid to us in a timely fashion.  Shutdowns or information technology disruptions could have an adverse effect on our operating and financial performance.

Failure to protect the integrity and security of individually identifiable data of our customers and employees could expose us to litigation and damage our reputation.  We receive and maintain certain personal, sensitive and confidential information about our customers, vendors and employees.  The collection and use of this information are regulated at the international, federal and state levels, and are subject to certain contractual restrictions in third-party contracts.  Non-compliance with these regulations and contractual restrictions may subject us to fines, penalties, restrictions and expulsion from credit card acceptance programs and civil liability.  Although we have implemented processes to collect and protect the integrity and security of this personal information, there can be no assurance that this information will not be obtained by unauthorized persons, or collected or used inappropriately, including as a result of cyber-security breaches, acts of vandalism, computer viruses, credit card fraud or phishing.  Advanced cyber-security threats are persistent and continue to evolve, making them increasingly difficult to identify and prevent.  If our security and information systems or the systems of our employees or external business associates are compromised or our employees or external business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons, or collected or used inappropriately, our reputation, as well as our operations and financial results, could be negatively affected and litigation or regulatory action against us or the imposition of costs, fines or other penalties could also occur.  As privacy and information security laws and regulations change, we may incur additional costs to remain in compliance.

We outsource certain business processes to third-party vendors and have certain business relationships that subject us to risks, including disruptions in business and increased costs.  We rely on third-party suppliers for our merchandise and outsource some of our business processes to third-party vendors. Our relationships with these business partners expose us to risks, including disruptions in our business and increased costs. In addition, other matters involving our business partners could have an adverse effect on our business and financial results.  These include, but are not limited to:

We make a diligent effort to ensure that all providers of these outsourced services are observing proper internal control practices; however, there are no guarantees that failures will not occur.  Failure of our business partners to provide adequate services or our inability to arrange for alternative providers on favorable terms in a timely manner could disrupt our business, increase our costs or otherwise adversely affect our business and our financial results.

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Failure to maintain positive brand perception and recognition could have a negative impact on our business.  Maintaining a good reputation is critical to our business.  In recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites and other forms of internet-based communications that allow individuals access to a broad audience of consumers and other persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination. If we are unable to quickly and effectively respond to the dissemination of negative information about us via social media or any other incidents negatively impacting our reputation and brand, we may suffer declines in customer loyalty and traffic and we may experience vendor relationship issues and other issues, regardless of the information’s accuracy, all of which could negatively affect our financial results.  In addition, we frequently use social media to communicate with customers and the public in general. Failure to use social media effectively could negatively impact our brand value and revenues.  

We will require significant funds to implement our business strategy and meet our other liquidity needs We may not generate sufficient cash flow from operations or obtain sufficient borrowings under our existing credit facility to finance our business strategy and meet our other liquidity needs.  In fiscal 2020, capital expenditures are expected to range from $15 to $20 million.  Our actual costs may be greater than anticipated; however, the resources allocated to projects requiring capital expenditures are subject to near-term changes depending on the impacts associated with the COVID-19 pandemic.  We also require working capital to support inventory for our existing stores.  Failure to generate or raise sufficient funds may require us to modify, delay or abandon some of our future growth or expenditure plans.  We utilize our existing credit facility to issue merchandise and special purpose standby letters of credit as well as to fund working capital requirements, as needed.  Significant decreases in cash flow from operations could result in our borrowing under the credit facility to fund operational needs.  If we borrow funds under our credit facility and interest rates materially increase from present levels, our results could be adversely affected.

Continued financial market volatility could have an adverse effect on the sources and costs of financing available to us. The capital and credit markets have recently experienced, and may continue to experience, volatility and disruption, which could have the following impacts, among other things:

Various risks associated with our e-commerce business may adversely affect our business and results of operations.  Digital commerce has been a rapidly growing sales channel, particularly with younger consumers, and an increasing source of competition in the retail industry.  We sell shoes and related accessories through our website at www.shoecarnival.com.  We fulfill e-commerce orders from our store locations and from our distribution center.  We anticipate that the percentage of our sales through our e-commerce site will continue to grow and thus the risks associated with these operations could have a material impact on our overall operations.  However, our e-commerce operations may not achieve growing sales and profitability.  Our e-commerce operations are subject to numerous risks that could have an impact on our results of operations, including:

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Any significant interruptions in the operations of our third-party providers, over which we have no control, could have a material adverse effect on our e-commerce business.  Any breach involving our customer information could materially harm our reputation or result in liability including, but not limited to, fines, penalties and costs of litigation, any of which could have a material adverse effect on our operating results, financial position and cash flows.  

An increase in the cost or a disruption in the flow of imported goods may decrease our sales and profits.  We rely on imported goods to sell in our stores.  Substantially all of our footwear product is manufactured overseas, including the merchandise we import directly from overseas manufacturers and the merchandise we purchase from domestic vendors.  Our primary footwear manufacturers are located in China.  A disruption in the flow of imported merchandise or an increase in the cost of those goods may decrease our sales and profits.    

If imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands.  Products from alternative sources may be of lesser quality and more expensive than those we currently import.  Other risks associated with our use of imported goods include:

We may not be able to successfully execute our growth strategy, which could have a material adverse effect on our business, financial condition and results of operations.  As part of our growth strategy, we intend to continue to invest in our multi-channel initiatives, which will require substantial investment in technology.  We expect to open a limited number of new stores in fiscal 2020. However, we may not be able to open all of the new stores contemplated by our growth strategy, and the new stores that we open may not be as profitable as existing stores.  

