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 increased $7.9 million to $154.8 million during the second quarter ended August 4, 2007, a 5.4% increase from net sales of $146.9 million in the second quarter ended July 29, 2006. Of the increase in net sales, $6.0 million was attributable to operating the 27 new stores opened in fiscal 2006 and fiscal 2007 (net of the six store closings in fiscal 2006). An additional $13.1 million increase in net sales was attributed to the seasonal differences associated with the fiscal calendar shift noted above, but was partially offset by the 7.1% decrease in comparable store sales.
Net sales increased $5.1 million to $320.5 million in the first half of fiscal 2007, a 1.6% increase over net sales of $315.4 million in the comparable prior year period. Of the increase in net sales, $11.4 million was attributable to operating the 27 new stores opened in fiscal 2006 and fiscal 2007 (net of the six store closings in fiscal 2006). An additional $10.9 million increase in net sales was attributable to the seasonal differences associated with the fiscal calendar shift noted above, but was more than offset by a 5.4% decrease in comparable store sales.
The second quarter continued to be a difficult period for us and footwear retailers in general. Our core customer base has been faced with financial challenges brought about by higher gasoline prices, housing and mortgage issues and increased consumer debt loads. This resulted in lower traffic counts throughout the first and second quarters of fiscal 2007 as compared to the same periods last year. From a fashion perspective, our core customers did not respond to the style and color direction of dress and sandalized footwear this past spring. Additionally, on an industry-wide basis, retailers have continued to see a decline in the demand for traditional athletic footwear.
We have aggressively managed our inventories during fiscal 2007 and will continue to do so for the remainder of the year. Per-store inventories at the end of the second quarter were approximately flat with inventories at the end of the comparable week in fiscal 2006. By keeping our inventories lean and fresh, we have the ability to react to developing trends and opportunistic buys.
Gross Profit
Gross profit decreased $594,000 to $40.2 million in the second quarter of fiscal 2007 from gross profit of $40.8 million in the comparable prior year period. Our gross profit margin in the second quarter of fiscal 2007 decreased to 26.0% from 27.8% in the comparable prior year period. As a percentage of sales, the merchandise margin decreased 1.5% and buying, distribution and occupancy costs increased 0.3%. The decrease in the merchandise margin was driven by a decrease in the average sale price resulting from the promotionally driven quarter. The increase in buying, distribution and occupancy costs, as a percentage of sales, was primarily attributable to higher fixed costs associated with our new distribution center. The increase in fixed costs was primarily due to under utilized capacity, which is necessary for future store growth.
Gross profit decreased $2.3 million to $90.0 million in the first half of fiscal 2007 from $92.3 million in the comparable prior year period. Our gross profit margin decreased to 28.1% in the first six months of fiscal 2007 from 29.3% for the first six months of fiscal 2006. As a percentage of sales, the merchandise margin decreased 0.2% and buying, distribution and occupancy costs increased 1.0%. The increase in buying, distribution and occupancy costs, as a percentage of sales, was primarily due to the increase in distribution costs related to the operation of our new distribution center and the deleveraging effect of lower same store sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.7 million to $40.1 million in the second quarter of fiscal 2007 from $36.4 million in the comparable prior year period. Of the increase, $2.0 million resulted from an increase in advertising costs due to the shift in the retail calendar and approximately $1.3 million was attributable to operating the 27 new stores opened in fiscal 2006 and fiscal 2007 (net of the six store closings in fiscal 2006). As a percentage of sales, selling, general and administrative expenses increased to 25.9% in the second quarter of fiscal 2007 from 24.8% for the comparable period last year. The increase as a percentage of sales resulted primarily from an increase in advertising costs coupled with the deleveraging effect of lower same store sales.
Pre-opening costs were $268,000, or 0.2% of sales, for the second quarter of fiscal 2007 as compared to $164,000, or 0.1% of sales, for the second quarter of fiscal 2006. We opened six stores in the second quarter of fiscal 2007 as compared to four stores in the second quarter of fiscal 2006. Pre-opening costs, such as advertising, payroll and supplies, incurred prior to the opening of a new store are charged to expense in the period they are incurred. The total amount of pre-opening expense incurred will vary on a store-by-store basis depending on the specific market and the promotional activities involved.
Store closing costs were $346,000, or 0.2% of sales, for the second quarter of fiscal 2007 as compared to $143,000, or 0.1% of sales, for the second quarter of fiscal 2006. 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. The costs incurred in the second quarter of fiscal 2007 related primarily to the impairment of three stores planned for closing later this year. No stores were closed during the second quarter of fiscal 2007 and two stores were closed during the second quarter of fiscal 2006.
