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 May 1, 1999
[ ] 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 Number)
incorporation or organization)
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, 13,259,286 shares outstanding as of June 1, 1999.
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 6. Exhibits and Reports on Form 8-K............... 12
Signature............................................... 13
2
SHOE CARNIVAL, INC.
CONDENSED BALANCE SHEETS
Unaudited
May 1, January 30, May 2,
1999 1999 1998
--------- ------------ ---------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents................ $ 2,598 $ 1,944 $ 2,080
Accounts receivable...................... 688 567 678
Merchandise inventories.................. 79,722 75,390 66,730
Deferred income tax benefit.............. 798 782 850
Other.................................... 845 1,222 929
-------- --------- ---------
Total Current Assets........................ 84,651 79,905 71,267
Property and equipment-net.................. 45,367 40,856 32,263
--------- --------- ---------
Total Assets................................ $ 130,018 $ 120,761 $ 103,530
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................... $ 19,119 $ 25,698 $ 10,481
Accrued and other liabilities............ 9,337 5,757 7,346
Current portion of long-term debt........ 671 782 647
--------- --------- ---------
Total Current Liabilities................... 29,127 32,237 18,474
Long-term debt.............................. 9,202 1,361 6,892
Deferred lease incentives................... 2,348 2,424 1,239
Deferred income taxes....................... 2,106 2,072 1,817
--------- --------- ---------
Total Liabilities........................... 42,783 38,094 28,422
--------- --------- ---------
Shareholders' Equity:
Common stock, $.01 par value, 50,000
shares authorized, 13,253, 13,179,
13,132 shares issued and outstanding
at May 1, 1999, January 30, 1999 and
May 2, 1998............................. 133 132 0
Additional paid-in capital............... 63,066 62,543 62,228
Retained earnings........................ 24,036 19,992 12,880
--------- --------- ---------
Total Shareholders' Equity.................. 87,235 82,667 75,108
--------- --------- ---------
Total Liabilities and Shareholders' Equity.. $ 130,018 $ 120,761 $ 103,530
========= ========= =========
See Notes to Condensed Financial Statements
3
SHOE CARNIVAL, INC.
CONDENSED STATEMENTS OF INCOME
Unaudited
Thirteen Thirteen
Weeks Ended Weeks Ended
May 1, 1999 May 2, 1998
----------- -----------
(In thousands, except per share data)
Net sales.............................. $ 78,111 $ 65,694
Cost of sales (including buying,
distribution and occupancy costs).... 53,253 45,020
---------- ----------
Gross profit........................... 24,858 20,674
Selling, general and
administrative expenses.............. 17,968 15,309
---------- ----------
Operating income....................... 6,890 5,365
Interest expense, net.................. 150 174
---------- ----------
Income before income taxes............. 6,740 5,191
Income taxes........................... 2,696 2,076
---------- ----------
Net income............................. $ 4,044 $ 3,115
========== ==========
Net income per share:
Basic................................ $ .31 $ .24
========== ==========
Diluted.............................. $ .30 $ .23
========== ==========
Average shares outstanding:
Basic................................ 13,206 13,108
========== ==========
Diluted.............................. 13,532 13,404
========== ==========
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 30, 1999.... 13,179 $ 132 $ 62,543 $ 19,992 $ 82,667
Employee stock purchase
plan purchases........... 4 40 40
Exercise of stock options... 70 1 483 484
Net income.................. 4,044 4,044
------ ------ ---------- -------- --------
Balance at May 1, 1999......... 13,253 $ 133 $ 63,066 $ 24,036 $ 87,235
====== ====== ========== ======== ========
See Notes to Condensed Financial Statements
5
SHOE CARNIVAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
Thirteen Thirteen
Weeks Ended Weeks Ended
May 1, 1999 May 2, 1998
----------- -----------
(In thousands)
Cash flows from operating activities:
Net income........................................ $ 4,044 $ 3,115
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 1,877 1,484
Loss on retirement of assets.................... 6 13
Deferred income taxes........................... 19 92
Other ......................................... (76) (69)
Changes in operating assets and liabilities:
Merchandise inventories....................... (4,333) (6,639)
Accounts receivable........................... (121) 103
Accounts payable and accrued liabilities...... (2,999) 3,172
Other......................................... 378 (95)
---------- ----------
Net cash (used in) provided by operating activities.. (1,205) 1,176
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment............... (6,394) (1,791)
Other............................................. 0 22
---------- ----------
Net cash used in investing activities................ (6,394) (1,769)
---------- ----------
Cash flows from financing activities:
Borrowings under line of credit................... 39,650 36,175
Payments on line of credit........................ (31,675) (35,275)
Payments on capital lease obligations............. (246) (182)
Proceeds from issuance of stock................... 524 384
---------- ----------
Net cash provided by financing activities............ 8,253 1,102
---------- ----------
Net increase in cash and cash equivalents............ 654 509
Cash and cash equivalents at beginning of period..... 1,944 1,571
---------- ----------
Cash and cash equivalents at end of period........... $ 2,598 $ 2,080
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during period for interest.............. $ 118 $ 169
Cash paid during period for income taxes.......... $ 74 $ 64
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 1998
Annual Report.