The complexity of our operations and management responsibilities will increase as we execute our growth strategy.  Our growth strategy requires that we continue to expand and improve our operating and financial systems and expand, train and manage our employee base.  In addition, as we create more opportunities to connect with our customers through our multi-channel initiatives and as we open new stores, we may be unable to hire a sufficient number of qualified personnel or successfully integrate the multi-channel initiatives or new stores into our business.

If we fail to successfully implement our growth strategy, our business, financial condition or results of operations could be materially adversely effected.  The success of our growth strategy will depend on a number of other factors, many of which are out of our control, including, among other things:

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We depend on our key suppliers for merchandise and advertising support and the loss of key suppliers could adversely affect our business.  Our business depends upon our ability to purchase fashionable, name brand and other merchandise at competitive prices from our suppliers.  In fiscal 2019, two branded suppliers, Nike, Inc. and Skechers USA, Inc., collectively accounted for approximately 41% of our net sales.  Nike, Inc. accounted for approximately 30% and Skechers USA, Inc. accounted for approximately 11% of our net sales, respectively. Name brand suppliers also provide us with cooperative advertising and visual merchandising funds.  A loss of any of our key suppliers in certain product categories or our inability to obtain name brand or other merchandise from suppliers at competitive prices could have a material adverse effect on our business. As is common in the industry, we do not have any long‑term contracts with our suppliers.

Our quarterly operating results will fluctuate due to seasonality, weather conditions and other factors.  Our quarterly results of operations have fluctuated and are expected to continue to fluctuate in the future, primarily as a result of seasonal variances, weather conditions and the timing of sales and costs associated with opening new stores and closing existing stores.

We have three distinct peak selling periods: Easter, back-to-school and Christmas.  To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year.  We expect reduced sales during the fiscal 2020 Easter season as a result of the COVID-19 pandemic.  This expected reduction and any other unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively affect our profitability.  Our operating results depend significantly upon the sales generated during these periods, and our quarterly results may be impacted by calendar shifts of holiday or seasonal periods.  

We also increase our inventory levels to offer styles particularly suited for the relevant season, such as sandals in the early summer season and boots during the winter season.  If the weather conditions for a particular season vary significantly from those typical for such season, such as an unusually cold early summer or an unusually warm winter, consumer demand for the seasonally appropriate merchandise that we have available in our stores could be adversely affected and negatively impact net sales and margins.  Lower demand for seasonally appropriate merchandise may leave us with an excess inventory of our seasonally appropriate products, forcing us to sell these products at significantly discounted prices and adversely affecting our net sales margins and operating cash flow.

Conversely, if weather conditions permit us to sell our seasonal product early in the season, this may reduce inventory levels needed to meet our customers’ needs later in that same season.  Consequently, our results of operations are highly dependent on somewhat predictable weather conditions and our ability to react to changes in weather conditions.

Other factors that may affect our quarterly results of operations include:

If our future quarterly results fail to meet the expectations of research analysts, then the market price of our common stock could decline substantially.

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We are exposed to physical and financial risks related to the uncertainty of climate change. A changing climate creates uncertainty and could result in broad changes, both physical and financial in nature, to our retail, distribution, and corporate locations.  These impacts could include, but are not limited to:

Such changes could impact us in a number of ways including limiting available real estate; changing the demographics of our customer base and employees, and increasing the likelihood of capital expenditures to replace damaged infrastructure.

To the extent climate change impacts a region’s economic health, it may also impact the level of discretionary income of that region’s population and thus impact our revenues.  Customers’ shopping habits vary with weather conditions. To the extent weather conditions are affected by climate change, our customers’ shopping habits will also change, and we may not be able to timely adapt to those changes.

Our ability to attract customers to our stores depends on the success of the open-air shopping centers where our stores are located.  We locate our stores primarily in open-air shopping centers where we believe our customers and potential customers shop. The success of an individual store can depend on favorable placement within a given open-air shopping center and from the volume of traffic generated by the other destination retailers and the anchor stores in the open-air shopping centers where our stores are located. We cannot control the development of alternative shopping destinations near our existing stores or the availability or cost of real estate within existing or new shopping destinations. If our store locations fail to attract sufficient customer traffic or we are unable to locate replacement locations on terms acceptable to us, our business could suffer. If one or more of the destination retailers or anchor stores located in the open-air shopping centers where our stores are located close or leave, or if there is significant deterioration of the surrounding areas in which our stores are located, our business may be adversely affected.

We may not have adequate insurance coverage for all potential liabilities. Natural risks, as well as other hazards associated with our operations, can result in personal injury, severe damage or destruction to our owned assets, leasehold improvements and inventory, and suspension of our operations. We maintain an amount of insurance protection we believe is appropriate, but there can be no assurance that the amount of insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. A claim for which we are not adequately insured could have a material adverse effect on our financial condition. Further, due to the cyclical nature of the insurance markets, we cannot provide assurance that insurance coverage will continue to be available on terms similar to those presently in place.

If our long-lived assets become impaired, we may need to record significant non-cash impairment charges.  Periodically, we review our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  Significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets (such as store relocations or closures) have resulted, and in the future may result, in impairment charges. Any such impairment charges, if significant, would adversely affect our financial position and results of operations.

We are subject to periodic litigation and other regulatory proceedings, which could result in the unexpected expenditure of time and resources.  We are a defendant from time to time in lawsuits and regulatory actions relating to our business.  Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings.  An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations.  In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and will require us to devote substantial resources and executive time to defend, thereby diverting management’s attention and resources that are needed to successfully run our business.

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Our failure to manage key executive succession and retention and to continue to attract qualified personnel could adversely affect our business.  Our success depends largely on the continued service of our executive management team.  Our business would be adversely affected if we fail to adequately plan for the succession and retention of our executive management team.  While we have succession plans in place for members of our executive management team, and continue to review and update those plans, and we have employment agreements with certain key executive officers, these plans and agreements do not guarantee that the services of our executive officers will continue to be available to us or that we will be able to find suitable management personnel to replace departing executives on a timely basis.