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Selling, general and administrative expenses increased $3.3 million to $79.4 million in the first half of fiscal 2007 from $76.1 million in the comparable prior year period. Of the increase, approximately $2.0 million resulted from an increase in advertising costs due to the shift in the retail calendar and $2.2 was attributable to operating the 27 new stores opened in fiscal 2006 and fiscal 2007 (net of the six store closings in fiscal 2006). The increase was partially offset by $1.2 million of savings generated by comparable stores during the first half of fiscal 2007 compared to the same period last year. As a percentage of sales, these expenses increased to 24.8% from 24.1% in the first six months of last year. The increase as a percentage of sales resulted primarily from an increase in advertising costs coupled with the deleveraging effect of lower same store sales.
Pre-opening costs were $556,000, or 0.2% of sales, for the first half of fiscal 2007 as compared to $164,000, or 0.1% of sales, for the first half of fiscal 2006. We opened 13 stores in the first half of fiscal 2007 as compared to four stores in the first half of fiscal 2006. Pre-opening costs, such as advertising, payroll and supplies, incurred prior to the opening of a new store are charged to expense in the period they are incurred. The total amount of pre-opening expense incurred will vary on a store-by-store basis depending on the specific market and the promotional activities involved.
Store closing costs were $400,000 or 0.1% of sales, for the first half of fiscal 2007 as compared to $254,000, or 0.1% of sales, for the first half of fiscal 2006. 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. The costs incurred in the first six months of fiscal 2007 related primarily to the impairment of three stores planned for closing later this year. No stores were closed in the first half of fiscal 2007 and two stores were closed in the first half of fiscal 2006.
Interest (Income) Expense
We recorded net interest income of $144,000 and $260,000 in the second quarter of fiscal 2007 and 2006, respectively. For the first six months of fiscal 2007 and 2006, we recorded net interest income of $446,000 and $436,000, respectively. We had no direct borrowings under our credit facility during the first half of fiscal 2007 or fiscal 2006.
Income Taxes
The effective income tax rate for the second quarter of fiscal 2007 decreased to 38.7% from 38.8% for the comparable period in 2006. The effective income tax rate for the first six months of fiscal 2007 decreased to 32.1% from 38.4% compared to the same time period in 2006. The reduction in the effective income tax rate for the six months of fiscal 2007 as compared to fiscal 2006 was primarily due to a reduction in state income taxes from state incentives related to the investment in our new distribution center.
Liquidity and Capital Resources
Net cash provided by operating activities was $10.4 million for the first six months of fiscal 2007, as compared to net cash provided by operating activities of $1.8 million for the first six months of fiscal 2006. These amounts reflect the income from operations adjusted for non-cash items and working capital changes. The $8.6 million increase in cash provided by operating activities between the two respective periods related primarily to the reduction in inventory levels coupled with the timing of the payments of accounts payable and accrued liabilities.
Working capital decreased to $141.2 million at August 4, 2007 from $149.0 million at July 29, 2006. The decrease in working capital was primarily the result of a $9.9 million decrease in cash and cash equivalents attributable to outstanding common stock purchased under the stock-buyback program. The decrease in working capital was also due to a $2.7 million net increase in accounts payable (net of merchandise inventory) offset by a $5.1 million increase in other assets. The current ratio at August 4, 2007 was 2.4 as compared to 2.7 at July 29, 2006. We had no long-term debt at August 4, 2007 or July 29, 2006.
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Capital expenditures were $11.4 million in the first half of fiscal 2007. Of this amount, $4.2 million was incurred for our new distribution center, $3.4 million was incurred for new stores and $1.9 million was incurred for our new corporate headquarters. The remaining capital expenditures for the first half of fiscal 2007 were incurred for store remodeling and relocation, software and information technology, in-store graphics and miscellaneous equipment purchases. We did not receive any cash lease incentives from landlords during the first six months of fiscal 2007.
During the first half of fiscal 2007, we opened 13 new stores and closed no stores. This compares to four store openings and two store closings in the first half of fiscal 2006. We anticipate opening an additional 12 stores and closing four stores in the second half of fiscal 2007.
Remaining capital expenditures are expected to be $9 million to $10 million in fiscal 2007. Of this amount, approximately $4.7 million will be spent on new stores and $1.4 million represents equipment for our new distribution center. The balance of capital expenditures are expected to be incurred for store remodels, visual presentation enhancements and various other store improvements, furnishing our new corporate headquarters, 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 fiscal 2007 are expected to average approximately $298,000. The average inventory investment in a new store is expected to range from $350,000 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 $45,000 per store in fiscal 2007 with individual stores experiencing variances in expenditure levels based on the specific market.
