The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:
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 include stores that have been open for 13 full months 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.
Net sales decreased $1.8 million to $146.9 million in the second quarter of 2006, a 1.2% decrease from net sales of $148.7 million in the comparable prior year period. This decrease in sales can be attributed to two primary factors, a decrease in total store count as of the end of the second quarter and a 1% comparable store sales decrease. At the end of the second quarter of fiscal 2006, we operated 265 stores, one less store than the 266 stores we operated at the end of the second quarter of fiscal 2005. Also, the second quarter represented a challenging period for the athletic footwear industry. Our comparable store sales loss of 1% in the second quarter was the result of a 6% decline in adult athletic product sales offset by a collective 2.4% increase in all of our other product categories. We believe that current fashion trends for men and women are moving toward, what has generally been called, low-profile or sport-fusion footwear at the sake of mainstream athletic and classic athletic footwear. We classify these sport-fusion styles in our casual categories.
Net sales increased $6.0 million to $315.4 million in the first half of 2006, a 1.9% increase over net sales of $309.4 million in the comparable prior year period. Of the increase, $5.3 million was attributable to the 1.8% increase in comparable store sales, with the balance being attributable to the additional sales generated by our new stores net of store closings. The steps we have taken to improve our women’s and men’s dress and casual business continues to yield enhanced results on a year-to-date basis as comparable store sales of men’s product is up 7.0% and women’s product is up 6.5%. These gains have been partially offset by 3.2% comparable store sales decrease in athletic product, which is a direct result of the emerging trend away from traditional athletic footwear towards dress and casual footwear.
Gross Profit
Gross profit decreased $617,000 to $40.8 million in the second quarter of 2006, a 1.5% decrease from gross profit of $41.5 million in the comparable prior year period. Our gross profit margin in the second quarter of 2006 decreased to 27.8% from 27.9% in the comparable prior year period. As a percentage of sales, our merchandise gross profit margin increased 0.3% but was more than offset by a 0.4% increase in our buying, distribution and occupancy costs. The increase in the merchandise gross profit margin was primarily driven by more full price selling resulting from our improved product assortment and lean inventories. These factors contributed to a reduction in clearance product. The increase in buying, distribution and occupancy costs, as a percentage of sales, was primarily a result of the decline in comparable store sales.
Gross profit increased $3.2 million to $92.3 million in the first half of 2006, a 3.6% increase over gross profit of $89.1 million in the comparable prior year period. Our gross profit margin increased to 29.3% in the first six months of 2006 from 28.8% for the first six months of 2005. The increase in gross profit margin resulted from a 0.5% increase in our merchandise gross profit margin while buying, distribution and occupancy costs remained relatively flat. As with the second quarter of 2006, the increase in the merchandise gross profit margin was primarily driven by our continued focus on improving our product assortment and maintaining lean fresh inventories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $559,000 to $36.4 million in the second quarter of 2006 from $37.0 million in the comparable prior year period. As a percentage of sales, these expenses decreased to 24.8% in the second quarter of 2006 from 24.9% for the comparable period last year. Significant changes in expenses included a $547,000 decrease in advertising expense partially offset by an increase in health care costs of $440,000 along with an increase in stock-based compensation expense of $189,000.
Pre-opening costs were $164,000, or 0.1% of sales, for the second quarter of 2006 as compared to $296,000, or 0.2% of sales, for the second quarter of 2005. We opened four stores in the second quarter of 2006 as compared to the seven stores we opened in the second quarter of 2005.
Store closing costs were $146,000, or 0.1% of sales, for the second quarter of 2006 as compared to $284,000, or 0.2% of sales, for the second quarter of 2005. We closed two stores in the second quarter of 2006 as compared to the one store we closed in the second quarter of 2005. The timing and actual amount of expense recorded in closing a store can vary significantly on a store-by-store basis depending in part on the period in which management commits to a closing plan, the age of the store and possible lease buyout involved.
Selling, general and administrative expenses increased $1.3 million to $76.1 million in the first half of 2006 from $74.8 million in the comparable prior year period. As a percentage of sales, these expenses decreased to 24.1% from 24.2% in the first six months of last year. The most significant change was a $852,000, or 0.3% as a percentage of sales, increase in stock-based compensation in the first six months of 2006. Disclosure regarding our stock-based compensation plans and the effect of the adoption of SFAS No. 123R is contained in Note 4 – Stock-Based Compensation of the notes to the condensed consolidated financial statements in PART I, ITEM 1. FINANCIAL STATEMENTS of this Report.