Furthermore, our strategy requires us to continue to train, motivate and manage our employees and to attract, motivate and retain additional qualified managerial and merchandising personnel.  Our ability to control costs and meet our labor needs in a rising wage environment is subject to external factors such as unemployment levels, prevailing wage rates paid by those with whom we compete for talent, health care and minimum wage legislation and changing demographics.  If we are unable to attract and retain quality sales associates and management, the ability to meet growth goals or to sustain expected levels of profitability may be compromised. 

Perception of the overall retail industry may impact our stock price and operations.  The retail industry continues to evolve and undergo structural change.  This evolution and structural change has resulted in the bankruptcy and/or reorganization of various footwear specific and other publicly traded retailers.  Despite our best efforts to differentiate our business model and processes, our stock price has fluctuated as a result of perceptions of the overall retail environment and investor confidence in the retail sector.  We cannot provide any assurance that perception of the retail industry overall will not continue to impact our stock price or our ability to engage business partners on terms acceptable to us.

Our stock price may be volatile and could decline substantially.  The stock market has, from time to time, experienced extreme price and volume fluctuations.  Many factors may cause the market price for our common stock to decline, including:

In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation.  If we become involved in securities class action litigation in the future, it could result in substantial costs and diversion of management attention and resources, thus harming our business.

We cannot guarantee that we will continue to make dividend payments or that we will continue to repurchase stock pursuant to our stock repurchase program.  Our Board of Directors determines if it is in our best interest to pay a dividend to our shareholders and the amount of any dividend and declares all dividend payments. In the future, our results of operations and financial condition may not allow for a dividend to be declared or the Board of Directors may decide not to continue to declare dividends. In addition, our current share repurchase program authorizes the purchase of up to $50 million of our common stock through December 31, 2020.  However, we are not obligated to make any purchases under the share repurchase program and the program may be amended, suspended or discontinued at any time.

Failure to maintain effective internal control over financial reporting could result in a loss of investor confidence in our financial reports and have a material adverse effect on our stock price.  We must continue to document, test and evaluate our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual reports by management regarding the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to the effectiveness of our internal control over financial reporting.  We have expended, and expect that we will continue to expend, significant management time and resources documenting and testing our internal control over financial reporting. If we conclude in future periods that our internal control over financial reporting is not effective, it could result in lost investor confidence in the accuracy, reliability and completeness of our financial reports.  Any such events could have a material adverse effect on our stock price.

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We are controlled by our principal shareholders. J. Wayne Weaver, our Chairman of the Board of Directors, and his spouse together beneficially own approximately 23.9% of our outstanding common stock. Mr. Weaver’s adult son is the sole trustee of the J. Wayne Weaver 2018 Grantor Retained Annuity Trust for Bradley Wayne Weaver, and, as a result, beneficially owns the approximately 4.7% of our outstanding common stock held by such trust. Mr. Weaver’s adult daughter is the sole trustee of the J. Wayne Weaver 2018 Grantor Retained Annuity Trust for Leigh Anne Weaver and is the sole trustee of the J. Wayne Weaver 2019 Grantor Retained Annuity Trust for Leigh Anne Weaver, and, as a result, beneficially owns the approximately 7.1% of our outstanding common stock held by such trusts.  Accordingly, the Weaver family is able to exert substantial influence over our management and operations. In addition, their interests may differ from or be opposed to the interests of our other shareholders, and their ownership may have the effect of delaying or preventing a change in control that may be favored by other shareholders.

Provisions of our organizational documents and Indiana law might deter acquisition bids for us.  Our Restated Articles of Incorporation, our By-Laws and Indiana corporate laws contain provisions that may discourage other persons from attempting to acquire control of us, including, without limitation, a Board of Directors that has staggered terms for its members, supermajority voting provisions, restrictions on the ability of shareholders to call a special meeting of shareholders and procedural requirements in connection with shareholder proposals or director nominations.  The Board of Directors has the authority to issue preferred stock in one or more series without the approval of the holders of our common stock.  Further, Indiana corporate law contains business combination provisions that, in general, prohibit for five years any business combination with a beneficial owner of 10% or more of our common stock unless the holder’s acquisition of the stock was approved in advance by our Board of Directors.  Indiana corporate law also contains control share acquisition provisions that limit the ability of certain shareholders to vote their shares unless their control share acquisition is approved.  In certain circumstances, the fact that corporate devices are in place that inhibit or discourage takeover attempts could reduce the market value of our common stock.

ITEM 1B.  Unresolved staff comments

None.

ITEM 2.    PROPERTIES

As of February 1, 2020, we operated 392 stores in 35 states and Puerto Rico.  We lease all stores and intend to lease all future stores.  Approximately 97% of the leases for our existing stores provide for fixed minimum rentals and approximately 52% provide for contingent rental payments based upon various specified percentages of sales above minimum levels.  Certain leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes.

In February 2006, we entered into an operating lease with an independent third party to lease our 410,000 square foot distribution center located in Evansville, Indiana.  The lease had an initial term of 15 years.  In April 2019, we extended this lease for a term of 15 years, expiring in 2034.  We have the right to further extend the lease term for up to eight additional periods of five years each, and to expand the facility by up to 200,000 square feet.

In the first quarter of fiscal 2019, we purchased our corporate headquarters for approximately $7 million. Prior to that, we had been leasing our corporate headquarters from an independent third party since June 2006, and the initial term of that lease was to expire in 2021.  

