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March 25, 2022, 4:22 p.m. EDT


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The following discussion of our financial condition and results of operations (the "MD&A") should be read together with our consolidated financial statements and notes to those statements included in PART II, ITEM 8 of this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses fiscal 2021 and fiscal 2020 and year-over-year comparisons between fiscal 2021 and fiscal 2020. A discussion of fiscal 2019 and year-over-year comparisons between fiscal 2020 and fiscal 2019 that are not included in this Annual Report on Form 10-K can be found in PART II, ITEM 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021, filed with the United States Securities and Exchange Commission on March 26, 2021. However, given the significant impact of the COVID-19 pandemic on our fiscal 2020 results, we have included certain comparisons in this MD&A between fiscal 2021 and fiscal 2019 to provide further context regarding our fiscal 2021 results of operations. At the end of this section of this Annual Report on Form 10-K, we have included historical data for the past five fiscal years to facilitate trend analysis of key data reported in our consolidated financial statements and other select operating data.

Our fiscal year is a 52/53 week year ending on the Saturday closest to January

Overview of Our Business

Shoe Carnival, Inc. is one of the nation's largest family footwear retailers. On December 3, 2021, we began operating under two banners: Shoe Carnival and Shoe Station. Our objective is to be the omnichannel retailer-of-choice for on-trend branded and private label footwear for the entire family. Our product assortment, whether shopping in a physical store or on our e-commerce platform, includes dress, casual, and work shoes, sandals, boots and a wide assortment of athletic shoes. Our typical physical store carries shoes in two general categories - athletics and non-athletics with subcategories for men's, women's, and children's, as well as a broad range of accessories. In addition to our physical stores, our e-commerce platform offers customers the same assortment of merchandise in all categories of footwear with expanded options in certain instances.

Our stores under the Shoe Carnival banner combine competitive pricing with a high-energy in-store environment that encourages customer participation. Footwear in our Shoe Carnival physical stores is organized by category and brand, creating strong brand statements within the aisles. These brand statements are underscored by branded signage on endcaps and in-line signage throughout the store. Our signage may highlight a vendor's product offerings or sales promotions, or may highlight seasonal or lifestyle statements by grouping similar footwear from multiple vendors. Approximately 160 of our Shoe Carnival stores have athletic shops that highlight leading athletic brands. We expect to continue growing our "athletic shop" in-store concept across our fleet in the years ahead.

The addition of the Shoe Station banner and retail locations creates a complementary retail platform to serve a broader family footwear customer base across both urban and suburban demographics. The Shoe Station concept targets a more affluent family footwear customer and has a strong track record of capitalizing on emerging footwear fashion trends and introducing new brands. Due to the larger average size of our Shoe Station stores and the targeted customer, these locations provide for a primary destination shopping experience.

We believe our distinctive shopping experiences give us 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.

Acquisition of Shoe Station

On December 3, 2021, we acquired substantially all of the assets of Shoe Station, a privately-held, family-owned shoe retailer. The Shoe Station assets were acquired for $70.7 million, inclusive of customary adjustments which are not yet finalized, and funded with cash on hand. We are continuing to operate the 21 locations acquired under the Shoe Station banner. Shoe Station contributed net sales of $16.6 million during the period from the acquisition date through January 29, 2022. We incurred acquisition and integration-related charges of $4.3 million ($3.2 million after tax, or $0.11 on a diluted per share basis) during fiscal 2021. These charges were comprised of non-recurring expense related

to the fair value adjustment to acquisition-date inventory of $1.1 million recorded in cost of goods sold and $3.2 million of transaction costs and integration-related charges recorded in selling, general, and administrative expenses. See Note 3 - "Acquisition of Shoe Station" in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for additional information on the acquisition.

Comparable Store Sales

Comparable store sales is a key performance indicator for us. Comparable store sales include stores that have been open for 13 full months after such stores' acquisition or grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores recently opened, acquired or closed are not included in comparable store sales. We generally include e-commerce sales in our comparable store sales as a result of our omnichannel retailer strategy. Due to our omnichannel retailer strategy, we view e-commerce sales as an extension of our physical stores. Similar to our physical stores, e-commerce platforms that are acquired will not be included in comparable store sales for 13 months after the acquisition of the platform. Our method for calculating comparable store sales for fiscal 2021, therefore, does not include any sales activity from Shoe Station.

Stock Split

The shares outstanding and net income per share information throughout this MD&A has been adjusted retroactively for all periods presented as a result of a two-for-one stock split of the outstanding shares of our common stock held by shareholders of record on July 6, 2021 that was completed on July 19, 2021. See Note 2 - "Summary of Significant Accounting Policies" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for additional information on the stock split.

