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Dec. 5, 2019, 4:04 p.m. EST

10-Q: SHOE CARNIVAL INC

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors That May Affect Future Results

This quarterly report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: general economic conditions in the areas of the continental United States in which our stores are located and the impact of the ongoing economic crisis in Puerto Rico on sales at, and cash flows of, our stores located in Puerto Rico; the effects and duration of economic downturns and unemployment rates; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; our ability to generate increased sales at our stores; our ability to successfully navigate the increasing use of online retailers for fashion purchases and the impact on traffic and transactions in our physical stores; our ability to attract customers to our e-commerce website and to successfully grow our e-commerce sales; the potential impact of national and international security concerns on the retail environment; changes in our relationships with key suppliers; changes in the political and economic environments in, the status of trade relations with, and the impact of changes in trade policies and tariffs impacting, China and other countries which are the major manufacturers of footwear; the impact of competition and pricing; our ability to successfully manage and execute our marketing initiatives and maintain positive brand perception and recognition; changes in weather patterns, consumer buying trends and our ability to identify and respond to emerging fashion trends; the impact of disruptions in our distribution or information technology operations; the effectiveness of our inventory management; the impact of natural disasters on our stores, as well as on consumer confidence and purchasing in general; risks associated with the seasonality of the retail industry; the impact of unauthorized disclosure or misuse of personal and confidential information about our customers, vendors and employees, including as a result of a cyber-security breach; our ability to manage our third-party vendor relationships; our ability to successfully execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability to open new stores in a timely and profitable manner, including our entry into major new markets, and the availability of sufficient funds to implement our business plans; higher than anticipated costs associated with the closing of underperforming stores; the inability of manufacturers to deliver products in a timely manner; the impact of regulatory changes in the United States and the countries where our manufacturers are located; the resolution of litigation or regulatory proceedings in which we are or may become involved; our ability to meet our labor needs while controlling costs; and future stock repurchases under our stock repurchase program and future dividend payments. For a more detailed discussion of certain risk factors, see the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information to assist the reader in better understanding and evaluating our financial condition and results of operations. We encourage you to read this in conjunction with our Condensed Consolidated Financial Statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 as filed with the SEC.

Overview of Our Business

Shoe Carnival, Inc. is one of the nation's largest family footwear retailers, providing the convenience of shopping at any of our store locations or online at shoecarnival.com. Our stores combine competitive pricing with a fun and promotional, in-store marketing effort that encourages customer participation and injects fun and surprise into every shopping experience. We believe this fun and promotional atmosphere results in various competitive advantages, including increased multiple unit sales; the building of a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell-through of in-season goods. A similar customer experience is reflected in our e-commerce site through special promotions and limited time sales, along with relevant product stories featured on our home page.

Our objective is to be the destination retailer-of-choice for a wide range of consumers seeking value-priced, current season name brand and private label footwear. Our product assortment includes dress and casual shoes, sandals, boots and a wide assortment of athletic shoes for the entire family in four general categories - women's, men's, children's and athletics. In addition to footwear, our stores carry selected accessory items such as socks, belts, shoe care items, handbags, sport bags, backpacks and wallets. Our e-commerce site offers customers an opportunity to choose from a large selection of products in all of the same categories of footwear with a depth of sizes and colors that may not be available in our stores and introduces our concept to consumers who are new to Shoe Carnival in both existing and new markets.

Critical Accounting Policies

We use judgment in reporting our financial results. This judgment involves estimates based in part on our historical experience and incorporates the impact of the current general economic climate and company-specific circumstances. However, because future events and economic conditions are inherently uncertain, our actual results could differ materially from these estimates. Our accounting policies that require more significant judgments include those with respect to merchandise inventories, valuation of long-lived assets, insurance reserves, leases and income taxes. Other than our new accounting policy on leases, which we adopted in the first quarter of fiscal 2019 and is discussed in Note 7 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the accounting policies that require more significant judgment are discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

With the exception of our newly adopted accounting policy on leases, there have been no material changes to our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. See Note 3 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on recently issued accounting pronouncements.







        Results of Operations Summary Information
                                                          Number of Stores                         Store Square Footage
                                         Beginning                                   End of         Net            End          Comparable
        Quarter Ended                    Of Period       Opened        Closed        Period       Change        of Period      Store Sales
        May 4, 2019                             397             0             2          395       (22,000 )     4,246,000             (0.2 )%
        August 3, 2019                          395             0             2          393       (16,000 )     4,230,000              1.4 %
        November 2, 2019                        393             1             1          393         1,000       4,231,000              3.5 %
        Year-to-date                            397             1             5          393       (37,000 )     4,231,000              1.6 %
        May 5, 2018                             408             0             3          405       (31,000 )     4,360,000              1.3 %
        August 4, 2018                          405                           3          402       (36,000 )     4,324,000              6.7 %
        November 3, 2018                        402             3             3          402        (5,000 )     4,319,000              4.5 %
        Year-to-date                            408             3             9          402       (72,000 )     4,319,000              4.2 %
        


Comparable store sales for the periods indicated include stores that have been open for 13 full months after such store's grand opening 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. We include e-commerce sales in our comparable store sales. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores.