For additional information with respect to our properties, see ITEM 1. BUSINESS – “Growth Strategy” and “Distribution” as well as PART II, ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – “Executive Summary” of this Annual Report on Form 10-K.

ITEM 3.    LEGAL PROCEEDINGS

From time to time, we are involved in certain legal proceedings in the ordinary course of conducting our business.  While the outcome of any legal proceeding is uncertain, we do not currently expect that any such proceedings will have a material adverse effect on our financial position or results of operations.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders

Our common stock has been quoted on The Nasdaq Stock Market, LLC under the trading symbol “SCVL” since March 16, 1993.  As of March 25, 2020, there were approximately 145 holders of record of our common stock.  We did not sell any unregistered equity securities during fiscal 2019, 2018 or 2017.  

Cash Dividends

During fiscal 2019, we paid quarterly cash dividends of $0.080 per share in the first quarter and $0.085 per share in the second, third and fourth quarters. The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors.  Our credit agreement permits the payment of cash dividends as long as no default or event of default exists under the credit agreement both immediately before and immediately after giving effect to the cash dividends, and the aggregate amount of cash dividends for a fiscal year does not exceed $10 million.

On March 18, 2020, the Board of Directors approved the payment of a cash dividend to our shareholders in the first quarter of fiscal 2020.  The quarterly cash dividend of $0.085 per share will be paid on April 20, 2020 to shareholders of record as of the close of business on April 6, 2020.

Issuer Purchases of Equity Securities

Throughout fiscal 2019, we issued treasury shares to certain employees and to our non-employee directors in the form of restricted stock awards and upon the vesting of restricted stock units and performance stock units.  We also repurchased 324,214 shares of common stock as a result of our withholding shares or allowing our employees to deliver shares to us for the income taxes resulting from the vesting of certain share-settled equity awards.  We intend to continue issuing shares out of treasury to meet these needs.

On December 12, 2019, our Board of Directors authorized a new share repurchase program for up to $50 million of outstanding common stock, effective January 1, 2020. The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2020 and in accordance with applicable laws, rules and regulations.  The share repurchase program may be amended, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on hand, and any shares acquired will be available for stock-based compensation awards and other corporate purposes.  The actual number and value of the shares to be purchased will depend on the performance of our stock price and other market conditions. As of February 1, 2020, we had repurchased approximately 184,000 shares at an aggregate cost of $6.9 million under the new share repurchase program.

The new share repurchase program replaced the prior $50 million share repurchase program that was authorized in December 2018 and expired in accordance with its terms on December 31, 2019. At its expiration, we had purchased approximately 933,000 shares at an aggregate cost of $30.9 million under the prior repurchase program.

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The following table summarizes repurchase activity during the fourth quarter of fiscal 2019:

Issuer Purchases of Equity Securities

Securities Authorized for Issuance Under Equity Compensation Plans

The information required by this Item concerning securities authorized for issuance under our equity plans has been incorporated by reference into PART III, ITEM 12 of this Annual Report on Form 10-K.

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in PART II, ITEM 7 along with our consolidated financial statements and notes to those statements included in PART II, ITEM 8 of this Annual Report on Form 10-K.

(In thousands, except per share and operating data)

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to those statements included in PART II, ITEM 8 of this Annual Report on Form 10-K.  This section of this Annual Report on Form 10-K generally discusses fiscal 2019 and fiscal 2018 items and year-over-year comparisons between fiscal 2019 and fiscal 2018. A detailed discussion of fiscal 2017 items and year-over-year comparisons between fiscal 2018 and fiscal 2017 that are not included in this Annual Report on Form 10-K can be found in PART II, ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, filed with the United States Securities and Exchange Commission on April 2, 2019.

Overview of Our Business

Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers, providing the convenience of shopping at any of our store locations, our mobile app or online at www.shoecarnival.com.  Our stores combine competitive pricing with a promotional, high-energy in-store environment that encourages customer participation and injects fun and excitement into every shopping experience.  We believe our distinctive shopping experience gives us 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. A similar customer experience is reflected in our e-commerce site and mobile app through special promotions and limited time sales.

Our objective is to be the destination retailer-of-choice for value-priced, on-trend branded 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.  Our average store carries shoes in four general categories – women’s, men’s, children’s and athletics, as well as a broad range of accessories such as socks, belts, shoe care items, handbags, hats, sport bags, backpacks and wallets.  Footwear is organized by category and brand, creating strong brand statements within the aisles.  These brand statements are underscored by branded signage on endcaps and in-line signage throughout the store.  Our signage may highlight a vendor’s product offerings or sales promotions, or may highlight seasonal or lifestyle statements by grouping similar footwear from multiple vendors.  Our e-commerce site offers customers a large assortment of products in all categories of footwear with an increased depth of sizes and colors that may not be available in all stores.

Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31. Unless otherwise stated, references to years 2019 and 2018 relate respectively to the fiscal years ended February 1, 2020 and February 2, 2019. Both fiscal year 2019 and fiscal year 2018 consisted of 52 weeks.

Executive Summary

Overview

Net income increased 12.5% to $42.9 million in fiscal 2019, or $2.92 per diluted share, compared to net income of $38.1 million, or $2.45 per diluted share, in fiscal 2018.  Comparable store sales increased by 1.9% in fiscal 2019 and we generated low-single digit improvements in our conversion rate and units per transaction.  Store traffic was flat in fiscal 2019 compared to fiscal 2018.  Fiscal 2019 contains a $1.9 million, or $0.13 per diluted share, tax benefit associated with stock-based compensation awards.

