UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 1, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 0-21360
Shoe Carnival, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1736614
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
8233 Baumgart Road, Evansville, Indiana 47711
(Address of principal executive offices) (Zip Code)
(812) 867-6471
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value, 13,168,670 shares outstanding as of September 1,
1998.
SHOE CARNIVAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Part I Financial Information
Item 1 - Financial Statements (Unaudited)
Condensed Balance Sheets ................................. 3
Condensed Statements of Income............................ 4
Condensed Statement of Shareholders' Equity............... 5
Condensed Statements of Cash Flows........................ 6
Notes to Condensed Financial Statements................... 7
Item 2 - Management's Discussion and Analysis................ 8-11
Part II Other Information
Item 4. Submission of Matters to Vote of Security Holders.... 12
Item 6. Exhibits and Reports on Form 8-K.................... 12
Signature.................................................... 13
2
SHOE CARNIVAL, INC.
CONDENSED BALANCE SHEETS
Unaudited
August 1, January 31, August 2,
1998 1998 1997
--------- ----------- ---------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents................ $ 2,550 $ 1,571 $ 1,902
Accounts receivable...................... 721 781 852
Notes receivable from shareholders....... 22 22
Merchandise inventories.................. 77,023 59,444 68,819
Deferred income tax benefit.............. 802 933 483
Other.................................... 1,232 834 1,220
--------- -------- ---------
Total Current Assets........................ 82,328 63,585 73,298
Property and equipment-net.................. 34,639 31,969 31,451
--------- -------- ---------
Total Assets................................ $ 116,967 $ 95,554 $ 104,749
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................... $ 21,363 $ 9,521 $ 14,960
Accrued and other liabilities............ 5,806 4,487 4,335
Current portion of long-term debt........ 681 688 717
--------- -------- ---------
Total Current Liabilities................... 27,850 14,696 20,012
Long-term debt.............................. 7,549 6,133 14,355
Deferred lease incentives................... 1,478 1,308 1,404
Deferred income taxes....................... 1,924 1,808 1,207
--------- -------- ---------
Total Liabilities........................... 38,801 23,945 36,978
--------- -------- ---------
Shareholders' Equity:
Common stock, $.01 and no par value,
50,000 shares authorized, 13,169,
13,088, 13,045 shares issued and
outstanding at August 1, 1998,
January 31, 1998 and August 2, 1997..... 132 0 0
Additional paid-in capital............... 62,332 61,844 61,616
Retained earnings........................ 15,702 9,765 6,155
--------- -------- ---------
Total Shareholders' Equity.................. 78,166 71,609 67,771
--------- -------- ---------
Total Liabilities and Shareholders' Equity... $ 116,967 $ 95,554 $ 104,749
========= ======== =========
See Notes to Condensed Financial Statements
3
SHOE CARNIVAL, INC.
CONDENSED STATEMENTS OF INCOME
Unaudited
Thirteen Thirteen Twenty-six Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In thousands, except per share data)
Net sales.................. $ 68,104 $ 62,393 $ 133,798 $ 121,721
Cost of sales (including
buying, distribution and
occupancy costs)......... 47,554 44,271 92,574 85,269
--------- --------- ---------- ----------
Gross profit............... 20,550 18,122 41,224 36,452
Selling, general and
administrative expenses.. 15,740 14,575 31,049 29,619
--------- --------- ---------- ----------
Operating income........... 4,810 3,547 10,175 6,833
Interest expense, net...... 106 247 280 478
--------- --------- ---------- ----------
Income before income taxes. 4,704 3,300 9,895 6,355
Income taxes............... 1,882 1,337 3,958 2,574
--------- --------- ---------- ----------
Net income................. $ 2,822 $ 1,963 $ 5,937 $ 3,781
========= ========= ========== ==========
Net income per share:
Basic.................. $ .21 $ .15 $ .45 $ .29
========= ========= ========== ==========
Diluted................ $ .21 $ .15 $ .44 $ .29
========= ========= ========== ==========
Average shares outstanding:
Basic.................. 13,149 13,042 13,128 13,038
========= ========= ========== ==========
Diluted................ 13,539 13,286 13,472 13,170
========= ========= ========== ==========
See Notes to Condensed Financial Statements
4
SHOE CARNIVAL, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
Unaudited
Common Stock Additional
------------ Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ---------- --------- --------
(In thousands)
Balance at January 31, 1998..... 13,088 $ 0 $ 61,844 $ 9,765 $ 71,609
Employee stock purchase
plan purchases.......... 7 69 69
Exercise of stock options.... 74 551 551
Increase in par value........ 132 (132)
Net income................... 5,937 5,937
------ ----- -------- -------- --------
Balance at August 1, 1998....... 13,169 $ 132 $ 62,332 $ 15,702 $ 78,166
====== ===== ======== ======== ========
See Notes to Condensed Financial Statements
5
SHOE CARNIVAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
Twenty-six Twenty-six
Weeks Ended Weeks Ended
August 1, August 2,
1998 1997
----------- -----------
(In thousands)
Cash flows from operating activities:
Net income.......................................... $ 5,937 $ 3,781
Adjustments to reconcile net income to net
cash provided (used in) by operating activities:
Depreciation and amortization..................... 2,993 2,840