Information regarding the COVID-19 Coronavirus Pandemic ("COVID-19")

We continue to closely monitor and manage the impact of the COVID-19 pandemic, and the safety and well-being of our customers, employees and business partners remains a top priority. The COVID-19 pandemic has significantly impacted, and is expected to continue to impact, our operations, supply chains, distribution processes, and overall economic conditions and consumer spending for the foreseeable future.

In response to the COVID-19 pandemic, all of our physical stores were temporarily closed effective March 19, 2020. Our e-commerce platform continued to operate, and our e-commerce sales increased significantly in fiscal 2020 as customers shifted purchases to our online channel. We began reopening our physical stores in accordance with applicable public health guidelines in late April 2020. Thus, substantially all of our physical stores were closed for approximately 50% of the first fiscal quarter of 2020. By the beginning of the second quarter of fiscal 2020, approximately 50% of our stores were reopened, and by early June 2020, substantially all of our stores had reopened. We did not have any stores closed as of January 29, 2022 or for extended periods during fiscal 2021 due to the pandemic.

Executive Summary

Fiscal 2021 was a record-breaking year for us. Results in fiscal 2021 were the highest in terms of net sales, gross profit, operating income and diluted net income per share in our history. For each of these financial metrics, the first three quarters of fiscal 2021 set consecutive all-time records and the fourth quarter of fiscal 2021 set a record for that specific quarter. The diluted net income per share of $5.42 earned in fiscal 2021, which included the Shoe Station acquisition-related charges incurred during the fourth quarter of fiscal 2021, exceeded the diluted net income per share earned during the last six fiscal years combined.

Comparable store sales in fiscal 2021 increased 35.3% compared to fiscal 2020 and increased 28.3% compared to fiscal 2019.

We believe these record-breaking results were driven by the following:

During fiscal 2021, physical store traffic increased 37.5% compared to fiscal 2020 and was slightly above traffic in fiscal 2019. The increased store traffic, combined with increased conversion rates, resulted in an increased number of converted customers, compared to both prior year periods.

All of our major product categories had comparable store sale increases ranging from low to mid double digits compared to fiscal 2020 and fiscal 2019. These increases were driven by higher average per unit prices across all categories and, overall, more units sold.

Highlights for fiscal 2021 and a brief discussion of some key initiatives follow:

Fiscal 2022 Plans

Following is a summary of certain strategic initiatives and goals for fiscal 2022:

Results of Operations

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

                                                              2021        2020        2019
        Net sales                                              100.0 %     100.0 %     100.0 %
        Cost of sales (including buying, distribution, and
          occupancy costs)                                      60.4        71.3        69.9
        Gross profit                                            39.6        28.7        30.1
        Selling, general and administrative expenses            24.0        26.5        24.9
        Operating income                                        15.6         2.2         5.2
        Interest income                                         (0.0 )       0.0        (0.1 )
        Interest expense                                         0.0         0.0         0.0
        Income before income taxes                              15.6         2.2         5.3
        Income tax expense                                       4.0         0.6         1.2
        Net income                                              11.6 %       1.6 %       4.1 %

Fiscal 2021 Compared to Fiscal 2020

Net Sales

Net sales were a record $1.33 billion during fiscal 2021 and increased 36.2% compared to fiscal 2020 and 28.3% compared to fiscal 2019. Comparable stores sales increased 35.3% compared to fiscal 2020. Sales generated from our comparable physical stores increased 45.8% in fiscal 2021 compared to fiscal 2020 and 20.1% compared to fiscal 2019. Sales generated from the Shoe Carnival branded e-commerce platform decreased 10.3% compared to fiscal 2020 due to the return of in-store shopping. E-commerce sales in fiscal 2021 were 146.6% higher than sales in fiscal 2019. E-commerce sales were approximately 12% of merchandise sales in fiscal 2021, compared to 19% in fiscal 2020 and 6% in fiscal 2019.

Net sales were positively impacted by continued demand for our merchandise as result of our merchandise selection, the continued easing of COVID-19 restrictions and customers returning to a more normal lifestyle, including going back to work and in-person learning, and the economic impact of consumer-based government stimulus. Net sales in fiscal 2021 were also favorably impacted by increased average transaction price and more units sold compared to fiscal 2020, with store traffic slightly above the pre-pandemic levels experienced in fiscal 2019. The increase in average transaction price was primarily driven by our more focused promotional activity.