Note 2 - Long-Term Debt
During 1998, the Company had an unsecured $35 million credit agreement (the
"Credit Agreement") with a bank group. Borrowings are based on eligible
inventory and bear interest, at the Company's option, at the agent bank's prime
rate or the applicable London Inter-Bank Offered Rate (LIBOR) plus from 0.75% to
2%, depending on the Company's achievement of certain performance criteria. A
commitment fee of 0.25% per annum is charged on the unused portion of the first
$30 million of the bank group's commitment. The Credit Agreement contains
various restrictive and financial covenants, including the maintenance of
specific financial ratios and a limitation on the payment of dividends.
On April 16, 1999, the Credit Agreement was amended to increase the total credit
facility to $45 million and to extend the maturity date to March 31, 2001. The
amendment also adjusted certain economic terms and financial covenants.
Borrowings will now bear interest, at the Company's option, at the agent bank's
prime rate minus 0.5% or LIBOR plus from 0.75% to 1.5%, depending on the
Company's achievement of certain performance criteria. A commitment fee will be
charged, at the Company's option, at 0.3% per annum on the unused portion of the
bank group's commitment or 0.15% per annum of the total commitment. Certain
adjustments were made to the financial covenants including the elimination of
the limitation on the payment of dividends.
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 1, 1999 111 3 0 114 40,000 1,314,000 3.4%
May 2, 1998 92 3 0 95 46,000 1,067,000 7.0%
The following table sets forth the Company's results of operations expressed as
a percentage of net sales for the periods indicated:
Thirteen Thirteen
Weeks Ended Weeks Ended
May 1, 1999 May 2, 1998
----------- -----------
Net sales................................ 100.0% 100.0%
Cost of sales (including buying,
distribution and occupancy costs)...... 68.2 68.5
----------- -----------
Gross profit............................. 31.8 31.5
Selling, general and administrative
expenses............................... 23.0 23.3
----------- -----------
Operating income......................... 8.8 8.2
Interest expense......................... .2 .3
----------- -----------
Income before income taxes............... 8.6 7.9
Income taxes............................. 3.4 3.2
----------- -----------
Net income............................... 5.2% 4.7%
=========== ===========
Net Sales
Net sales increased $12.4 million to $78.1 million in the first quarter of 1999,
an 18.9% increase over net sales of $65.7 million in the comparable prior year
period. The increase was attributable to a 3.4% comparable store sales increase
and the sales generated by the 23 new stores opened in 1998 and 1999, partially
offset by the reduction in sales for the one store closed in 1998. Average
footwear unit prices and footwear unit sales in comparable stores increased 0.2%
and 3.1%, respectively. Sales of private label and non-name brand footwear
constituted 12.6% of total footwear sales in the first quarter of 1999 as
compared with 14.7% in the prior year quarter.
Gross Profit
Gross profit increased $4.2 million to $24.9 million in the first quarter of
1999, a 20.2% increase over gross profit of $20.7 million in the comparable
prior year period. The Company's gross profit margin increased to 31.8% from
31.5%. As a percentage of sales, the merchandise gross profit margin increased
0.4% which was partially offset by a 0.1% increase in buying, distribution and
occupancy costs.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.7 million to $18.0
million in the first quarter of 1999 from $15.3 million in the comparable prior
year period. As a percentage of sales, these expenses decreased 0.3% primarily
as a result of the comparable store sales increase. Total pre-opening costs for
the three stores opened in the first quarter of 1999 were $267,000 or 0.3% of
sales, as compared to $245,000 or 0.4% of sales, for the three stores opened in
the first quarter of 1998.
Interest Expense
The reduction in net interest expense to $150,000 in the first quarter of 1999
from $174,000 in the first quarter of 1998 resulted from reduced borrowings.