Loss on retirement of assets...................... 235 190
Deferred income taxes............................. 246 68
Compensation for forgiveness of debt.............. 0 158
Other ........................................... (150) (54)
Changes in operating assets and liabilities:
Merchandise inventories......................... (17,578) (9,579)
Accounts receivable............................. 60 64
Accounts payable and accrued liabilities........ 13,162 2,135
Other........................................... (399) (315)
----------- ----------
Net cash provided by (used in) operating activities.... 4,506 (712)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment................. (5,422) (3,850)
Lease incentives.................................... 319 0
Other............................................... 22 16
----------- ----------
Net cash used in investing activities.................. (5,081) (3,834)
----------- ----------
Cash flows from financing activities:
Borrowings under line of credit..................... 63,425 67,425
Payments on line of credit.......................... (62,125) (62,325)
Payments on capital lease obligations............... (366) (337)
Proceeds from issuance of stock..................... 620 60
----------- ----------
Net cash provided by financing activities.............. 1,554 4,823
----------- ----------
Net increase in cash and cash equivalents.............. 979 277
Cash and cash equivalents at beginning of period....... 1,571 1,625
----------- ----------
Cash and cash equivalents at end of period............. $ 2,550 $ 1,902
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during period for interest................ $ 312 $ 473
Cash paid during period for income taxes............ $ 4,020 $ 2,379
Supplemental disclosure of noncash investing activities:
Capital lease obligations incurred.................. $ 474 $ 0
See Notes to Condensed Financial Statements
6
SHOE CARNIVAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
Note 1 - Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments necessary to present fairly the financial
position of the Company and the results of its operations and its cash flows for
the periods presented. Certain information and disclosures normally included in
notes to financial statements have been condensed or omitted according to the
rules and regulations of the Securities and Exchange Commission, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year.
It is suggested that these financial statements be read in conjunction with the
financial statements and financial notes thereto included in the Company's 1997
Annual Report.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Number of Stores Store Square Footage Comparable
---------------- -------------------- Store
Beginning End of Net End Sales
Quarter Ended Of Period Opened Closed Period Change of Period Increase
- ------------- --------- ------ ------ ------ ------ --------- ----------
May 2, 1998 92 3 0 95 46,000 1,067,000 7.0%
August 1, 1998 95 7 0 102 85,000 1,152,000 2.9%
Year-to-date 92 10 0 102 131,000 1,152,000 4.9%
May 3, 1997 93 0 2 91 (19,000) 1,007,000 4.4%
August 2, 1997 91 0 0 91 5,000 1,012,000 8.8%
Year-to-date 93 0 2 91 (14,000) 1,012,000 6.0%
The following table sets forth the Company's results of operations expressed as
a percentage of net sales for the periods indicated:
Thirteen Thirteen Twenty-six Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales.................... 100.0% 100.0% 100.0% 100.0%
Cost of sales (including
buying, distribution and
occupancy costs)........... 69.8 70.9 69.2 70.1
----------- ----------- ----------- -----------
Gross profit................. 30.2 29.1 30.8 29.9
Selling, general and
administrative expenses... 23.1 23.4 23.2 24.3
----------- ----------- ----------- -----------
Operating income............. 7.1 5.7 7.6 5.6
Interest expense............. .2 .4 .2 .4
----------- ----------- ----------- -----------
Income before income taxes... 6.9 5.3 7.4 5.2
Income taxes................. 2.8 2.1 3.0 2.1
----------- ----------- ----------- -----------
Net income................... 4.1% 3.2% 4.4% 3.1%
=========== =========== =========== ===========
Net Sales
Net sales increased $5.7 million to $68.1 million in the second quarter of 1998,
a 9.2% increase over net sales of $62.4 million in the comparable prior year
period. The increase was attributable to a 2.9% comparable store sales increase
and the sales generated by the 14 new stores opened in 1997 and 1998, partially
offset by the reduction in sales for the five stores closed in 1997. The
comparable store sales increase was supported with increases in the majority of
the product categories. Average footwear unit prices in comparable stores
increased 9.4% while footwear unit sales decreased 5.6%. Sales of private label
and non-name brand footwear constituted 14.9% of total footwear sales in the
second quarter of 1998 as compared with 17.7% in the prior year quarter.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net sales increased $12.1 million to $133.8 million in the first half of 1998, a
9.9% increase over net sales of $121.7 million in the comparable prior year
period. The increase was attributable to a 4.9% comparable store sales increase
and the sales generated by the 14 new stores opened in 1997 and 1998, partially
offset by the reduction in sales for the five stores closed in 1997. The
comparable store sales increase was supported with increases in all major shoe
categories. Average footwear unit prices in comparable stores increased 7.9%
while footwear unit sales decreased 2.5%. Sales of private label and non-name
brand footwear constituted 14.8% of total footwear sales in the first half of
1998 as compared with 17.2% in the prior year.