The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:







                                                   Thirteen               Thirteen             Thirty-nine            Thirty-nine
                                                 Weeks Ended            Weeks Ended            Weeks Ended            Weeks Ended
                                               November 2, 2019       November 3, 2018       November 2, 2019       November 3, 2018
        Net sales                                          100.0 %                100.0 %                100.0 %                100.0 %
        Cost of sales (including buying,
        distribution and
          occupancy costs)                                  69.1                   69.8                   69.6                   69.5
        Gross profit                                        30.9                   30.2                   30.4                   30.5
        Selling, general and administrative
        expenses                                            24.3                   24.3                   24.2                   24.4
        Operating income                                     6.6                    5.9                    6.2                    6.1
        Interest income                                     (0.1 )                 (0.1 )                 (0.1 )                  0.0
        Income tax expense                                   1.7                    1.5                    1.3                    1.5
        Net income                                           5.0 %                  4.5 %                  5.0 %                  4.6 %
        


Executive Summary for Third Quarter Ended November 2, 2019

During the third quarter of fiscal 2019, we achieved a comparable store sales increase of 3.5%, which was in addition to the 4.5% comparable store sales increase in the third quarter of fiscal 2018. Our broad-based sales growth, which was across all product categories, geographies, and sales channels, was primarily driven by non-athletic sales. Fiscal year 2019 marked the 17th consecutive year we have recognized a comparable store sales increase during the month of August, our peak back-to-school season. During the third quarter of fiscal 2019, our brick-and-mortar store and e-commerce traffic and store conversion increased, which also contributed to the $5.5 million increase in net sales year-over-year. We ended the quarter with inventory up 1.4% on a per-store basis as we continued to purchase inventory ahead of any new tariffs that might go into effect in the future.

Highlights for the third quarter of fiscal 2019 and a brief discussion of some key initiatives are as follows:

Net sales increased 2.0% to $274.6 million, compared to the third quarter last year.

Diluted earnings per share was a quarterly record of $0.94, a 23.7% increase over the third quarter of fiscal 2018.

Gross profit margin for the third quarter increased 0.7% to 30.9% compared to 30.2% in the third quarter of fiscal 2018. This was driven by an increase in sales of women's fashion product, which typically carry a higher margin, along with the leveraging effect of higher sales on lower distribution costs.

We purchased 521,800 shares of our common stock during the third quarter of fiscal 2019 at a total cost of $16.9 million.

We ended the quarter with $33.7 million in cash and cash equivalents and no outstanding debt.

We continue to invest in our Customer Relationship Management ("CRM") program, and our initial implementation of CRM was placed into service during the third quarter of fiscal 2019. We believe that our holistic approach to CRM will be a sales driver and that the data received and the insight our real estate team and merchants are gaining as a result of our CRM program will allow us to better merchandise our stores, market to specific customers and aid in identifying new store opportunities.

We believe early results of our CRM program have enabled us to grow our Shoe Perks customer loyalty membership to over 23 million members at the end of the third quarter of fiscal 2019, an 11% increase over the third quarter of the prior year. Additionally, we experienced a 61% increase in Gold membership status as of the end of the third quarter of fiscal 2019 compared to as of the end of the third quarter of the prior year. During the first nine months of fiscal 2019, Gold members spent on average over $15 more per transaction than basic members spent per transaction. As we continue to leverage our CRM capabilities, we believe we will continue to convert additional loyalty members to Gold status and grow our active shopper database.

We expect to open six to eight new stores in fiscal 2020 within our existing 35-state geographic footprint, leading to flat to slightly positive net store growth in fiscal 2020.

Results of Operations for the Third Quarter Ended November 2, 2019

Net Sales

Net sales increased $5.5 million to $274.6 million during the third quarter of fiscal 2019, a 2.0% increase over the prior year's third quarter net sales of $269.2 million. Of this change in net sales, $9.2 million was attributable to the 3.5% increase in comparable store sales and $1.2 million was attributable to the four new stores opened since the beginning of the third quarter of fiscal 2018. These increases were partially offset by a loss in sales of $4.2 million from the 13 stores closed over the same period and a decrease in sales of $0.7 million year-over-year attributable to our other non-comparable stores. The increase in comparable store sales, including e-commerce sales, was primarily driven by higher traffic and store conversion.