Highlights of our performance in fiscal 2019 compared to the prior year are presented below, followed by a more comprehensive discussion under “Results of Operations”:

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Fiscal 2020

The COVID-19 pandemic has significantly impacted our store operations, sales and costs beginning in the first quarter of fiscal 2020.  Impacts have included the temporary closure of our brick-and-mortar stores effective March 19, 2020 to April 2, 2020, reduced foot traffic and sales prior to such time, deteriorating economic conditions for our customer base and some disruption to our global supply chain.  The impact caused by COVID-19 on our operations and the operations of our business partners will continue to be fluid over the course of fiscal 2020 as our operations, economic conditions, supply chains and consumer spending adapt to the impacts of this virus being present where we operate, procure merchandise and raise capital. As guidance and mandates from governments and health officials continue to evolve, closures to some, or all, of our operations will need to extend beyond the announced closure period. In addition, certain projects and expansion opportunities will likely experience some delay as a result of the need for social distancing to control the virus and the need to allocate resources to address the impacts associated with COVID-19.  

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Our plan for fiscal 2020 is to manage the effect of COVID-19 on our operations and to continue to focus on key strategic objectives in order to create sustainable long-term growth for our shareholders.  Our core initiatives include:

Critical Accounting Policies

We use judgment in reporting our financial results.  This judgment involves estimates based in part on our historical experience and incorporates the impact of the current general economic climate and company-specific circumstances.  However, because future events and economic conditions are inherently uncertain, our actual results could differ materially from these estimates.  The accounting policies that require more significant judgment are included below.

Merchandise Inventories – Our merchandise inventories are stated at the lower of cost or net realizable value as of the balance sheet date and consist primarily of dress, casual and athletic footwear for women, men and children.  The cost of our merchandise is determined using the first-in, first-out valuation method (“FIFO”).  For determining net realizable value, we estimate the future demand and related sale price of merchandise in our inventory.  The stated value of merchandise inventories contained on our consolidated balance sheets also includes freight, certain capitalized overhead costs and reserves.

Factors considered when we review our inventory to properly state it at lower of cost or net realizable value include recent sale prices, historical loss rates, the length of time merchandise has been held in inventory, quantities of the various styles held in inventory, seasonality of the merchandise, expected consideration to be received from our vendors and current and expected future sales trends.  We reduce the value of our inventory to its estimated net realizable value where cost exceeds the estimated future selling price.  Merchandise inventories as of February 1, 2020, totaled $259.5 million, representing approximately 41% of total assets. Merchandise inventories as of February 2, 2019, totaled $257.5 million, representing approximately 62% of total assets.  Given the significance of inventories to our consolidated financial statements, the determination of net realizable value is a critical accounting estimate.  Material changes in the factors noted above could have a significant impact on the actual net realizable value of our inventory and our reported operating results.

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Valuation of Long-Lived Assets – Long-lived assets, such as property and equipment subject to depreciation and right of use assets arising from our leased properties, are evaluated for impairment on a periodic basis if events or circumstances indicate the carrying value may not be recoverable.  This evaluation includes performing an analysis of the estimated undiscounted future cash flows of the long-lived assets.  Assets are grouped and the evaluation performed at the lowest level for which there are identifiable cash flows, which is generally at a store level.  

If the estimated future cash flows for a store are determined to be less than the carrying value of the store’s assets, an impairment loss is recorded for the difference between the estimated fair value and the carrying value.  We estimate the fair value of our long-lived assets using store-specific cash flow assumptions discounted by a rate commensurate with the risk involved with such assets while incorporating marketplace assumptions.  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 judgment.  Assets subject to impairment are adjusted to estimated fair value and, if applicable, an impairment loss is recorded in selling, general and administrative expenses.  If actual operating results or market conditions differ from those anticipated, the carrying value of certain of our assets may prove unrecoverable and we may incur additional impairment charges in the future.

Leases- We lease our retail stores and our single distribution center, which has a current lease term of 15 years, expiring in 2034.  We also enter into leases of equipment, copiers and billboards.  Prior to the purchase of our corporate headquarters in fiscal 2019, it was also leased.  All of our leases are operating leases.  Therefore, how operating leases are recognized throughout the financial statements in accordance with applicable accounting guidance can have a significant impact on our financial condition and results of operations and related disclosures.  

In accordance with Accounting Standards Codification Topic No. 842 – Leases (“ASC 842”), which we adopted in fiscal 2019, on the lease commencement date we recognize a right-of-use asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.  The weighted average discount rate utilized in fiscal 2019 was 5.5%.

As of the date of adoption of ASC 842 and for new leases, renewals or amendments, we make certain estimates and assumptions regarding property values, market rents, property lives, discount rates and probable terms.  These estimates and assumptions can impact: (1) lease classification and the related accounting treatment; (2) rent holidays, escalations or deferred lease incentives, which are taken into consideration when calculating straight-line expense; (3) the term over which leasehold improvements for each store are amortized; and (4) the values and lives of adjustments to initial right-of-use assets.  The amount of amortized rent expense would vary if different estimates and assumptions were used.  

Our real estate leases typically include options to extend the lease or to terminate the lease at our sole discretion.  Options to extend real estate leases typically include one or more options to renew, with renewal terms that typically extend the lease term for five years or more.  Many of our leases also contain “co-tenancy” provisions, including the required presence and continued operation of certain anchor tenants in the adjoining retail space.  If a co-tenancy violation occurs, we have the right to a reduction of rent for a defined period after which we have the option to terminate the lease if the violation is not cured.  In addition to co-tenancy provisions, certain leases contain “go-dark” provisions that allow us to cease operations while continuing to pay rent through the end of the lease term. When determining the lease term, we include options that are reasonably certain to be exercised.