Gross Profit
Gross profit increased $2.4 million to $20.6 million in the second quarter of
1998, a 13.4% increase over gross profit of $18.1 million in the comparable
prior year period. The Company's gross profit margin increased to 30.2% from
29.1%. As a percentage of sales, the merchandise gross profit margin increased
1.0% and buying, distribution and occupancy costs decreased .1%.
Gross profit increased $4.8 million to $41.2 million in the first half of 1998,
a 13.1% increase over gross profit of $36.4 million in the comparable prior year
period. The Company's gross profit margin increased to 30.8% from 29.9%. As a
percentage of sales, the merchandise gross profit margin increased .5% and
buying, distribution and occupancy costs decreased .4%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.2 million to $15.7
million in the second quarter of 1998 from $14.6 million in the comparable prior
year period. As a percentage of sales, these expenses decreased .3% primarily as
a result of the comparable store sales increase and relatively flat
administrative expenses. Total pre-opening costs for the seven stores opened in
the second quarter of 1998 were $576,000 or .8% of sales. No stores were opened
and consequently no pre-opening costs were incurred in the second quarter of
1997.
Selling, general and administrative expenses increased $1.4 million to $31
million in the first half of 1998 from $29.6 million in the comparable prior
year period. As a percentage of sales, these expenses decreased 1.1% primarily
as a result of the comparable store sales increase and a non-recurring charge in
the first quarter of 1997 of $650,000 related to the retirement of the former
chief executive officer. Total pre-opening costs for the ten stores opened in
the first half of 1998 were $821,000 or .6% of sales. No stores were opened and
consequently no pre-opening costs were incurred in the first half of 1997.
Interest Expense
The reduction in net interest expense in the second quarter and the first six
months of 1998 as compared with in the second quarter and the first six months
of 1997 resulted from a combination of reduced borrowings and lower interest
rates.
Income Taxes
The effective income tax rate of 40% and 40.5% in the second quarters and the
first six months of 1998 and 1997, respectively, differed from the statutory
federal rates due primarily to state and local income taxes, net of the federal
tax benefit.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
The Company's primary sources of funds are cash flows from operations and
borrowings under its revolving credit facility. Net cash provided by operating
activities was $4.5 million during the first half of 1998. Excluding changes in
operating assets and liabilities, cash provided by operating activities was $9.3
million in the first half of 1998. An increase in merchandise inventories of
$17.6 million was partially offset by a $13.2 million increase in accounts
payable and accrued liabilities. The increase in merchandise inventories was
primarily due to seasonal fluctuations and the net increase of 11 stores over
the comparable period in 1997.
Working capital increased to $54.5 million at August 1, 1998 from $48.9 million
at January 31, 1998 and the current ratio was 3 to 1 at August 1, 1998 as
compared with 4.3 to 1 at January 31, 1998. Long-term debt as a percentage of
total capital was 8.8% at August 1, 1998, compared to 7.9% at January 31, 1998.
The increase in working capital and long term debt as a percent of total capital
was primarily due to seasonal fluctuations.
Capital expenditures were $5.9 million in the first half of 1998 (including
$474,000 of capital lease assets). Of these expenditures, approximately $4.2
million was incurred for new stores and the relocation of two existing stores.
