While occupancy costs increased on a year-over-year basis as a result of operating additional stores, we were able to offset these increases through cost saving initiatives within our buying and distribution functions resulting in a net expense savings of $514,000. This savings coupled with the increase in net sales resulted in us leveraging these costs by 0.6% as a percentage of sales.
Selling, general and administrative expenses increased $1.6 million in the first nine months of fiscal 2009 to $124.0 million, or 24.3% of sales; however, the sales gain for the first nine months of fiscal 2009 enabled us to leverage these costs, as a percentage of sales, by 0.6%. The increase in expense between the two comparative periods was primarily the result of a $2.1 million increase in employee benefits along with incurring an additional $1.6 million in incentive compensation. Included in employee benefits is our non-qualified deferred compensation plan. During the first nine months of fiscal 2008, we recorded a loss on investments for this plan of $890,000 due to the decline in the stock markets. For the first nine months of fiscal 2009, we recorded earnings on investments for this plan of $391,000 resulting in an increase in expense between the two comparative periods of $1.3 million. Even though we operated additional stores during the first nine months of fiscal 2009 compared to the prior year period, we were able to reduce store-level expenses. Expense reductions resulted primarily from decreases in depreciation and advertising and recording lower store closing costs.
Pre-opening costs included in selling, general and administrative expenses were $859,000, or 0.2% of sales, for the first nine months of fiscal 2009 as compared to $826,000, or 0.2% of sales, for the first nine months of fiscal 2008. We opened 16 stores in the first nine months of fiscal 2009 as compared to 22 stores in the first nine months 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 by store depending on the specific market and the promotional activities involved.
The portion of store closing costs included in selling, general and administrative expenses were $400,000, or 0.1% of sales, for the first nine months of fiscal 2009 as compared to $1.1 million, or 0.2% of sales, for the first nine months of fiscal 2008. We closed three stores during the first nine months of both fiscal 2009 and fiscal 2008 and incurred costs related to other planned closures. 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 expense of $109,000 in the first nine months of fiscal 2009 as compared to net interest income of $27,000 in the first nine months of the prior year. As returns available on short-term investments fell to record lows, we held our excess funds for the first seven months of fiscal 2009 in non-interest bearing deposit accounts to offset bank service fees, which are included in selling, general and administrative expenses.
The effective income tax rate for the first nine months of fiscal 2009 increased to 38.8% from 36.6% for the same time period in 2008. The increase in rate between the two periods was primarily due to the federal tax rate falling below 35% in fiscal 2008 as a result of lower projected income before tax. The annual effective income tax rate for fiscal 2009 is expected to be approximately 39.0% compared to 36.5% for fiscal 2008.
Liquidity and Capital Resources
Our primary sources of funds are cash flows from operations and borrowings under our revolving credit facility. Net cash provided by operations was $10.5 million in the first nine months of fiscal 2009 as compared to net cash provided by operations of $10.8 million in the first nine months of 2008. While the change in operating cash flow when comparing the two periods of each year was minimal, we did experience a significant change in inventory, accounts payable and income taxes between the two periods. Due to slowing sales trends during the first nine months of fiscal 2008, we reduced our average per-store inventories over prior year levels. We reacted to the increasing sales experienced during the fiscal 2009 back-to-school and early fall seasons by modestly increasing our inventories on a per-store basis. The increase in per-store inventory levels, along with operating additional stores, resulted in a significant shift in the use of cash when comparing the two periods. The resulting use of cash was mostly offset by the timing of payments for accounts payable, an increase in income taxes payable, and the increase in net income.
Working capital increased $19.2 million to $169.1 million at October 31, 2009 from $149.9 million at November 1, 2008 primarily as a result of our increase in cash and cash equivalents. Our strong earnings performance coupled with tightly controlling our inventory and fixed asset investments enabled us to increase our cash and cash equivalents by $18.1 million. The current ratio at October 31, 2009 was 3.5 as compared to 3.3 at November 1, 2008. We had no interest bearing long-term debt as of the end of either period.
During the first nine months of fiscal 2009, we expended $8.7 million in cash for the purchase of property and equipment. Of this expenditure, $6.3 million was used for new stores, store remodeling and store relocation projects. An additional $1.1 million was used to begin the remediation of our distribution center's material handling system. The remaining capital expenditures were used primarily for information technology and miscellaneous equipment purchases. We anticipate capital expenditures of approximately $1.3 million to $2.3 million will be made during the fourth quarter of fiscal 2009. We currently anticipate recognizing an additional $400,000 in landlord incentives through the end of fiscal 2009 to bring our total to $2.1 million for fiscal 2009.
During the first nine months of fiscal 2009, we opened 16 new stores averaging 9,700 square feet and have completed our new store openings for the fiscal year. On a per-store basis, the initial inventory investment averaged $484,000, capital expenditures averaged $359,000 and lease incentives received from landlords averaged $100,000. Pre-opening expenses such as advertising, salaries and supplies, have averaged approximately $55,000 per store.
We closed three stores during the first nine months of both fiscal years. We expect to close six stores during the fourth quarter of fiscal 2009 as compared to closing eight stores in the fourth quarter of fiscal 2008. We will continue to evaluate underperforming stores for possible closure in 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.
Our unsecured credit agreement provides for up to $95.0 million in cash advances and commercial and standby letters of credit. Borrowings under the revolving credit line are based on eligible inventory. The credit agreement contains 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 October 31, 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 October 31, 2009, there were no cash advances outstanding and letters of credit outstanding were $7.9 million. The amount available to us for additional borrowings was $87.1 million as of October 31, 2009.
During December 2006, the Board of Directors authorized a $50.0 million share repurchase program which will terminate on December 31, 2009. 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 October 31, 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 October 31, 2009 was $21.9 million. No shares have been repurchased since the fourth quarter of fiscal 2007.
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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 forego collection of the $1.2 million in unpaid retainage and to pay us $1.2 million towards the remediation of the distribution center's material handling system. The $1.2 million will be paid in installments over seven years and is evidenced by a promissory note secured by a standby letter of credit, renewable annually, in an amount not less than $200,000 and by a security interest in SDI's accounts receivable. In addition, both parties agreed to the dismissal of all pending claims currently under arbitration. The installment due on the promissory note within the next 12 months has been recorded in Accounts receivable in our consolidated financial statements. The remaining balance of the promissory note is recorded in Other as a non-current asset. SDI remitted the first scheduled payment prior to the due date of July 1, 2009.
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 another distribution logistics company to provide recommendations to improve throughput and have begun implementation of certain of these recommendations and will continue to make improvements in fiscal 2010.
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.
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 nine months of fiscal 2009.
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ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of October 31, 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 October 31, 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 | | 6/12/2009 | | |
| |
| 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: December 10, 2009 | | SHOE CARNIVAL, INC. |
| | | (Registrant) |
| |
| |
| | By:/s/ W. Kerry Jackson |
| | W. Kerry Jackson |
| | Executive Vice President and |
| | Chief Financial Officer |
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