Other significant changes included a $675,000 increase in employee health care costs, a $552,000 decrease in advertising expense and a decrease in credit card charges of $512,000 resulting from the Visa Check / MasterMoney Antitrust Litigation class action lawsuit settlement. We anticipate receiving payment on this during the second half of fiscal 2006.
Pre-opening costs were $164,000, or 0.1% of sales, for the first half of 2006 as compared to $489,000, or 0.2% of sales, for the first half of 2005. We opened four stores in the first half of 2006 as compared to the 12 stores we opened in the first half of 2005.
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Store closing costs were $259,000, or 0.1% of sales, for the first half of 2006 as compared to $437,000, or 0.1% of sales, for the first half of 2005. We closed two stores in the first half of 2006 as compared to the one store we closed in the first half of 2005. The timing and actual amount of expense recorded in closing a store can vary significantly on a store-by-store basis depending in part on the period in which management commits to a closing plan, the age of the store and possible lease buyout involved.
Interest (Income) Expense
We recorded net interest income of $260,000 in the second quarter of 2006 compared to net interest expense of $128,000 in the second quarter of the prior year. For the first six months of 2006, net interest income was $436,000 compared to net interest expense of $261,000 for the first six months of 2005. We had no direct borrowings under our credit facility during the first half of fiscal 2006.
Income Taxes
The effective income tax rate for the second quarter of 2006 increased to 38.8% from 37.8% for the same time period in 2005. The effective income tax rate for the first six months of 2006 remained flat at 38.4% when compared to the same time period in 2005.
Liquidity and Capital Resources
Net cash provided by operating activities was $1.8 million for the first six months of 2006, as compared to a net use of cash of $3.0 million for the first six months of 2005. These amounts reflect the income from operations adjusted for non-cash items and working capital changes. The $4.8 million increase in cash provided by operating activities between the two respective periods related primarily to the reduction in inventory levels on a per store basis coupled with the timing of income tax payments.
Working capital increased to $149.0 million at July 29, 2006 from $136.7 million at July 30, 2005. The increase in working capital is primarily the result of an increase in cash and cash equivalents of $18.4 million partially offset by a $5.7 million increase in our accounts payable. The current ratio at July 29, 2006 was 2.7 as compared to 2.6 at July 30, 2005. Long-term debt as a percentage of total capital (long-term debt plus shareholders’ equity) was 9.4% at July 30, 2005. We had no long-term debt as of July 29, 2006.
Capital expenditures were $5.8 million in the first half of 2006. We incurred $1.6 million for new stores, $1.7 million for store remodeling and relocation, $947,000 in costs related to our new distribution center and $786,000 for software and related technology. The remaining capital expenditures were incurred for in-store graphics and miscellaneous equipment purchases. Lease incentives received from landlords were $127,000 in the first half of 2006.
In February 2006, we sold our current combined distribution center and corporate headquarters for $7.2 million and recorded a loss of approximately $55,000 including legal fees and associated selling costs. We entered into a lease to continue operations in our current facility, the initial term of which expires on January 31, 2007. The lease contains an option that allows us to continue our occupancy until January 31, 2008, if necessary. It also provides for early termination of the lease upon our relocation to new facilities.
In February 2006, we signed a 15 year lease with a real estate developer who is constructing, to our specifications, a new distribution center of approximately 410,000 square feet located on 43 acres in the Evansville, Indiana area. We expect the new distribution center to be fully operational in January 2007. In June 2006, we signed a 15 year lease with the same real estate developer who is constructing, to our specifications, a new corporate headquarters building. We anticipate occupying the corporate headquarters in the first half of 2007. Further information on our new facilities is contained in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.
During the first half of 2006, we opened four new stores and closed two, all of these in the second quarter. We anticipate opening an additional 10 or 11 stores, and closing five, in the second half of fiscal 2006.