The temporary closure of our physical stores for approximately 50% of the first quarter of fiscal 2020 as a result of the COVID-19 pandemic, with some stores closed through May 2020, decreased net sales in the prior year.

Gross Profit

Gross profit was a record $526.8 million during fiscal 2021, an increase of $246.8 million compared to fiscal 2020. Gross profit margin in fiscal 2021 increased to 39.6% compared to 28.7% in fiscal 2020 and 30.1% in fiscal 2019. Merchandise margin increased 8.8 percentage points compared to fiscal 2020 and 8.2 percentage points compared to fiscal 2019. Fewer margin-dilutive promotions and higher average selling prices drove a higher merchandise margin compared to both fiscal 2020 and 2019. We began eliminating broad-based use of the "buy one get one half off" promotional strategy during fiscal 2020 and completely eliminated its broad use during fiscal year 2021. A more standard product mix, with more non-athletic merchandise sold in fiscal 2021 compared to fiscal 2020, further increased margins compared to fiscal 2020.

As a percentage of sales, our buying, distribution and occupancy costs decreased 2.2 percentage points compared to fiscal 2020 and 1.3 percentage points compared to fiscal 2019 primarily due to the leveraging effect of increased sales, despite higher supply chain and distribution costs.

Selling, General and Administrative Expenses ("SG&A")

SG&A increased $61.0 million to $319.1 million in fiscal 2021 compared to $258.1 million in fiscal 2020. As a percentage of net sales, SG&A was leveraged to 24.0% in fiscal 2021 compared to 26.5% in fiscal 2020 and 24.9% in fiscal 2019.

Compared to fiscal 2020, the increase in SG&A primarily correlated with our record performance, in terms of increased performance-based incentive compensation, general wages (inclusive of CARES Act payroll retention tax credits recognized in fiscal 2020) and variable costs, such as credit card fees. SG&A also increased due to increased investment in advertising, as well as market return volatility on our deferred compensation plan and higher stock-based compensation. Store level wages, incentives paid to store level employees, and annual performance-based compensation comprised nearly half of the increase compared to the prior year, with advertising being the majority of the remaining increase.

Income Taxes

The effective income tax rate for fiscal 2021 was 25.3% compared to 25.8% for fiscal 2020. The lower effective rate was primarily attributable to increased benefit from vested stock-based compensation awards.

Liquidity and Capital Resources

Our primary sources of liquidity are $132.4 million of cash, cash equivalents and marketable securities on hand at the end of fiscal 2021, cash generated from operations, plus availability under our $100 million credit facility, which was amended and restated on March 23, 2022 to, among other things, extend the term until March 23, 2027 (the "New Credit Agreement"). While the effects of the COVID-19 pandemic and other macroeconomic uncertainty make our operating cash flow less predictable, we believe our 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 normally for working capital, which are principally inventory purchases, investments in our stores, such as new stores, remodels and relocations, distribution center initiatives, lease payments associated with our real estate leases, potential dividend payments, potential share repurchases under our share repurchase program, and the financing of capital projects, including investments in new systems. As part of our growth strategy, we may also pursue additional strategic acquisitions of other footwear retailers.

Cash Flow - Operating Activities

Net cash generated from operating activities was $147.9 million in fiscal 2021 compared to $63.4 million during fiscal 2020. The increase in operating cash flow was primarily driven by higher cash receipts on increased sales, partially offset by increased inventory purchases and payments for operating expenses and income taxes.

Working capital increased on a year-over-year basis and totaled $288.4 million at January 29, 2022 compared to $224.4 million at January 30, 2021. The increase was primarily attributable to increased cash and marketable securities positions. Our current ratio was 2.9 as of January 29, 2022, compared to 2.7 as of January 30, 2021.

Cash Flow - Investing Activities

Our cash outflows for investing activities are normally for capital expenditures. During fiscal 2021, we expended $31.4 million for the purchase of property and equipment, primarily related to our store portfolio modernization plan. During fiscal 2020, we expended $12.4 million for the purchase of property and equipment, $5.9 million of which was for new store construction and the remodeling and relocation of existing stores, and $3.1 million was for investments in our distribution center.

During fiscal 2021, we acquired substantially all of the assets of Shoe Station for approximately $70.7 million and invested on a net basis approximately $17.2 million in publicly traded mutual funds designed to mitigate income statement volatility associated with our nonqualified deferred compensation plan. Additional information regarding the Shoe Station acquisition can be found in Note 3 -"Acquisition of Shoe Station" and regarding the marketable securities can be found in Note 4 - "Fair Value of Financial Instruments" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

Cash Flow - Financing Activities

Our cash outflows for financing activities are typically for cash dividend payments, share repurchases or payments on our credit facility. 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 stock-based compensation awards that are settled in shares. Our cash inflows from financing activities generally reflect stock issuances to employees under our Employee Stock Purchase Plan and borrowings under our credit facility.