Insurance Reserves – We self-insure a significant portion of our workers’ compensation, general liability and employee health care costs and also maintain insurance in each area of risk to protect us from individual and aggregate losses over specified dollar values.  Self-insurance reserves include estimates of claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported.  These estimates take into consideration a number of factors, including historical claims experience, severity factors, statistical trends and, in certain instances, valuation assistance provided by independent third parties.  As of February 1, 2020 and February 2, 2019, our self-insurance reserves totaled $2.7 million and $3.4 million, respectively.  While we believe that the recorded amounts are adequate, there can be no assurance that changes to management’s estimates will not occur due to limitations inherent in the estimating process.  If actual results are not consistent with our estimates or assumptions, we may be exposed to future losses or gains that could be material.

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Income Taxes – As part of the process of preparing our consolidated financial statements, we are required to estimate our current and future income taxes for each tax jurisdiction in which we operate.  Significant judgment is required in determining our annual tax expense and evaluating our tax positions.  As a part of this process, 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 bases.  Our temporary timing differences relate primarily to inventory, depreciation, accrued expenses, deferred lease incentives and stock-based compensation.  Deferred tax assets and liabilities are measured using the tax rates enacted and expected to be in effect in the years when those temporary differences are expected to reverse.  Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain.  

We are also required to make many subjective assumptions and judgments regarding our income tax exposures when accounting for uncertain tax positions associated with our income tax filings.  We must presume that taxing authorities will examine all uncertain tax positions and that they have full knowledge of all relevant information.  However, interpretations of guidance surrounding income tax laws and regulations are often complex, ambiguous and frequently change over time, and a number of years may elapse before a particular issue is resolved.  As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in our consolidated financial statements.  Although we believe we have no uncertain tax positions, tax authorities could assess tax liabilities in open tax periods not presently foreseen.

Results of Operations

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

In the regular course of business, we offer our customers sales incentives, including coupons, discounts, and free merchandise.  Sales are recorded net of such incentives and returns and allowances.  If an incentive involves free merchandise, that merchandise is recorded as a zero sale and the cost is included in cost of sales.  Comparable store sales for the periods indicated below include stores that have been open for 13 full months after such stores’ grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled.  Therefore, stores opened or closed during the periods indicated are not included in comparable store sales.  We include e-commerce sales in our comparable store sales as a result of our multi-channel retailer strategy. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores.

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2019 Compared to 2018

Net Sales

Net sales increased $6.9 million to $1.037 billion for fiscal 2019, a 0.7% increase from net sales of $1.030 billion for fiscal 2018.  Of this increase in net sales, $20.2 million was attributable to the 1.9% increase in comparable store sales, as we generated low-single digit improvements in our conversion rate and units per transaction, even though traffic was flat in fiscal 2019 compared to fiscal 2018, and $4.6 million was attributable to the four new stores opened since the beginning of fiscal 2018.  The increase in net sales was partially offset by a loss in sales of $16.1 million from the 20 stores closed since the beginning of fiscal 2018 and a decrease in sales of $1.8 million attributable to our other non-comparable stores in fiscal 2019.

Gross Profit

Gross profit increased $2.9 million to $311.9 million in fiscal 2019 primarily due to higher sales.  Our gross profit margin slightly increased to 30.1% in fiscal 2019 from 30.0% in the prior year.  Our merchandise margin increased 0.3% primarily due to higher sales in the women’s non-athletic category, which typically carry a higher margin.  Buying, distribution and occupancy costs, as a percentage of sales, increased 0.2% compared to the prior year primarily due to lower occupancy expense during fiscal 2018 as a result of a $1.0 million lease termination benefit recognized for two stores in Puerto Rico where the landlord failed to make contractually required repairs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1.6 million to $257.7 million in fiscal 2019 compared to $259.2 million in the prior year.  As a percentage of sales, these expenses decreased to 24.9% in fiscal 2019 from 25.2% in fiscal 2018.  On an overall basis, the decrease in selling, general and administrative expenses was primarily driven by decreases in incentive and stock-based compensation expense and store closing and impairment costs, partially offset by increases in payroll and related benefits.  Significant changes in expense between the periods were as follows:

Pre-Opening Costs

In fiscal 2019, pre-opening costs included in selling, general and administrative expenses were $43,000 compared to $208,000 for fiscal 2018.  We opened one store during fiscal 2019 compared to three stores in fiscal 2018 at an average pre-opening cost of $69,000.  Per store pre-opening expense decreased between years primarily due to lower advertising costs.  Pre-opening costs, such as payroll, most forms of advertising and supplies incurred prior to the opening of a new store, are charged to expense in the period in which they are incurred.  Advertising related to external production costs is expensed when the advertisement first takes place.  The total amount of pre-opening expense incurred will vary by store depending on the specific market and the promotional activities involved.    

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Store Closing Costs and Impairments

The portion of store closing costs included in selling, general and administrative expenses for fiscal 2019 was $1.7 million.  Store closing costs in fiscal 2019 were related to the six stores we closed during the year and acceleration of expenses associated with management’s determination to close certain underperforming stores in future periods.  From our evaluations performed during fiscal 2019, we recorded impairments of long-lived assets of $1.2 million on 11 underperforming stores.    

The portion of store closing costs included in selling, general and administrative expenses for fiscal 2018 was $2.8 million.  Store closing costs in fiscal 2018 were related to the 14 stores we closed during the year and acceleration of expenses associated with management’s determination to close certain underperforming stores in future periods.  There were no impairments of long-lived assets recorded in fiscal 2018.  

The timing and actual amount of expense recorded in closing a store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the cost incurred in terminating the lease.