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Capital expenditures are expected to be between $29 million to $31 million in fiscal 2006. Of this amount, approximately $18 million represents our projected investment in equipment for our new distribution center and approximately $1 million for furniture and fixtures for our new corporate headquarters. The expected aggregate capital cost of the anticipated 14 to 15 new stores will be between $4.3 million and $4.6 million. The remaining capital expenditures are expected to be incurred for store remodels, visual presentation enhancements and various other store improvements, along with continued investments in technology and normal asset replacement activities. The actual amount of cash required for capital expenditures for store operations depends in part on the number of new stores opened, the amount of lease incentives, if any, received from landlords and the number of stores remodeled. The opening of new stores will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending in areas we target for expansion.
Our current store prototype uses between 6,500 and 12,000 square feet depending upon, among other factors, the location of the store and the population base the store is expected to service. Capital expenditures for a new store in 2006 are expected to average approximately $305,000. The average inventory investment in a new store is expected to range from $425,000 to $750,000 depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as advertising, salaries and supplies, are expected to average approximately $44,000 per store in 2006 with individual stores experiencing variances in expenditure levels based on the specific market.
Our unsecured credit facility provides for up to $70 million in cash advances from a revolving credit line and commercial letters of credit. Borrowings under the revolving credit line are based on eligible inventory. The agreement governing the credit facility stipulates a minimum threshold for net worth, a maximum ratio of funded debt plus rent to EBITDA plus rent, and a maximum of total distributions for stock repurchases and cash dividends. We were in compliance with these requirements as of July 29, 2006. Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest at their discretion. The credit agreement and amendments thereto are incorporated by reference as exhibits to this Quarterly Report on Form 10-Q. There were no borrowings outstanding under the revolving credit line and letters of credit outstanding were $11.7 million at July 29, 2006. As of July 29, 2006, $58.3 million was available to us for additional borrowings under the credit facility.
Our primary sources of funds are cash flows from operations and borrowings under our revolving credit facility. We anticipate that our existing cash and cash flow from operations, supplemented by borrowings under our revolving credit line, will be sufficient to fund our planned store expansion, the capital investment required for both the new distribution facility and corporate headquarters and other operating cash requirements for at least the next 12 months.
Seasonality
Our quarterly results of operations have fluctuated and are expected to continue to fluctuate in the future primarily as a result of seasonal variances and the timing of sales and costs associated with opening new stores. Non-capital expenditures, such as advertising and payroll, incurred prior to opening a new store are charged to expense as incurred. Therefore, our results of operations may be adversely affected in any quarter in which we incur pre-opening expenses related to the opening of new stores.
We have three distinct peak selling periods: Easter, back-to-school and Christmas.
New Accounting Pronouncements
Recent accounting pronouncements applicable to our operations are contained in Note 3 – Recently Issued Accounting Pronouncements contained in the Notes to Condensed Consolidated Financial Statements included in PART I, ITEM 1. FINANCIAL STATEMENTS of this Report.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk in that the interest payable under our credit facility is based on variable interest rates and therefore is affected by changes in market rates. We do not use interest rate derivative instruments to manage exposure to changes in market interest rates. We did not incur borrowings against our revolving credit line during the first six months of fiscal 2006.
ITEM 4. | CONTROLS AND PROCEDURES |
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of July 29, 2006, that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended July 29, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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SHOE CARNIVAL, INC.
PART II - OTHER INFORMATION
You should carefully consider the risks and uncertainties we describe both in this Report and in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 28, 2006 before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occur, our business, financial condition, results of operations or cash flows could be materially adversely affected. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The annual meeting of our common shareholders was held June 12, 2006.
Election of Directors
Messrs. William E. Bindley and Kent A. Kleeberger were elected at the annual meeting to serve as our Directors for a three-year term. Mr. Bindley received 12,610,384 votes in favor and 227,921 votes were withheld. Mr. Kleeberger received 12,640,631 votes in favor and 197,674 votes were withheld.
In addition, the following Directors continue in office until the annual meeting of shareholders in the year indicated:
Mark L. Lemond | 2007 |
James A. Aschleman | 2007 |
J. Wayne Weaver | 2008 |
Gerald W. Schoor | 2008 |
Other Matters Voted Upon at the Meeting
The appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2006 was ratified. Votes of 12,827,447 were cast in favor, 9,303 votes were cast against, 1,555 abstentions were recorded, and no broker non-votes were recorded with respect to such ratification.
The Shoe Carnival, Inc. 2006 Executive Incentive Compensation Plan was approved. Votes of 11,269,306 were cast in favor, 68,931 were cast against, 24,825 abstentions were recorded, and 1,475,825 broker non-votes were recorded.
