Net sales decreased $10.1 million to $494.3 million in the first nine months of fiscal 2007, a 2.0% decrease over net sales of $504.4 million in the comparable prior year period. Of this decrease, approximately $24.6 million was attributable to our 5.0% comparable store sales decline, and approximately $2.8 million related to the seasonal differences associated with the fiscal calendar shift noted above. The decrease in net sales was partially offset by a $17.3 million increase in sales generated through operation of the 38 new stores opened during fiscal 2006 and fiscal 2007 net of the sales loss from eight stores which were closed during the same period.
Gross profit decreased $8.4 million to $140.6 million in the first nine months of fiscal 2007 from $149.0 million in the comparable prior year period. Our gross profit margin decreased to 28.5% in the first nine months of fiscal 2007 from 29.5% for the first nine months of fiscal 2006. As a percentage of sales, the merchandise margin increased 0.1% while buying, distribution and occupancy costs increased 1.1%. The increase in buying, distribution and occupancy costs, as a percentage of sales, was primarily attributable to increases in occupancy and distribution costs due to operating more stores, coupled with the costs incurred during the first quarter of fiscal 2007 to convert to our new distribution center and the increased fixed costs associated with operating the new facility.
Selling, general and administrative expenses increased $3.8 million to $123.1 million in the first nine months of fiscal 2007 from $119.3 million in the comparable prior year period. The increase in selling, general and administrative expenses necessary to operate and support the 30 net new stores opened during fiscal 2006 and fiscal 2007 was partially offset by a savings of approximately $2.4 million from expense controls in addition to a $1.5 million decrease in performance based incentive compensation expense. As a percentage of sales, selling, general and administrative expenses increased to 24.9% from 23.7% in the first nine months of last year. The increase, as a percentage of sales, resulted primarily from the deleveraging effect of lower store sales.
Pre-opening costs were $963,000, or 0.2% of sales, for the first nine months of fiscal 2007 as compared to $460,000, or 0.1% of sales, for the first nine months of fiscal 2006. We opened 24 stores in the first nine months of fiscal 2007 as compared to 12 stores in the first nine months 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 $525,000, or 0.1% of sales, for the first nine months of fiscal 2007 as compared to $486,000, or 0.1% of sales, for the first nine months of fiscal 2006. We closed two stores in the first nine months of fiscal 2007 and five stores were closed in the first nine months 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.
For the first nine months of fiscal 2007, net interest income was $432,000 compared to net interest income of $756,000 for the first nine months of fiscal 2006. The change in net interest income was primarily related to a decrease in the first nine months of fiscal 2007 in the excess funds available for investment.
Income Taxes
The effective income tax rate for the first nine months of fiscal 2007 decreased to 35.0% from 38.8% when compared to the same time period in fiscal 2006. The reduction in the effective income tax rate for the nine 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 used in operating activities was $2.3 million during the first nine months of fiscal 2007, as compared to net cash provided by operating activities of $3.7 million during the first nine months of fiscal 2006. These amounts reflect the income from operations adjusted for non-cash items and working capital changes. The $6.0 million decrease in cash provided by operating activities between the two respective periods related primarily to the decrease in net income.
Working capital increased to $154.5 million at November 3, 2007 from $149.6 million at October 28, 2006. The current ratio at November 3, 2007 was 3.4 and remained unchanged as compared to October 28, 2006. Long-term debt as a percentage of total capital (long-term debt plus shareholders' equity) was 6.7% at November 3, 2007. We had no long-term debt as of October 28, 2006.
Capital expenditures were $15.3 million in the first nine months of fiscal 2007. Of this amount, $4.4 million was incurred for our new distribution center, $5.9 million was incurred for new stores and $2.3 million was incurred for our new corporate headquarters. The remaining capital expenditures for the first nine months of fiscal 2007 were incurred for store remodeling and relocation, software and information technology, in-store graphics and miscellaneous equipment purchases. We received $418,000 in lease incentives from landlords during the first nine months of fiscal 2007.
During the first nine months of fiscal 2007, we opened 24 new stores and closed two stores. This compares to 12 store openings and five store closings in the first nine months of fiscal 2006. We anticipate opening an additional store and closing three stores in the fourth quarter of fiscal 2007. We expect to incur additional capital expenditures of $2 million in the fourth quarter of fiscal 2007 related primarily to fiscal 2007 and fiscal 2008 new store openings.
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 $40,000 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 November 3, 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. At November 3, 2007, there were $14.2 million in borrowings outstanding under the credit facility and $3.0 million in letters of credit outstanding. As of November 3, 2007, $52.8 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. During December 2006, the Board of Directors authorized a $50 million stock buy-back program, which will terminate on the earlier of the repurchase of the maximum amount or December 31, 2008. As of November 3, 2007, approximately 1.0 million shares had been repurchased at an aggregate cost of $25.6 million. The amount that remained available under the existing repurchase authorization at November 3, 2007 was $24.4 million.
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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, any future repurchase of our common stock under our current repurchase plan 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 Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in that the interest payable under our credit facility is based on variable interest rates and therefore is affected by changes in market rates. We do not use interest rate derivative instruments to manage exposure to changes in market interest rates. A 1% change in the weighted average interest rate charged under the credit facility would have resulted in interest expense fluctuating by approximately $11,000 for the third quarter and first nine months of fiscal 2007. We did not incur borrowings against our revolving credit line during the first nine 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 November 3, 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 third quarter ended November 3, 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
| | | | | | | | | Approximate |
| | | | | | | Total Number Of | | Dollar Value |
| | | | | | | Shares | | of Shares that |
| | | | | | | Purchased as | | May Yet Be |
| | Total Number | | Average | | Part of Publicly | | Purchased |
| | of Shares | | Price Paid | | Announced | | Under the |
| Period | | Purchased(1) | | per Share | | Programs(1) | | Programs |
| August 5, 2007 to September 1, 2007 | | 339,288 | | $ | 18.88 | | 339,288 | | $ | 24,378,000 |
| September 2, 2007 to October 6, 2007 | | 0 | | $ | 0.00 | | 0 | | $ | 24,378,000 |
| October 7, 2007 to November 3, 2007 | | 0 | | $ | 0.00 | | 0 | | $ | 24,378,000 |
| | 339,288 | | | | | 339,288 | | | |
| (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 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) |
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| (a) | | | | Exhibits (continued) |
| | | | | | |
| | | | | (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) (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) |
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| (a) | | | | Exhibits (continued) |
| | | | | | |
| | | 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: December 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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