Income Taxes
The effective income tax rate of 40% in the first quarters of 1999 and 1998
differed from the statutory federal rates due primarily to state and local
income taxes, net of the federal tax benefit.
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 used in operating
activities was $1.2 million during the first quarter of 1999. The decrease
resulted primarily from an increase in inventories and a decrease in accounts
payable and accrued liabilities. Excluding changes in operating assets and
liabilities, cash provided by operating activities was $5.9 million in the first
quarter of 1999. The increase in merchandise inventories was primarily due to
seasonal fluctuations and the addition of three stores in the first quarter of
1999.
Working capital increased to $55.5 million at May 1, 1999 from $47.7 million at
January 30, 1999 and the current ratio was 2.9 to 1 as compared with 2.5 to 1 at
January 30, 1999. Long-term debt as a percentage of total capital was 9.5% at
May 1, 1999 and 1.6% at January 30, 1999. The increase in working capital and
long-term debt as a percent of total capital was primarily due to seasonal
fluctuations.
Capital expenditures were $6.4 million in the first quarter of 1999. Of these
expenditures, $2.3 million was incurred for new stores and $2.6 million was
incurred for the expansion of the existing distribution center. The remaining
capital expenditures in the first quarter of 1999 were primarily for the
remodeling of certain stores, merchandise display and signage enhancements and
improvements to computer systems.
The Company intends to open 28 stores in 1999, including the three stores opened
in the first quarter. Eleven stores are expected to be opened in the second
quarter and 14 stores in the third quarter. Three stores were opened in the
first quarter of 1998.
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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company's current store prototype utilizes between 12,000 and 15,000 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 $350,000, 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 $80,000 per store.
The Company's 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 May 1, 1999 were $8.0
million and $3.5 million, respectively. On April 16, 1999, the credit agreement
was amended to increase the facility by $10 million to allow for up to $45
million in cash advances and commercial letters of credit. The maturity date was
also extended to March 31, 2001.
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.
Impact of Year 2000
The "Year 2000 Issue" generally refers to computer systems that were designed
and developed using two digits, rather than four, to specify the year. As a
result, such systems that utilize a two digit date may not be able to
distinguish the year 2000 from the year 1900. This could result in erroneous
data or complete failure of some systems unless corrective actions are taken.
Management initiated a company wide program in 1998 to address the Year 2000
issue. The phases of the program include (1) creating awareness of the issues
through education and training; (2) assessing the extent of the problem and
determining resource requirements; (3) renovation of the systems by modifying,
upgrading or replacing affected systems; (4) validation of the renovations
through testing and implementation; and (5) contingency planning. The Company
has completed the awareness and assessment phases and is 85% complete on the
renovation phase. The testing phase is ongoing as hardware or system software is
modified, upgraded or replaced but is expected to be completed by the third
quarter of 1999. Revisions to existing business interruption contingency plans
to address specific issues related to the Year 2000 problem will also be
completed in the third quarter of 1999.
The Company estimates the total cost of the two year Year 2000 project to be
approximately $280,000, of which approximately $142,000 was incurred and
expensed in 1998 and $15,000 was incurred and expensed in the first quarter of
1999. Allocating existing resources rather than incurring incremental costs
should fund the majority of the estimated Year 2000 compliance costs.
The Company does not anticipate the costs of the Year 2000 project will have a
material adverse effect on the Company's financial position, results of
operations or cash flows in future periods. The anticipated impact and costs of
the Year 2000 project, as well as the date on which the Company expects to
complete the project, are based on management's best estimates using information
currently available and numerous assumptions about future events. However, there
can be no guarantee that the estimates will be achieved and actual results could
differ materially from those planned.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Formal inquiries are being made by the Company of its major suppliers and other
third-party entities with which it has business relations to obtain assurances
of their Year 2000 compliance. Appropriate contingency plans will be developed
in the event that a significant exposure is identified relative to the
dependencies on third-party systems.
However, there can be no assurance that the systems of other companies on which
the Company relies upon will be corrected in a timely manner, or that any such
failure would not have a material adverse effect on the Company.
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 as incurred. Therefore, the
Company's results of operations may be adversely affected in any quarter in
which the Company incurs pre-opening expenses related to the opening of new
stores.
The Company has three distinct selling periods: Easter, back-to-school and
Christmas.
11
SHOE CARNIVAL, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 1, 1999
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: June 14, 1999 SHOE CARNIVAL, INC.
(Registrant)
By: /s/ W. Kerry Jackson
W. Kerry Jackson
Vice President and
Chief Financial Officer
13