(a) | | | | Exhibits |
| | | | |
| | 3-A | | Restated Articles of Incorporation of Registrant (incorporated herein by reference from the same exhibit number to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2002) |
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| | 3-B | | By-laws of Registrant, as amended to date (incorporated herein by reference from the same exhibit number to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2002) |
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| | 4 | | (i) Amended and Restated Credit Agreement and Promissory Notes dated April 16, 1999, between Registrant and Mercantile Bank National Association, First Union National Bank and Old National Bank (incorporated herein by reference from exhibit 4(I) to the Registrant’s Annual Report on Form 10-K for the year ended January 30, 1999) |
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(a) | | | | Exhibits |
| | | | |
| | | | (ii) Amendment to Amended and Restated Credit Agreement and Promissory Notes dated March 24, 2000, between Registrant and Mercantile Bank National Association, First Union National Bank and Old National Bank (incorporated herein by reference from the same exhibit number to the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2000) |
| | | | |
| | | | (iii) Second Amendment to Amended and Restated Credit Agreement and Promissory Notes dated November 8, 2000, between Registrant and Firstar Bank N.A., First Union National Bank, Old National Bank and LaSalle Bank National Association (incorporated herein by reference from the same exhibit number to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 28, 2000) |
| | | | |
| | | | (iv) Third Amendment to Amended and Restated Credit Agreement and Promissory Notes dated March 18, 2002, between Registrant and U.S. Bank National Association, First Union National Bank, Old National Bank and LaSalle Bank National Association (incorporated herein by reference from the same exhibit number to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2002) |
| | | | |
| | | | (v) Fourth Amendment to Amended and Restated Credit Agreement and Promissory Notes dated March 12, 2003, between Registrant and U.S. Bank National Association, Wachovia Bank National Association, Old National Bank and LaSalle Bank National Association (incorporated herein by reference from the same exhibit number to the Registrant’s Annual Report on Form 10-K for the year ended February 1, 2003) |
| | | | |
| | | | (vi) Fifth Amendment to Amended and Restated Credit Agreement and Promissory Notes dated April 5, 2004, between Registrant and U.S. Bank National Association, Wachovia Bank National Association, Old National Bank and LaSalle Bank National Association (incorporated herein by reference from the same exhibit number to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 2004) |
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| | | | (vii) Assignment Agreement dated June 1, 2004 among LaSalle Bank National Association as Assignor, Fifth Third Bank (Southern Indiana) as Assignee, Registrant as Borrower and U.S. Bank National Association as Agent relating to the Amended and Restated Credit Agreement as further amended (incorporated herein by reference from the same exhibit number to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 1, 2004) |
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| | | | (viii) Sixth Amendment to Amended and Restated Credit Agreement and Notes dated April 5, 2005, between Registrant and U.S. Bank National Association, Wachovia Bank National Association, Fifth Third Bank (Southern Indiana) and Old National Bank (incorporated herein by reference from the same exhibit number to the Registrant’s Current Report on Form 8-K filed on April 11, 2005) |
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| | | | (ix) Seventh Amendment to Amended and Restated Credit Agreement and Notes dated March 31, 2006, between Registrant and U.S. Bank National Association, Wachovia Bank, National Association and Fifth Third Bank (incorporated herein by reference from the same exhibit number to the Registrant’s Current Report on Form 8-K filed on April 4, 2006) |
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| | 10-B | | Shoe Carnival, Inc. 2006 Executive Incentive Compensation Plan (incorporated herein by reference from the same exhibit number to the Registrant’s Current Report on Form 8-K filed on June 15, 2006) |
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| | 10-D | | Lease, dated as of June 22, 2006, by and between the Registrant and Outback Holdings, LLC (incorporated herein by reference from the same exhibit number to the Registrant’s Current Report on Form 8-K filed on June 28, 2006) |
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(a) | | | | Exhibits |
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| | 31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | 31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| | 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SHOE CARNIVAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed, on its behalf by the undersigned thereunto duly authorized.
Date: September 7, 2006 | SHOE CARNIVAL, INC. |
| (Registrant) |
| | |
| | |
| By: | /s/ W. Kerry Jackson |
| |
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| | W. Kerry Jackson |
| | Executive Vice President and |
| | Chief Financial Officer |
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