During fiscal 2021, net cash used in financing activities was $17.7 million compared to $6.7 million during fiscal 2020. The increase in net cash used in financing activities was primarily due to the repurchase of $7.1 million of shares in fiscal 2021 associated with our Board of Directors' authorized share repurchase program. In fiscal 2021 we also increased our dividend payments and more shares were withheld upon the vesting of stock-based compensation awards. During fiscal 2021, we did not borrow or repay funds under our credit facility. During fiscal 2020, we borrowed and repaid $24.9 million under our credit facility. Letters of credit outstanding were $700,000 at January 29, 2022, and our borrowing capacity was $99.3 million.

Our credit facility requires us to maintain compliance with various financial covenants. See Note 9 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our credit facility and its covenants. We were in compliance with these covenants as of January 29, 2022.

Store Openings and Closings - Fiscal 2022

Increasing market penetration by adding new stores is expected to reemerge as a key component of our growth strategy. Through a combination of both organic and acquired store growth, we aim to add more than 10 new stores in fiscal 2022, over 20 new stores in fiscal 2023, and over 25 new stores annually by fiscal 2024. We expect limited, if any, store closures over the next several years.

Capital Expenditures - Fiscal 2022

Capital expenditures for fiscal 2022 are expected to be between $55 million and $65 million, with approximately $50 million to $55 million to be used for new stores, relocations and remodels and approximately $5 million to $10 million for upgrades to our distribution center and e-commerce platform, various other store improvements, continued investments in technology and normal asset replacement activities. The resources allocated to these projects are subject to near-term changes depending on the impacts associated with the COVID-19 pandemic, ongoing supply chain disruptions, and potential inflationary and other macroeconomic impacts. Furthermore, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, relocated, and remodeled, and the amount of lease incentives, if any, received from landlords. The number of new store openings and relocations 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 fiscal 2021, four quarterly cash dividends of $0.07 per share were approved and paid. During fiscal 2020, the first quarter dividend was in the amount of $0.0425 per share and the dividends for the remaining three quarters were $0.0450 per share. During fiscal years 2021 and 2020, we returned $8.0 million and $5.1 million, respectively, in cash to our shareholders through our quarterly dividends.

The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. Our credit facility in place at the end of fiscal 2021 permits the payment of cash dividends as long as no default or event of default exists under the credit agreement both immediately before and immediately after giving effect to the cash dividends, and the aggregate amount of cash dividends for a fiscal year do not exceed $10 million. These restrictions have changed as a result of entering into the New Credit Agreement after our fiscal year end. See Note 9 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

Share Repurchase Program

On December 16, 2021, our Board of Directors authorized a share repurchase program for up to $50 million of our outstanding common stock, effective January 1, 2022 (the "2022 Share Repurchase Program"). The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2022 and in accordance with applicable laws, rules and regulations. The 2022 Share Repurchase Program may be amended, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on hand, and any shares acquired will be available for stock-based compensation awards and other corporate purposes. The actual number and value of the shares to be purchased will depend on the performance of our stock price and other market and economic factors, including impacts caused by the COVID-19 pandemic.

The 2022 Share Repurchase Program replaced a $50 million share repurchase program that was authorized in December 2020, became effective January 1, 2021 and expired in accordance with its terms on December 31, 2021. Shares totaling 208,662 were repurchased during fiscal 2021 at a cost of $7.1 million. No repurchases were made in fiscal 2020, and share repurchases pursuant to previously Board-approved share repurchase programs that have now expired were approximately 2,234,000 shares at an aggregate cost of $37.8 million in fiscal 2019. Share repurchase activity in fiscal 2021 and fiscal 2020 was impacted by the COVID-19 pandemic.

Our credit facility in place at the end of fiscal 2021 stipulates that distributions in the form of redemptions of Equity Interests (as defined in the credit agreement) could be made solely with cash on hand so long as before and immediately after such distributions there are no revolving loans outstanding under the credit agreement. These restrictions have changed a result of entering into the New Credit Agreement after our fiscal year end. See Note 9 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.


Rent-related payments made in fiscal 2021 totaled $82.2 million. As we are contractually obligated to make lease payments to landlords, estimated future payments to landlords and lease-related charges are expected to be significant in future years and will increase in future years due to the acquisition of Shoe Station and other expected store growth. These payments include estimates for . . .

Mar 25, 2022


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