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.
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:
Net sales decreased $3.6 million to $162.1 million during the first quarter ended May 3, 2008, a 2.1% decrease from net sales of $165.7 million in the first quarter ended May 5, 2007. The decrease in net sales was primarily due to a comparable store sales decline of 4.9%. The decrease was offset by a $4.4 million increase in sales generated by the 27 new stores opened since February 3, 2007, net of sales lost from the five stores which were closed during this same period.
The challenging economic environment has continued into 2008. Rising fuel and food prices, along with the issues in the home mortgage industry, continue to dramatically impact the cost of living of our targeted moderate-income consumer. Consequently, we like others retailers have experienced declining traffic patterns, which has had a negative impact on our sales. Sales of our seasonal merchandise were disappointing for the first quarter of fiscal 2008, particularly in the sandals and opened up dress shoe categories. As a result, we experienced double digit comparable store sales losses in the entire women's non-athletic category. However, our athletic product category, including children's and adult sizes, posted a low single digit comparable store sales gain.
Gross Profit
Gross profit decreased $2.7 million to $47.1 million in the first quarter of fiscal 2008 from gross profit of $49.8 million in the comparable prior year period. Our gross profit margin in the first quarter of fiscal 2008 decreased to 29.0% from 30.0% in the comparable prior year period. As a percentage of sales, the merchandise margin decreased 0.8% while buying, distribution and occupancy costs increased 0.2%. The decrease in merchandise margin as a percentage of sales was largely related to the pressure on margins resulting from the current competitive retail environment. We experienced a 0.6% increase in occupancy costs, as a percentage of sales, primarily as a result of lower sales for the quarter against an increasing store base. This increase, as a percentage of sales, was partially offset by a decline in distribution costs. Our distribution costs, both as a percentage of sales and in dollars, declined predominantly as a result of one-time costs associated with the conversion to our new distribution center during the first quarter of the prior year. These costs incurred in the first quarter of fiscal 2007 totaled $936,000, or $0.04 per diluted share.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of fiscal 2008 remained even with the prior year at $39.3 million. Due to the deleveraging effect of lower sales, these costs as a percentage of sales increased to 24.2% from 23.7%. While we incurred costs as a result of the operation and support of the new stores opened since February 3, 2007, we were able to offset these cost increases with aggressive expense controls in others areas of our business.
Pre-opening costs were $34,000, or less than 0.1% of sales, for the first quarter of fiscal 2008 as compared to $289,000, or 0.2% of sales, for the first quarter of fiscal 2007. We opened two stores in the first quarter of fiscal 2008 as compared to seven stores in the first quarter of fiscal 2007. 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 included in selling, general and administrative expenses were $285,000, or 0.2% of sales, for the first quarter of fiscal 2008 as compared to $55,000, or less than 0.1% of sales, for the first quarter of fiscal 2007. No stores were closed in either period. We expect to close nine stores during the remainder of fiscal 2008 as compared to five stores in fiscal 2007. We will continue to evaluate under performing stores for possible closing on a routine basis, which may result in the identification of additional store closings for the current or future fiscal years. 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 remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout.
Interest (Income) Expense, Net
We recorded net interest income of $4,000 in the first quarter of fiscal 2008 as compared to net interest income of $302,000 in the first quarter of the prior year. This decrease in interest income is primarily the result of a decline in the cash available for short-term investment.
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Income Taxes
The effective income tax rate for the first quarter of fiscal 2008 increased to 38.4% from 32.0% for the same time period in fiscal 2007. The change in effective income tax rates between the two periods was primarily due to the fiscal 2007 reduction in state income taxes from state incentives related to the investment in our new distribution center. The reduction in income tax expense related to the tax incentives resulted in an increase of approximately $0.05 in earnings per diluted share for the first quarter of fiscal 2007. The 38.4% effective tax rate for the first quarter of fiscal 2008 is more reflective of our historical range for income taxes and in the range we are anticipating for the full fiscal year 2008.
Net Income
Net income for the first quarter of fiscal 2008 decreased to $4.8 million from $7.3 million in the first quarter of fiscal 2007. Diluted earnings per share decreased to $0.38 in the first quarter of fiscal 2008 from $0.53 in the first quarter of fiscal 2007.
Our average diluted shares outstanding at the end of the first quarter of fiscal 2008 was 12.4 million or approximately 10.4% lower than the 13.9 million average diluted shares outstanding at the end of the first quarter last year. This decrease was primarily due to the 1.2 million shares repurchased in fiscal 2007 as part of our $50.0 million share repurchase program. The reduction in shares outstanding increased our diluted earnings per share in the first quarter of fiscal 2008 by approximately $0.03.
Liquidity and Capital Resources
Our primary sources of funds are cash flows from operations and borrowings under our revolving credit facility. Our net cash provided by operations was $2.9 million in the first quarter of fiscal 2008 as compared to cash used in operating activities of $7.8 million in the first quarter of 2007, for a difference of $10.7 million. This difference, when comparing the two fiscal quarter of each year, was primarily due to a reduction in the use of cash for the payment of accounts payable ($14.0 million) partially offset by the growth in ending merchandise inventories resulting from the operation of additional stores ($5.5 million).