Our unsecured credit facility provides for up to $70 million in cash advances on a revolving basis and commercial letters of credit. Borrowings under the revolving credit line are based on eligible inventory. 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 August 4, 2007. 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 filed as exhibits to (or incorporated by reference in) this Quarterly Report on Form 10-Q. There were no borrowings outstanding under the credit facility and letters of credit outstanding were $13.6 million at August 4, 2007. As of August 4, 2007, $56.4 million was available to us for additional borrowings under the credit facility. On December 15, 2006, the credit agreement was amended to extend the maturity date to April 30, 2010 and to allow us to repurchase shares of our outstanding common stock in an amount not to exceed $50 million. This amendment followed the Board of Director’s December 2006 authorization of a $50 million stock buy-back program, which will terminate on the earlier of the repurchase of the maximum amount or December 31, 2008. During the second quarter of fiscal 2007, 662,000 shares of common stock were repurchased under this program at a cost of $18.9 million. Subsequent to August 4, 2007, through September 10, 2007, we purchased an additional 339,000 shares of our outstanding common stock at a cost of $6.4 million. All repurchases under this program have been made utilizing available cash on hand.
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 our new corporate headquarters and distribution center, the repurchase of our common stock under our current repurchase plan and other operating cash requirements for at least the next 12 months.
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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.
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 2007.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of August 4, 2007, 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.
Management is continuously seeking to improve the efficiency and effectiveness of our operations and internal controls. This results in refinements to processes throughout the company. In the fourth quarter of fiscal 2006, we began conversion to our new distribution center. We believe the launch of our new distribution center has strengthened the overall system of internal controls due to enhanced automation and integration of related processes. Testing of the controls related to this system is ongoing and management will make its evaluation of the effectiveness of these controls upon completion of all components and enhanced functions of the new distribution center. There have been no other changes in our internal control over financial reporting that occurred during the second quarter ended August 4, 2007, 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
ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties we describe both in this Quarterly Report on Form 10-Q and in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 3, 2007 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 February 3, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
| | | | | | Total Number | | Approximate |
| | | | | | Of Shares | | Dollar Value |
| | | | | | Purchased | | of Shares |
| | | | | | as Part | | that May Yet |
| | Total Number | | Average | | of Publicly | | Be Purchased |
| | of Shares | | Price Paid | | Announced | | Under the |
| Period | Purchased(1) | | per Share | | Programs(1) | | Programs |
| May 6, 2007 to June 2, 2007 | 119,771 | | $ | 28.63 | | 119,771 | | $ 46,276,000 |
| June 3, 2007 to July 7, 2007 | 541,841 | | $ | 28.59 | | 541,841 | | $ 30,785,000 |
| July 8, 2007 to August 4, 2007 | 0 | | $ | 0.00 | | 0 | | $ 30,785,000 |
| | 661,612 | | | | 661,612 | | |
| (1) | | These shares are part of a publicly announced, $50.0 million stock buy-back program that our Board of Directors approved in December 2006. The program will terminate on the earlier of the repurchase of the maximum amount or December 31, 2008. |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of our common shareholders was held June 12, 2007.
Election of Directors
Mark Lemond was elected at the annual meeting to serve as our Director for a three-year term. Mr. Lemond received 11,274,837 votes in favor of his election and 1,933,228 votes were withheld.
In addition, the following Directors continue in office until the annual meeting of shareholders in the year indicated:
| J. Wayne Weaver | 2008 |
| Gerald W. Schoor | 2008 |
| William E. Bindley | 2009 |
| Kent A. Kleeberger | 2009 |
Other Matters Voted Upon at the Meeting
The appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2007 was ratified. Votes of 13,171,004 were cast in favor, 32,473 votes were cast against, 4,688 abstentions were recorded, and no broker non-votes were recorded with respect to such ratification.
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ITEM 6. EXHIBITS
| | (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) |
| |
| | | 3-B | | By-laws of Registrant, as amended to date (incorporated herein by reference from the same exhibit number to our Current Report on Form 8-K filed on March 19, 2007) |
| |
| | | 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) |
| |
| | | | | (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) |
| | | | | |
| | | | | (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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| | (a) | | | | Exhibits (continued) |
| |
| | | | | (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) |
| |
| | | | | (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) |
| |
| | | | | (x) Eighth Amendment to Amended and Restated Credit Agreement and Notes dated December 15, 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 December 11, 2006) |
| |
| | | 31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | | 31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | | 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| | | 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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 13, 2007 | SHOE CARNIVAL, INC. |
| | | (Registrant) |
| |
| |
| | | By:/s/ W. Kerry Jackson |
| | | W. Kerry Jackson |
| | | Executive Vice President and |
| | | Chief Financial Officer |
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