Gross profit decreased $812,000 to $89.2 million in the first six months of fiscal 2008 from gross profit of $90.0 million in the comparable prior year period. Our gross profit margin in the first half of fiscal 2008 decreased to 27.8% from 28.1% in the comparable prior year period. As a percentage of sales, the merchandise margin remained flat, while buying, distribution and occupancy costs increased 0.3%. Occupancy costs, as a percentage of sales, increased 0.5% primarily as a result of lower comparable store sales and an increase in costs due to the additional stores we operated. This increase, as a percentage of sales, was partially offset by a 0.3% decline in distribution costs. Our distribution costs, both as a percentage of sales and in dollars, declined predominantly as a result of costs associated with the conversion to our new distribution center during the first quarter of the prior year. These additional costs incurred in the first quarter of fiscal 2007 totaled $936,000, or $0.04 per diluted share.
Selling, general and administrative expenses increased $541,000 to $80.0 million or 24.9% of sales in the first half of fiscal 2008 from $79.4 million or 24.8% of sales in the comparable prior year period. The increase was primarily the result of the $2.8 million of additional costs incurred as a result of the operation and support of the net new stores opened since February of fiscal 2007, along with a $800,000 increase in self-insured health care costs resulting primarily from several large medical claims. These increases were partially offset by a $2.6 million decrease in advertising costs. The decrease in advertising resulted from changes in our media mix and a market level analysis whereby we revised the level of advertising for each location primarily during the second quarter based on current market trends and store performance. We do not expect to significantly reduce our advertising spending, as compared to the prior year, during the remainder of fiscal 2008.
Pre-opening costs were $440,000, or 0.1% of sales, for the first half of fiscal 2008 as compared to $556,000, or 0.2% of sales, for the first six months of fiscal 2007. We opened 14 stores in the first six months of fiscal 2008 as compared to 13 stores in the first six months 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 by store depending on the specific market and the promotional activities involved.
Store closing costs included in selling, general and administrative expenses were $672,000, or 0.2% of sales, for the first half of fiscal 2008 as compared to $430,000, or 0.1% of sales, for the first half of fiscal 2007. Two stores were closed during the first half of fiscal 2008 and no stores were closed during the first half of fiscal 2007. We expect to close nine stores during the remainder of fiscal 2008 as compared to five stores in the second half of fiscal 2007. We will continue to evaluate underperforming 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 depending in part on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout.
We recorded net interest income of $7,000 in the first half of fiscal 2008 as compared to net interest income of $446,000 in the first half of the prior year. This decrease in interest income was primarily the result of a decline in the cash available for short-term investment.
The effective income tax rate for the first six months of fiscal 2008 increased to 37.7% from 32.1% compared to the same time period in 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 six months of fiscal 2007.
Net Income
For the first six months of fiscal 2008, net income decreased to $5.8 million from $7.5 million in the first six months of fiscal 2007. Diluted earnings per share decreased to $0.46 in the first six months of fiscal 2008 from $0.55 in the first six months of fiscal 2007.
Our average diluted shares outstanding at the end of the first half of fiscal 2008 were 12.5 million or approximately 8.7% lower than the 13.6 million average diluted shares outstanding at the end of the first half 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.
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 $13.8 million in the first six months of fiscal 2008 as compared to $10.4 million in the first six months of 2007, for an increase of net cash provided by operations of $3.4 million. This difference, when comparing the two periods of each year, was primarily due to a reduction in the use of cash for the payment of income taxes partially offset by the timing of payments for accounts payable (net of the change in inventory) and accrued liabilities.
Working capital increased to $148.4 million at August 2, 2008 from $141.2 million at August 4, 2007. The current ratio at August 2, 2008 was 2.7 as compared to 2.4 at August 4, 2007. We had no long-term debt as of the end of either period.
We expended $6.7 million in cash during the first half of fiscal 2008 for the purchase of property and equipment. Of this amount, $5.8 million was used for new stores, store remodeling and store relocation projects. The remaining capital expenditures were used primarily for information technology and miscellaneous equipment purchases.
During the first half of fiscal 2008, we opened 14 new stores. This compares to 13 store openings in the first half of fiscal 2007. We anticipate opening an additional ten stores and closing nine stores during the remainder of fiscal 2008. Additional capital expenditures of approximately $10.5 million to $11.0 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. For fiscal 2008, our new stores will average proximately 8,900 square feet. Capital expenditures for a new store in fiscal 2008 are expected to average approximately $290,000 and tenant improvement allowances are expected to average $30,000. The average inventory investment in a new store is expected to range from $300,000 to $550,000 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.
As of August 2, 2008, our unsecured credit facility provided for up to $95.0 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 August 2, 2008. Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest at their discretion. At August 2, 2008, there were no borrowings outstanding under the credit facility and $9.9 million in letters of credit outstanding. As of August 2, 2008, $85.1 million was available to us for additional borrowings under the credit facility.
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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 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 August 2, 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 August 2, 2008 was $21.9 million. No shares have been repurchased during 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. The hearing before the arbitration panel is currently scheduled for April 2009.
Although the investment we made in the new distribution center will satisfy our distribution needs throughout fiscal 2008, we have not achieved the productivity that we expect 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 prior to the end of fiscal 2009.
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 half of fiscal 2008.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of August 2, 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. The internal controls impacted by this project are mainly automated and operational in nature. 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. There have been no other changes in our internal control over financial reporting that occurred during the quarter ended August 2, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of our common shareholders was held June 12, 2008.
Election of Directors
J. Wayne Weaver and Gerald W. Schoor were elected at the annual meeting to serve as our Directors for three-year terms. Mr. Weaver received 11,554,066 votes in favor of his election and 115,094 votes were withheld. Mr. Schoor received 11,591,053 votes in favor of his election and 78,107 votes were withheld.
In addition, the following Directors continue in office until the annual meeting of shareholders in the year indicated:
| William E. Bindley | 2009 |
| Kent A. Kleeberger | 2009 |
| Mark L. Lemond | 2010 |
Other Matters Voted Upon at the Meeting
The appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2008 was ratified. Votes of 11,651,651 were cast in favor, 13,610 votes were cast against, 3,899 abstentions were recorded, and no broker non-votes were recorded with respect to such ratification.
The amendment to the Shoe Carnival, Inc. 2000 Stock Option and Incentive Plan was approved. This amendment increased the number of shares of our common stock subject to issuance under the Plan from 1,500,000 to 2,000,000. This amendment also extended the term of the Plan until the later of ten years from date of adoption of the plan by our shareholders or the approval of any amendment of the plan by our shareholders. Votes of 7,848,098 were cast in favor, 2,457,322 votes were cast against, 4,094 abstentions were recorded, and 1,359,646 broker non-votes were recorded with respect to the amendment.
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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) |
| | | | |
| | | | (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 (incorporated herein by reference from the same exhibit number to the Registrant's Quarterly Report on Form 10-Q for the quarter ended May 3, 2008) |
| | |
| | 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: | 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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