Working capital decreased to $148.1 million at May 3, 2008 from $160.5 million at May 5, 2007. This $12.4 million decrease resulted primarily from our use of cash to repurchase common stock during fiscal 2007 under our stock repurchase program. The current ratio at May 3, 2008 was 3.3 and as compared to 4.0 at May 5, 2007. We had no long-term debt as of the end of either period.
We expended $2.6 million in cash during the first quarter of fiscal 2008 for the purchase of property and equipment. Of this amount, $2.0 million was used for new stores along with remodeling and relocation projects. The remaining capital expenditures were used primarily for information technology and miscellaneous equipment purchases.
During the first quarter of fiscal 2008, we opened two new stores. This compares to seven store openings in the first quarter of fiscal 2007. We anticipate opening an additional 20 to 23 stores and closing nine stores during fiscal 2008. Additional capital expenditures of approximately $10 million will be made over the course of fiscal 2008 for the opening of new stores, store remodels 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 fiscal 2008 are expected to average approximately $275,000. The average inventory investment in a new store is expected to range from $350,000 to $600,000 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 $48,000 per store in fiscal 2008 with individual stores experiencing variances in expenditure levels based on the specific market.
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As of May 3, 2008, our unsecured credit facility provided for up to $70.0 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 May 3, 2008. Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest at their discretion. At May 3, 2008, there were no borrowings outstanding under the credit facility and $4.0 million in letters of credit outstanding. As of May 3, 2008, $66.0 million was available to us for additional borrowings under the credit facility. On June 10, 2008, we entered into an amendment to our credit agreement with our bank group which increased our credit facility by $25.0 million for a total of $95.0 million available for both cash advances and the issuance of commercial letters of credit. No other changes to the existing terms of the credit agreement were made in connection with the June 10, 2008 amendment. The credit agreement and amendments thereto are filed as exhibits to (or incorporated by reference in) this Quarterly Report on Form 10-Q.
During fiscal 2006, our Board of Directors authorized a $50.0 million share repurchase program, which will terminate upon the earlier of the repurchase of the maximum amount or December 31, 2008. Share repurchases under this authorization may be made in the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. As of May 3, 2008, approximately 1.2 million shares had been repurchased at an aggregate cost of $28.1 million. The amount that remained available under the existing repurchase authorization at May 3, 2008 was $21.9 million. No shares were repurchased during the first quarter of fiscal 2008.
On or about April 22, 2008, an arbitration claim was filed by SDI Industries, Inc. ("SDI") against us with the American Arbitration Association Western Case Management Center in Los Angeles, California,captioned SDI Industries, Inc. (Claimant and Counter-Respondent) v. Shoe Carnival, Inc. (Respondent and Counterclaimant), in which SDI seeks payment of $1.04 million of unpaid Retainage, as defined in our contract with SDI ("Contract"), plus additional interest and fees. The Retainage was withheld from progress billings for work performed on our new distribution center and is recorded in accrued and other liabilities and fixed assets in our consolidated financial statements. On or about May 21, 2008, we filed a Counterclaim and Response in this matter, denying SDI's claim, and seeking monetary damages of more than $3.0 million. We contend that SDI breached the Contract due to their failure to deliver our distribution center's material handling system pursuant to the specifications of the Contract. Although the investment we made in the new distribution center will satisfy our distribution needs throughout fiscal 2008, we have not achieved the expected productivity that will be required in three to five years, based on our long-term store growth plan. We are currently seeking proposals from other vendors to complete the work that we believe SDI failed to deliver and tentatively expect to have those modifications complete within 12 months.
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 along with other capital expenditures, any future repurchase of our common stock under our current repurchase plan and working capital 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.
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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 less than $1,000 for the first quarter of fiscal 2008.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of May 3, 2008, 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. As part of our continued strategy to grow our store base and increase capacity, we are in the process of redesigning certain elements of the material handling system in our distribution center. See our Notes to Condensed Consolidated Financial Statements, Note 5– "Litigation Matters" included in PART I, ITEM 1. FINANCIAL STATEMENTS of this Quarterly Report on Form 10-Q for further details on this matter. The internal controls impacted by this project are mainly automated and operational in nature and testing of these controls is expected to commence in the second quarter. There have been no other changes in our internal control over financial reporting that occurred during the quarter ended May 3, 2008 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 1. LEGAL PROCEEDINGS
The information set forth in Note 5 – "Litigation Matters" contained in the Notes to Condensed Consolidated Financial Statement included in PART I, ITEM 1. FINANCIAL STATEMENTS of this Quarterly Report on Form 10-Q is incorporated herein by reference.
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 2, 2008 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 2, 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) |
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| | | 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) |
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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) |
| |
| | | | | (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) |
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| | (a) | | | | Exhibits (continued) |
| |
| | �� | | | (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) (xi) Ninth Amendment to Amended and Restated Credit Agreement and Notes dated June 10, 2008, between Registrant and U.S. Bank National Association, Wachovia Bank, National Association and Fifth Third Bank |
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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 |
| | | | | |
| | | 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: | June 11, 2008 | SHOE CARNIVAL, INC. | |
| | | (Registrant) | |
| | |
| | |
| | | By:/s/ W. Kerry Jackson | |
| | | W. Kerry Jackson | |
| | | Executive Vice President and | |
| | | Chief Financial Officer | |
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