Gross Profit

Gross profit increased $3.5 million to $84.7 million during the third quarter of fiscal 2019 compared to gross profit of $81.2 million for the third quarter of fiscal 2018 primarily due to higher sales. Our gross profit margin increased to 30.9% compared to 30.2% in the third quarter of fiscal 2018. The increased profit margin was positively impacted by an increase in sales of women's non-athletic product, which typically carry a higher margin, lower distribution costs and the leveraging of expenses against a higher sales base.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.4 million in the third quarter of fiscal 2019 to $66.6 million compared to $65.2 million in the third quarter of fiscal 2018. As a percentage of sales, these expenses remained flat at 24.3% compared to the third quarter of fiscal 2018. Significant changes in selling, general and administrative expenses for the third quarter included increases in payroll, incentive compensation, employee benefits and store closing costs, which were partially offset by decreases in equity compensation, depreciation and advertising expenses and the impact of operating fewer stores during the quarter. Additionally, during the third quarter of fiscal 2018, we recorded a net gain of $911,000 associated with insurance recoveries related to our Puerto Rico operations, which reduced selling, general and administrative expenses in that year.

Store closing costs included in selling, general and administrative expenses were $639,000 in the third quarter of fiscal 2019 and $580,000 in the third quarter last year. We closed one store in the third quarter of 2019 and three stores in the third quarter of fiscal 2018. Included in store closing costs were non-cash impairments of fixed assets of $561,000 on three stores recorded during the third quarter of fiscal 2019. There were no impairments of long-lived assets recorded in the same prior year period.

Pre-opening expenses included in selling, general and administrative expenses were $43,000 in the third quarter of fiscal 2019 compared to $108,000 in the third quarter of fiscal 2018. We opened one new store in the third quarter of fiscal 2019 compared to three new stores in the third quarter of fiscal 2018. 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 in which 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.

Income Taxes

The effective income tax rate for the third quarter of fiscal 2019 was 24.9% as compared to 25.9% for the same period in fiscal 2018. The lower tax rate in the quarter was primarily driven by the reversal of a valuation allowance associated with our Puerto Rico operations.

Results of Operations for the Nine-Month Period Ended November 2, 2019

Net Sales

Net sales increased $1.7 million to $796.7 million for the nine-month period ended November 2, 2019, a 0.2% increase compared to net sales of $795.0 million for the nine-month period ended November 3, 2018. Of this change in net sales, $12.5 million was attributable to the 1.6% increase in comparable store sales and $3.9 million was attributable to the four new stores opened since the beginning of fiscal 2018. These increases were partially offset by a loss in sales of $12.4 million from the 19 stores closed over the same period and a decrease in sales of $2.3 million year-over-year attributable to our other non-comparable stores.

Gross Profit

Gross profit decreased $357,000 to $242.0 million during the first nine months of fiscal 2019 compared to gross profit of $242.3 million for the first nine months of fiscal 2018, as increased sales and lower merchandise costs were more than offset by higher occupancy costs. The gross profit margin for the first nine months of fiscal 2019 decreased to 30.4% from 30.5% in the comparable prior year period primarily due to the increase in occupancy costs resulting from higher property taxes and common area maintenance passed through from landlords. Additionally, occupancy expense was lower during the first nine months of fiscal 2018 as a result of a $1.0 million lease termination benefit recognized for two stores in Puerto Rico where the landlord failed to make contractually required repairs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1.5 million in the first nine months of fiscal 2019 to $192.5 million compared to $194.1 million in the same period last year. As a percentage of sales, these expenses decreased to 24.2% in the first nine months of fiscal 2019 from 24.4% in the first nine months of fiscal 2018. The overall decrease in selling, general and administrative expenses during the first nine months of fiscal 2019 was primarily due to a decrease in incentive and stock-based compensation, lower depreciation expense, lower store closing costs and the impact of operating fewer stores during the first nine months of fiscal 2019. These decreases were partially offset by higher store level payroll and benefit costs recognized in the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 and the net gain associated with insurance recoveries recognized in the first nine months of fiscal 2018.

Store closing costs included in selling, general and administrative expenses were $1.1 million in the first nine months of fiscal 2019 and $1.9 million in the first nine months of last year. We closed five stores in the first nine months of fiscal 2019 and nine stores in the first nine months of fiscal 2018. Included in store closing costs were non-cash impairments of fixed assets of $604,000 on four stores recorded during the first nine months of fiscal 2019. There were no impairments of long-lived assets recorded during the first nine months of fiscal 2018.

