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June 3, 2022, 4:07 p.m. EDT

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: our ability to control costs and meet our labor needs in a rising wage, inflationary, and/or supply chain constrained environment; the duration and spread of the COVID-19 pandemic, mitigating efforts deployed, including the effects of government stimulus on consumer spending, and the pandemic's overall impact on our operations, including our stores, supply chain and distribution processes, economic conditions, and financial market volatility; our ability to operate the recently acquired Shoe Station assets, retain Shoe Station employees and achieve expected operating results and other benefits from the Shoe Station acquisition within expected time frames, or at all; risks that the Shoe Station acquisition may disrupt our current plans and operations or negatively impact our relationship with our vendors and other suppliers; the potential impact of national and international security concerns, including those caused by war and terrorism, on the retail environment; general economic conditions in the areas of the continental United States and Puerto Rico where our stores are located; 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; 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; the success of the open-air shopping centers where many of our stores are located and its impact on our ability to attract customers to our stores; our ability to attract customers to our e-commerce platform and to successfully grow our omnichannel sales; the effectiveness of our inventory management, including our ability to manage key merchandise vendor relationships and emerging direct-to-consumer initiatives; changes in our relationships with other 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; our ability to successfully manage our current real estate portfolio and leasing obligations; changes in weather, including patterns impacted by climate change; changes in 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 impact of natural disasters, other public health crises, political crises, civil unrest, and other catastrophic events on our operations and the operations of our suppliers, 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 cybersecurity breach; our ability to successfully execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability to identify, consummate or effectively integrate future acquisitions, our ability to implement and adapt to new technology and systems, 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; an increase in the cost, or a disruption in the flow, of imported goods; the impact of regulatory changes in the United States, including minimum wage laws and regulations, and the countries where our manufacturers are located; the resolution of litigation or regulatory proceedings in which we are or may become involved; continued volatility and disruption in the capital and credit markets; future stock repurchases under our stock repurchase program and future dividend payments. For a more detailed discussion of risk factors impacting us, see the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

General

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") 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 January 29, 2022 as filed with the SEC. This section of this Quarterly Report on Form 10-Q generally discusses the first quarter 2022 and the first quarter 2021 and year-over-year comparisons between the first quarter 2022 and the first quarter 2021. However, given the significant impact of the COVID-19 pandemic on our fiscal 2021 and fiscal 2020 results, we have included certain comparisons in this MD&A between the first quarter 2022 and the first quarter 2019 to provide further context regarding our first quarter 2022 results of operations.

Referred to herein the first quarter 2022 is the thirteen weeks ended April 30, 2022; the first quarter 2021 is the thirteen weeks ended May 1, 2021; the first quarter 2020 is the thirteen weeks ended May 2, 2020; and the first quarter 2019 is the thirteen weeks ended May 4, 2019.

Overview of Our Business

Shoe Carnival, Inc. is one of the nation's largest family footwear retailers. After our acquisition of the physical stores and substantially all of the assets and liabilities of Shoe Station, Inc. ("Shoe Station") 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 through direct-ship arrangements with certain vendors.

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. Certain of our Shoe Carnival stores have athletic shops that highlight leading athletic brands, and we expect to continue growing our "athletic shop" in-store concept and other shop-in-shop concepts 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. See Note 2 - "Acquisition of Shoe Station" to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on Form 10-Q and Note 3 - "Acquisition of Shoe Station" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, for further discussion.

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.

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, accounting for business combinations, leases, and income taxes. The accounting policies that require more significant judgment are discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, and there have been no material changes to those critical accounting policies.







        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(1)
        April 30, 2022              393              2              0          395        31,000       4,450,000                (10.6 )%
        May 1, 2021                 383              0              6          377       (46,000 )     4,100,000                125.8 %
        


(1)

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







                                                               Thirteen             Thirteen
                                                              Weeks Ended          Weeks Ended
                                                             April 30, 2022        May 1, 2021
        Net sales                                                      100.0 %             100.0 %
        Cost of sales (including buying, distribution and
          occupancy costs)                                              64.5                60.4
        Gross profit                                                    35.5                39.6
        Selling, general and administrative expenses                    24.4                22.1
        Operating income                                                11.1                17.5
        Interest expense (income), net                                   0.0                 0.0
        Income tax expense                                               2.6                 4.3
        Net income                                                       8.5 %              13.2 %
        


The shares outstanding and net income per share information for the first quarter of 2021 throughout this MD&A has been adjusted retroactively 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 1 - "Basis of Presentation" to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on Form 10-Q for additional information on the stock split.

