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:
We experienced stronger than anticipated sales during the month of February and although the last two months of the quarter did not result in a combined comparable store sales gain, our early quarter performance was strong enough to limit the decline in comparable sales to just 0.3% for the quarter. Comparable store sales performance was driven largely by athletic footwear, including both children's and adult sizes, which recorded a mid-single digit increase for the quarter.
Our customers continued to react to value pricing of our adult dress and casual product, especially during the clearance period of February through early March. The decline in our gross profit margin during the first quarter of fiscal 2009 was a direct result of this aggressive liquidation within our non-athletic categories. However, this did enable us to reduce inventory levels and end the quarter with per-store inventories down 8.4% as compared to the first quarter of fiscal 2008.
We were able to leverage our buying, distribution and occupancy costs, as well as our selling, general and administrative expenditures. Through the efforts of our store-level, distribution center and administrative management groups, total dollar increases in these areas of expense were held to a minimum.
As we look forward, we recognize our targeted middle income customer will continue to be impacted by the economic downturn and sales within the retail sector may continue to experience downward pressure. Therefore, we will continue to manage our business conservatively, maintaining tight control over both our inventories and our cost structure through the remainder of fiscal 2009.
Results of Operations for the First Quarter Ended May 2, 2009
Net Sales
Net sales increased $5.2 million to $167.3 million during the first quarter of fiscal 2009, a 3.2% increase over the prior year's net sales of $162.1 million. The increase in net sales was primarily due to a $9.4 million increase in sales generated by the 34 new stores opened since the beginning of fiscal 2008. This increase was partially offset by a 0.3% decrease in comparable store sales and the loss of sales from the 12 stores closed since the beginning of fiscal 2008.
Gross Profit
Gross profit decreased $440,000 to $46.6 million in the first quarter of fiscal 2009 from gross profit of $47.1 million in the comparable prior year period. Gross margins for the first quarter of 2009 decreased 1.1% over the same period last year to 27.9%. The merchandise margin decreased 1.3% primarily due to the aggressive liquidation efforts we undertook during the quarter to significantly lower our per-store inventories in women's footwear. We were able to leverage buying, distribution and occupancy costs, as a percentage of sales, by 0.2% and to limit the total dollar increase to approximately $305,000. This increase in expense was primarily related to the additional occupancy costs incurred for the operation of our new stores. The increase was partially offset by rent reductions on certain comparable stores, the elimination of rent from the stores closed since the beginning of fiscal 2008 and, to a lesser extent, other cost savings initiatives in our buying and distribution functions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $733,000 in the first quarter of fiscal 2009 to $40.1 million, but as a percentage of sales decreased 0.2% to 24.0%. The increase in expense was primarily the result of the $1.6 million of additional cost incurred from the operation and support of the net new stores opened since the beginning of fiscal 2008, along with a $594,000 increase in self-insured health care costs resulting predominantly from several large medical claims. In addition to our continued focus on expense control and the resulting savings, these increases were partially offset by a reversal of $653,000 in stock-based compensation expense related to the reduction in the number of performance-based restricted shares anticipated to vest prior to their expiration.
Pre-opening costs were $481,000, or 0.3% of sales, for the first quarter of fiscal 2009 as compared to $34,000, or less than 0.1% of sales, for the first quarter of fiscal 2008. We opened ten stores in the first quarter of fiscal 2009 as compared to two stores in the first quarter of fiscal 2008. 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.
Interest (Income) Expense, Net
We recorded net interest expense of $39,000 in the first quarter of fiscal 2009 as compared to net interest income of $4,000 in the first quarter of the prior year.
Income Taxes
The effective income tax rate for the first quarter of fiscal 2009 decreased to 36.9% from 38.4% for the same time period in fiscal 2008.
Liquidity and Capital Resources
Our primary sources of funds are cash flows from operations and borrowings under our revolving credit facility. Our net cash used in operating activities was $1.5 million in the first quarter of fiscal 2009 as compared to cash provided by operations of $3.0 million in the first quarter of 2008. The change in operating cash flow, when comparing the two periods of each year, was primarily driven by our aggressive management of inventory levels partially offset by the timing of payments for accounts payable and accrued liabilities.
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Working capital increased to $155.6 million at May 2, 2009 from $148.1 million at May 3, 2008. This $7.5 million increase resulted primarily from an increase in cash and cash equivalents partially offset by a decrease in inventories. The current ratio at May 2, 2009 was 3.4 as compared to 3.3 at May 3, 2008. We had no long-term debt as of the end of either period.
We expended $3.2 million in cash during the first quarter of fiscal 2009 for the purchase of property and equipment, of which $2.9 million was for new stores.
During the first quarter of fiscal 2009, we opened ten new stores and we anticipate opening an additional five stores through the end of the year. Additional capital expenditures of approximately $6 million to $9 million will be made over the remainder of fiscal 2009, with $1 million to $3 million of this representing our anticipated investment in the remediation of our distribution center. The remaining capital expenditures will be incurred for the opening of new stores, store remodels and various other store improvements, along with continued investments in technology and normal asset replacement activities. We currently anticipate receiving an additional $1.0 million in landlord incentives through the end of fiscal 2009. 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 8,000 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 2009 are expected to average approximately $338,000. The average inventory investment in a new store is expected to range from $350,000 to $500,000 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 $62,000 per store in fiscal 2009.
We closed one store in the first quarter of fiscal 2009 and expect to close nine stores during the remainder of fiscal 2009. In connection with the 10 stores we plan on closing in fiscal 2009, we expect to incur $400,000 in store closing costs of which $140,000 was incurred during the first quarter. 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.