Income Taxes

The effective income tax rate for fiscal 2019 was 21.6% compared to 24.3% for fiscal 2018. Our effective tax rate decreased in fiscal 2019 primarily due to a $1.9 million tax benefit related to the vesting of stock-based compensation recognized during fiscal 2019.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents on hand of $61.9 million, cash generated from operations and availability under our $50 million credit facility.  While the impact of the COVID-19 pandemic, including our decision to temporarily close our stores, makes our operating cash flow less predictable, we believe our resources will be sufficient to fund our cash needs, as they arise, for at least the next 12 months. Our primary uses of cash are for working capital, which are principally inventory purchases, store initiatives, potential dividend payments, potential share repurchases under our share repurchase program, the financing of capital projects, including investments in new systems, and various other commitments and obligations.

Cash Flow - Operating Activities

Our net cash provided by operating activities was $66.9 million and $74.1 million in fiscal years 2019 and 2018, respectively.  These amounts reflect our income from operations adjusted for non-cash items and working capital changes.  The $7.2 million decrease in operating cash flow was primarily due to payments related to developing our new CRM platform and our new traffic management, warehouse management and order management systems, which are hosted arrangements. The current ratio was 2.7 as of February 1, 2020 compared to 4.8 as of February 2, 2019.  This decrease was primarily due to classifying a portion of our operating lease liabilities as current in fiscal 2019 due to the adoption of the new lease accounting guidance.

Cash Flow - Investing Activities

Our cash outflows for investing activities were primarily for capital expenditures.  During fiscal 2019, we expended $18.5 million for the purchase of property and equipment, $7.1 million of which was for the purchase of our corporate headquarters and $3.3 million was for the construction of one new store and the remodeling and relocation of existing stores.  During fiscal 2018, we expended $7.4 million for the purchase of property and equipment, $2.5 million of which was for the construction of new stores, remodeling and relocations.  

Cash Flow - Financing Activities

Our cash outflows for financing activities were primarily for cash dividend payments, share repurchases and payments on our credit facility. Shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of equity awards. Our cash inflows from financing activities have represented purchases under our Employee Stock Purchase Plan and borrowings under our credit facility.

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During fiscal 2019, net cash used in financing activities was $54.3 million compared to $51.0 million during fiscal 2018.  The increase in net cash used in financing activities between years was primarily due to a $10.7 million year-over-year increase for shares withheld upon the vesting of equity awards, partially offset by an $8.3 million decrease in common stock repurchased as part of our stock repurchase program.  

There were no borrowings outstanding under our credit facility and letters of credit outstanding were $1.2 million at February 1, 2020.  As of February 1, 2020, $48.8 million was available to us for additional borrowings under the credit facility.  Our credit facility requires us to maintain compliance with various financial covenants, the most restrictive of which are disclosed in Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.  We were in compliance with these covenants at February 1, 2020.

See Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our credit facility and its covenants.

Store Openings and Closings – Fiscal 2019

We expect to realize positive long-term financial performance for our store portfolio.  We utilize a formal review process in our evaluation of potential new store sites as well as for decisions surrounding leases on existing store locations.  Our approach is both qualitative and quantitative in nature.  We continually enhance this process with tools such as real estate software used for portfolio analysis that aid in identifying viable locations for future expansion and identifying potential store closings and relocations, as well as additional information we learn about customers from our new CRM platform.  

In fiscal 2019, we opened one new store.  The initial inventory investment for the new store was $683,000, capital expenditures were $236,000 and lease incentives received from our landlord were $120,000.  

Pre-opening expenses for the store opened in fiscal 2019 included in cost of sales and selling, general and administrative expenses were approximately $59,000. Items classified as pre-opening expenses include rent, freight, advertising, salaries and supplies. During fiscal 2018, we opened three new stores and expended $288,000 in pre-opening expenses, or an average of $96,000 per store.  The decrease in the average expense per new store was primarily the result of a decrease in advertising expense.     

We closed six stores during fiscal 2019 and 14 stores during fiscal 2018.  Total store closing costs were $1.3 million in fiscal 2019 and $554,000 in fiscal 2018.  Store closing costs include impairments of long-lived assets, fixed asset write-offs, employee severances, lease termination fees and store tear-down and clean-up expenses associated with closing a store, and acceleration of expenses and deferred lease incentives associated with management’s determination to close certain underperforming stores in future periods. In fiscal 2019, store closing costs included non-cash impairment charges on fixed assets of $1.2 million.  There were no impairments of long-lived assets recorded in fiscal 2018.  The timing and actual amount of expense recorded in closing an individual store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout.

Capital Expenditures – Fiscal 2020

Capital expenditures are expected to be $15 million to $20 million in fiscal 2020 and lease incentives from landlords are expected to be approximately $3 million.  Of our total capital expenditures, approximately $4 million are expected to be used for new store construction, approximately $6 million are expected to be used for store relocations and remodels and approximately $4 million are expected to be used to upgrade our distribution center.  The remaining capital expenditures are expected to be incurred for various other store improvements, continued investments in technology and normal asset replacement activities.  The resources allocated to these projects are subject to near-term changes depending on the impacts associated with the COVID-19 pandemic.  Further, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, the number of stores relocated, the amount of lease incentives, if any, received from landlords and the number of stores remodeled.  The number of new store openings and relocations 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.

Store Openings and Closings – Fiscal 2020

Increasing market penetration by opening new stores has historically been a key component of our growth strategy, and we continue to focus on generating positive long-term financial performance for our store portfolio.  In fiscal

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2020, we expect to open a limited number of new stores within our existing 35-state geographic footprint, and we also expect store closings to occur.  We expect to pursue opportunities for brick-and-mortar store growth across large and mid-size markets as we leverage customer data from our CRM program and more attractive real estate options become available.  Further, our future store growth may continue to be impacted by the current economic uncertainty associated with the COVID-19 pandemic.   