Pre-opening expenses included in selling, general and administrative expenses were $43,000 in the first nine months of fiscal 2019 and $112,000 in the first nine months of fiscal 2018. We opened one new store in the first nine months of fiscal 2019 compared to three new stores in the first nine months of fiscal 2018. 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 in which 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.

Income Taxes

The effective income tax rate for the first nine months of fiscal 2019 was 20.9% compared to 24.2% for the same period in fiscal 2018. The change in the effective tax rate for the first nine months of fiscal 2019 was primarily due to the third quarter reversal of a valuation allowance and a $1.9 million tax benefit related to the vesting of stock-based compensation recognized during the first quarter of fiscal 2019. Our provision for income tax expense is based on the current estimate of our annual effective tax rate and is adjusted as necessary for quarterly events. For the full year of fiscal 2019, we expect our tax rate to be approximately 21.3% compared to 24.3% last year. The reduction in our expected annual tax rate for fiscal 2019 is primarily the result of the reversal of the valuation allowance and the tax benefit related to the vesting of stock-based compensation described above.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents on hand, cash generated from operations and availability under our credit facility. We believe these resources will be sufficient to fund our cash needs, as they arise, for at least the next 12 months. Our primary uses of cash are for working capital, which are principally inventory purchases; store initiatives; potential dividend payments; potential share repurchases under our share repurchase program; the financing of capital projects, including investments in new systems and various other commitments and obligations.

Cash Flow - Operating Activities

Our net cash provided by operating activities was $28.0 million in the first nine months of fiscal 2019 compared to $37.8 million in the first nine months of fiscal 2018. These amounts reflect our income from operations adjusted for non-cash items and working capital changes. The $9.7 million decrease in operating cash flow was primarily due to the timing of payments for inventory and payments related to developing our CRM and order management projects, which are hosted arrangements. The current ratio was 2.6 as of November 2, 2019 compared to 4.2 as of November 3, 2018. This decrease was primarily due to classifying a portion of our operating lease liabilities as current in fiscal 2019 due to the adoption of the new lease accounting guidance.

Cash Flow - Investing Activities

Our cash outflows for investing activities are primarily for capital expenditures. During the first nine months of fiscal 2019, we expended $15.1 million for the purchase of property and equipment, of which approximately $7 million was for the purchase of our corporate headquarters and the remainder was for remodels of existing stores, investments in technology and normal asset replacement activities. During the first nine months of fiscal 2018, we expended $5.0 million for the purchase of property and equipment, primarily related to remodels of existing stores, investments in technology and normal asset replacement activities.

Cash Flow - Financing Activities

Our cash outflows for financing activities were primarily for cash dividend payments, share repurchases and payments on our credit facility described below. Shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of equity awards. Our cash inflows from financing activities have represented purchases under our Employee Stock Purchase Plan and borrowings under our credit facility.

During the first nine months of fiscal 2019, net cash used in financing activities was $46.3 million compared to $42.8 million in the first nine months of fiscal 2018. The increase in net cash used in financing activities was primarily due to a $10.7 million increase for shares withheld upon the vesting of equity awards and an $873,000 increase in dividends paid during the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018, partially offset by a $8.1 million decrease in common stock repurchased in the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018.

Capital Expenditures

Capital expenditures for fiscal 2019, including actual expenditures during the first nine months, are expected to be between $18 million and $19 million, with approximately $11 million to be used for one new store, relocations, remodels and the purchase of our corporate headquarters, which we purchased in the first quarter of fiscal 2019 for $7 million. The remaining capital expenditures are expected to be, or have been, incurred for other store improvements, continued investments in technology and normal asset replacement activities. Lease incentives to be received from landlords during fiscal 2019, including actual amounts received during the first nine months, are expected to be approximately $1.9 million. The actual amount of cash required for capital expenditures for store operations depends in part on the number of new stores opened and relocated, the amount of lease incentives, if any, received from landlords and the number of stores remodeled.

Store Openings and Closings

Increasing market penetration by opening new stores has historically been a key component of our growth strategy, and our focus continues to be on generating positive long-term financial performance for our store portfolio. As we leverage customer data from our CRM program, and as more attractive real estate opportunities become available, we will continue to pursue opportunities for brick-and-mortar store growth across existing large and mid-size markets. In fiscal 2020, we expect to open six to eight new stores within our existing 35-state geographic footprint, and we expect flat to slightly positive net store growth. The opening of new stores is 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. We utilize a formal review process in our evaluation of potential new store sites as well as for decisions surrounding leases on existing store locations. Our approach is both qualitative and quantitative in nature. We look to continually enhance this process with tools such as real estate software used for portfolio analysis that aid in identifying . . .

Dec 05, 2019

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