As of May 2, 2009, our unsecured credit agreement provided for up to $95.0 million in cash advances on a revolving basis and commercial and standby letters of credit. Borrowings under the revolving credit line are based on eligible inventory and the following covenants: (1) Total Shareholders' Equity, adjusted for the effect of any share repurchases, will not fall below that of the prior fiscal year-end; (2) the ratio of funded debt plus rent to EBITDA plus rent will not exceed 2.5 to 1.0; (3) total distributions for stock repurchases will not exceed $50.0 million; and (4) cash dividends will not reduce our Total Shareholders' Equity, adjusted for the effect of any share repurchases, below that of the prior fiscal year-end. We were in compliance with these covenants as of May 2, 2009. Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest at their discretion. As of May 2, 2009, there were no borrowings outstanding and letters of credit outstanding were $3.9 million. The amount available to us for additional borrowings was $87.8 million as of May 2, 2009.
Our $50.0 million share repurchase program will terminate on December 31, 2009, unless extended by our Board of Directors. 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 2, 2009, 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 2, 2009 was $21.9 million. No shares were repurchased during the first quarter of fiscal 2009.
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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, captionedSDI Industries, Inc. (Claimant and Counter-Respondent) v. Shoe Carnival, Inc. (Respondent and Counterclaimant), in which SDI sought payment of $1.2 million of unpaid retainage, $700,000 for services not yet billed, plus additional interest and legal fees. The retainage was withheld from progress billings for work performed on our distribution center and was recorded in accrued and other liabilities and fixed assets in our consolidated financial statements. We filed a Counterclaim and Response in this matter, denying SDI's claim, and seeking monetary damages of more than $3.0 million. We asserted that SDI breached our contract with SDI ("Contract") due to its failure to deliver our distribution center's material handling system pursuant to the specifications of the Contract.
On May 30, 2009, the parties entered into a settlement of the above matter. Under the terms of the settlement, SDI agreed to pay us $1.2 million towards the remediation of the distribution center's material handling system and to forego collection of the $1.2 million in unpaid retainage. In addition, both parties agreed to the dismissal of all pending litigation currently under arbitration. The $1.2 million will be paid in installments over seven years and is evidenced by a promissory note secured by a security interest in SDI's accounts receivable and by a standby letter of credit, renewable annually, in an amount not less than $200,000.
Although the investment we made in the distribution center will satisfy our distribution needs throughout fiscal 2009, we have not achieved the productivity that we expect will be required based on our plan for long-term store growth. We have contracted with a company to provide recommendations as to system upgrades to improve throughput. Modifications in the range of $1 million to $3 million are expected to be 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.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in that the interest payable under our credit facility is based on variable interest rates and therefore is affected by changes in market rates. We do not use interest rate derivative instruments to manage exposure to changes in market interest rates. We had no borrowings during the first quarter of fiscal 2009.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of May 2, 2009, 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 May 2, 2009 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 January 31, 2009 before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occur, our business, financial condition, results of operations or cash flows could be materially adversely affected. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
ITEM 6. EXHIBITS
| | | | Incorporated by Reference To |
| Exhibit | | | | | | | | Filing | | Filed |
| No. | | Description | | Form | | Exhibit | | Date | | Herewith |
| 3-A | | Restated Articles of Incorporation of Registrant | | 10-K | | 3-A | | 4/25/2002 | | |
| | | | | | | | | | |
| 3-B | | By-laws of Registrant, as amended to date | | 8-K | | 3-B | | 3/19/2007 | | |
| | | | | | | | | | |
| 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 | | 10-K | | 4(I) | | 4/29/1999 | | |
| | | | | | | | | | |
| | (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 | | 10-K | | 4(II) | | 4/28/2000 | | |
| | | | | | | | | | |
| | (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 | | 10-Q | | 4(III) | | 12/12/2000 | | |
| | | | | | | | | | |
| | (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 | | 10-K | | 4(IV) | | 4/25/2002 | | |
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EXHIBITS - Continued
| | | | Incorporated by Reference To |
| Exhibit | | | | | | | | Filing | | Filed |
| No. | | Description | | Form | | Exhibit | | Date | | Herewith |
| | (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 | | 10-K | | 4(V) | | 5/1/2003 | | |
| | | | | | | | | | |
| | (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 | | 10-K | | 4(VI) | | 4/14/2004 | | |
| | | | | | | | | | |
| | (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 | | 10-Q | | 4(VII) | | 6/8/2004 | | |
| | | | | | | | | | |
| | (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 | | 8-K | | 4(VIII) | | 4/11/2005 | | |
| | | | | | | | | | |
| | (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 | | 8-K | | 4(IX) | | 4/4/2006 | | |
| | | | | | | | | | |
| | (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 | | 8-K | | 4(X) | | 12/15/2006 | | |
| | | | | | | | | | |
| | (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 | | 10-Q | | 4(XI) | | 6/11/2008 | | |
| | | | | | | | | | |
| 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 | | | | | | | | X |
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EXHIBITS - Continued
| | | | Incorporated by Reference To |
| Exhibit | | | | | | | | Filing | | Filed |
| No. | | Description | | Form | | Exhibit | | Date | | Herewith |
| 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 | | | | | | | | X |
| | | | | | | | | | | |
| 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 | | | | | | | | X |
| | | | | | | | | | |
| 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 | | | | | | | | X |
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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, 2009 | | SHOE CARNIVAL, INC. |
| | | (Registrant) |
| | |
| | |
| | By: | /s/ W. Kerry Jackson | |
| | | W. Kerry Jackson |
| | | Executive Vice President and |
| | | Chief Financial Officer |
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