We continually analyze our portfolio of stores, with a concentration on underperforming stores, to meet our long-term goal of increasing shareholder value. Our objective is to identify and address underperforming stores that produce low or negative contribution and either renegotiate lease terms, relocate or close the stores. Even though store closings could reduce our overall net sales volume, we believe this strategy will realize long-term improvement in operating income and diluted net income per share.  Depending upon the results of lease negotiations with certain landlords of underperforming stores, we may increase or decrease the number of store closures in future periods.  The timing and actual amount of expense recorded in closing a store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout. We will continue to review our store portfolio based on our view of the internal and external opportunities and challenges in the marketplace.  

Dividends

In fiscal 2019, four quarterly cash dividends were approved and paid. The first quarter dividend was in the amount of $0.080 per share and the dividends paid for the remaining three quarters were increased to $0.085 per share. During fiscal 2018, the first quarter dividend was in the amount of $0.075 per share and the dividends for the remaining three quarters were $0.080 per share. During fiscal years 2019 and 2018, we returned $5.7 million and $4.8 million, respectively, in cash to our shareholders through our quarterly dividends.  

The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors.  Our credit facility permits the payment of cash dividends as long as no default or event of default exists under the credit agreement both immediately before and immediately after giving effect to the cash dividends, and the aggregate amount of cash dividends for a fiscal year do not exceed $10 million.  See Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our credit facility and its covenants.

Share Repurchase Program

On December 12, 2019, our Board of Directors authorized a new share repurchase program for up to $50 million of outstanding common stock, effective January 1, 2020. The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2020 and in accordance with applicable laws, rules and regulations. The share repurchase program may be amended, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on hand, and any shares acquired will be available for stock-based compensation awards and other corporate purposes.  The actual number and value of the shares to be purchased will depend on the performance of our stock price and other market conditions.  As of February 1, 2020, we had purchased approximately 184,000 shares at an aggregate cost of $6.9 million under the new share repurchase program, and we had $43.1 million available for future repurchases.  We do not anticipate repurchasing any shares in fiscal 2020 but will continue to reevaluate further share repurchases on an ongoing basis.  

The new share repurchase program replaced the prior $50 million share repurchase program that was authorized in December 2018 and expired in accordance with its terms on December 31, 2019. At its expiration, we had purchased approximately 933,000 shares at an aggregate cost of $30.9 million under the prior repurchase program.  

Our credit facility stipulates that distributions in the form of redemptions of Equity Interests (as defined in the Credit Agreement) can be made solely with cash on hand so long as before and immediately after such distributions there are no revolving loans outstanding under the Credit Agreement.  See Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our credit facility and its covenants.

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Contractual Obligations

Significant contractual obligations as of February 1, 2020 and the fiscal years in which payments are due include:

For purposes of our contractual obligations table above, we have assumed that we will make all payments scheduled or reasonably estimated to be made under those obligations that have a determinable expiration date.  We have disregarded the possibility that such obligations may be prematurely terminated or extended, whether automatically by the terms of the obligation or by agreement between us and the counterparty, due to the speculative nature of premature termination or extension.  Except for operating leases, the balances included in the “2025 and after” column of the contractual obligations table include amounts for which we are not able to reasonably estimate the timing of the potential future payments.  Estimated interest payments on our credit facility are not included in the above table, as our credit facility provides for frequent borrowing and/or repayment activities, which does not lend itself to reliable forecasting for disclosure purposes.  

See Note 7 – “Debt”, Note 8 – “Leases”, Note 9 – “Income Taxes” and Note 10 – “Employee Benefit Plans” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our contractual obligations.  

Off-Balance Sheet Arrangements

There were no assignments of operating leases to third parties in fiscal 2019 or 2018.  We did not have any off-balance sheet arrangements as of February 1, 2020.  See Note 8 – “Leases” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for further discussion of our lease obligations.

Seasonality and Quarterly Results

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 and closing underperforming stores.  Non-capital expenditures, such as advertising and payroll incurred prior to the opening of a new store, are charged to expense as incurred.  The timing and actual amount of expense recorded in closing an individual store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout.  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 or incur store closing costs related to the closure of existing stores.

We have three distinct peak selling periods: Easter, back-to-school and Christmas.  To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year.  We expect reduced sales during the fiscal 2020 Easter season as a result of the COVID-19 pandemic.  This expected reduction and any other unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively affect our profitability.  Our operating results depend significantly upon the sales generated during these periods.  

New Accounting Pronouncements

Recent accounting pronouncements applicable to our operations are contained in Note 16 – “New Accounting Pronouncements,” contained in the Notes to Consolidated Financial Statements included in PART II, ITEM 8 of this Annual Report on Form 10-K.

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ITEM 7A.  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.  We borrowed $20 million under our credit facility in July 2019, which we repaid prior to the end of the second quarter ended August 3, 2019.  A 1% change in the weighted average interest rate charged under the credit facility would not have yielded a material fluctuation of interest expense for fiscal 2019.  

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears beginning on page 40.  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Shoe Carnival, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Shoe Carnival, Inc. and subsidiaries (the "Company") as of February 1, 2020 and February 2, 2019, the related consolidated statements of income, shareholders’ equity, and cash flows, for each of the three years in the period ended February 1, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, effective February 3, 2019, the Company adopted Accounting Standards Codification Topic No. 842, Leases (ASC 842).

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Indianapolis, Indiana  

March 31, 2020

We have served as the Company's auditor since 1988.

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Shoe Carnival, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

See notes to consolidated financial statements.

40

Shoe Carnival, Inc.

Consolidated Statements of Income

(In thousands, except per share data)

See notes to consolidated financial statements.

41

Shoe Carnival, Inc.

Consolidated Statements of Shareholders’ Equity

(In thousands)