The remaining capital expenditures in the first half of 1998 were primarily for
merchandise display and signage enhancements and technological improvements in
the stores.
The Company intends to open approximately 19 stores in 1998, including the ten
stores opened in the first half. Three stores were opened in the first quarter
and seven in the second quarter. The remaining nine stores for 1998 will be
opened primarily in the third quarter. No stores were opened in the first half
of 1997 and two stores were closed.
The actual amount of the Company's cash requirements for capital expenditures
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 the Company targets for expansion. The Company's current prototype
utilizes between 12,000 and 18,000 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 is expected to average
approximately $400,000, including point-of-sale equipment which is generally
acquired through equipment leasing transactions. The average inventory
investment in a new store is expected to range from $550,000 to $850,000,
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, supplies
and utilities, are expected to average approximately $70,000 per store.
The Company's $35 million credit facility provides for a combination of cash
advances on a revolving basis and the issuance of commercial letters of credit.
Borrowings under the revolving credit line are based on eligible inventory.
Borrowings and letters of credit outstanding under this facility at August 1,
1998 were $7 million and $6.2 million, respectively.
The Company anticipates that its existing cash and cash flow from operations,
supplemented by borrowings under the credit facility will be sufficient to fund
its planned expansion and other operating cash requirements for at least the
next 12 months.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Impact of Year 2000
The Company has invested significant resources in the latest information
technologies over the past five years and therefore has minimized the effect of
the Year 2000 problem. Management initiated a company wide program to evaluate
all computer systems and applications and has determined the adjustments
necessary to become Year 2000 compliant. It is anticipated that existing
internal resources will be sufficient to correct any internal systems
deficiencies by the end of fiscal 1998 at an estimated cost of $150,000. The
Company is currently making inquiries of its major suppliers and other
third-party entities with which it has business relations and is obtaining
assurances of their Year 2000 compliance. However, there can be no assurance
that the systems of other companies, on which the Company's systems rely, also
will be timely corrected, or that any such failure to correct such systems by
another company would not have a material adverse effect on the Company's
systems. Contingency plans are currently being developed to be implemented in
the event any information technology system, non-information technology system,
third party or supplier is not Year 2000 compliant in a timely manner.
Seasonality
The Company's 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 of a new store are charged to expense in the month the store is opened.
Therefore, the Company's results of operations may be adversely affected in any
quarter in which the Company opens new stores.
The Company has three distinct selling periods: Easter, back-to-school and
Christmas.
Factors That May Effect Future Results
This report contains certain forward looking statements that involve a number of
risks and uncertainties. Among the factors that could cause actual results to
differ materially are the following: general economic conditions in the areas of
the United States in which the Company's stores are located; changes in the
overall retail environment and more specifically in the apparel and footwear
retail sectors; the impact of competition, weather patterns, consumer buying
trends and the ability of the Company to identify and respond to emerging
fashion trends; the availability of desirable store locations and management's
ability to negotiate acceptable lease terms and open new stores in a timely
manner; and changes in the political and economic environments in the People's
Republic of China, where most of the Company's private label products are
manufactured, and the continued favorable trade relationships between China and
the United States.
11
SHOE CARNIVAL, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The annual meeting of the common shareholders of the Company was held
June 11, 1998.
Election of Director
Mark L. Lemond and William E. Bindley were each elected at the annual
meeting to serve as a Director of the Company for a three year term.
Mr. Lemond received 11,084,043 votes in favor of his election and
43,450 against. Mr. Bindley received 11,081,493 votes in favor of his
election and 46,000 against.
Other Matters Voted Upon at the Meeting
Deloitte & Touche LLP was appointed as auditor for the Company for
1998. 11,116,002 votes were cast in favor, 1,125 votes were cast
against and 10,366 abstentions were recorded with respect to such
appointment.
Shareholders approved an amendment to the Restated Articles of
Incorporation of the Company to establish a par value of $.01 per
share for the Common Stock and Preferred Stock of the Company.
11,073,170 votes were cast in favor, 3,725 votes were cast against,
32,884 abstentions and 17,714 broker non-votes were recorded with
respect to such approval.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3-A (i)Articles of Amendment of Restated Articles of Incorporation
of Registrant
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 1,
1998.
12
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: September 10, 1998 SHOE CARNIVAL, INC.
(Registrant)
By: /s/ W. Kerry Jackson
W. Kerry Jackson
Vice President and
Chief Financial Officer
13