Executive Summary for the First Fiscal Quarter Ended April 30, 2022

During the first quarter 2022, our customers shopped for footwear without the pandemic-related government stimulus received in 2021 and without the pandemic-related retail store closures experienced in 2020. Our customers returned to a more normal, pre-pandemic shopping pattern, with the mix of sales being more balanced between the athletic and non-athletic categories. Our first quarter 2022 results demonstrated the structural profit transformation and increased scale our strategic plans have achieved compared to pre-pandemic results. This quarter we continued to achieve gross profit margins in the mid-thirties, double-digit operating income margin and trailing twelve-month store productivity above $300 per square foot, despite the current economic headwinds and continuing global uncertainty.

For the first quarter 2022, diluted net income per share was $0.95, the second highest first quarter in our history and only surpassed by the stimulus-enhanced first quarter 2021. The $0.95 per share earned was more than double the amount earned pre-pandemic in the first quarter 2019. Net sales in the first quarter 2022 were $317.5 million. Excluding the stimulus-enhanced first quarter 2021, the first quarter 2022 net sales were also the highest in our history, surpassing any other first quarter by more than 20%. As an indicator of the strength of our first quarter 2022 results against the pre-pandemic first quarter 2019, net sales increased 25.1% and comparable store sales increased 16.8%. Our physical store comparable store sales increased 9.1% and e-commerce net sales increased 154.4%.

Our first quarter 2022 results were positively impacted by growth in our customer base and the transformation of our gross profit margin. During the quarter, we surpassed 29 million Shoe Perks loyalty program members, representing an increase in new customers of 10% compared to the first quarter 2021 and growth of over 25% compared to the first quarter 2019. Gross profit margin during the first quarter 2022 was 35.5%, a near 600 basis point increase compared to the first quarter 2019, driven primarily by changes to our customer relationship management and promotional strategies, offset by increased transportation and fuel costs.

Compared to the stimulus-enhanced first quarter 2021, net sales were down 3.3% and comparable store sales declined 10.6%. These results compared to a net sales increase of 122.7% and a comparable store sales increase of 125.8% in the first quarter 2021 compared to the first quarter 2020 when our stores were closed for about half of the quarter. Due to the current global supply chain issues and inflation, we incurred significantly higher transportation and fuel costs in the first quarter 2022 compared to the first quarter 2021, which reduced our merchandise margin by 150 basis points and increased our distribution costs by 190 basis points. Excluding the 150 basis point increase in transportation and fuel costs, our merchandise margin would have increased in the first quarter 2022 compared to the first quarter 2021. Also compared to the first quarter 2021, these additional costs decreased our diluted net income per share by $0.29.

We ended the first quarter 2022 with inventory of $345.0 million, an increase of $76.4 million compared to the first quarter 2021, or 22.6% on a per store basis. The majority of the increase was due to accelerated receipts of merchandise in an effort to mitigate supply chain issues for the back-to-school shopping period, and approximately 40% of the increase was due to the addition of Shoe Station stores.

We had no borrowings outstanding under our credit facility, which was amended and restated during the first quarter 2022, and we ended the first quarter 2022 with $97.1 million of cash, cash equivalents and marketable securities. Our new credit facility expires on March 23, 2027.

We are currently in the process of modernizing our stores and plan to have over 50% of our stores modernized by the summer of 2023 and the full program complete by the end of fiscal 2024. Through the first quarter 2022, 31% of the fleet is complete.

Two new stores were opened in the first quarter 2022 and no stores were closed. We aim to open approximately 10 new stores in fiscal 2022 and expect no store closures and for store count to exceed 400 stores by the end of fiscal 2022.

Results of Operations for the First Quarter Ended April 30, 2022 Compared to the First Quarter Ended May 1, 2021

Net Sales

Net sales were $317.5 million during the first quarter 2022 and decreased 3.3% compared to the first quarter 2021. The change in net sales was primarily a result of a 10.6% comparable store sales decline due primarily to the impact of government stimulus dollars in the first quarter 2021 offset by revenues attributable to new stores, including the Shoe Station stores. E-commerce sales were approximately 11% of merchandise sales in the first quarter 2022, compared to 12% in the first quarter 2021.

Gross Profit

Gross profit was $112.9 million during the first quarter 2022, a decrease of $17.3 million compared to the first quarter 2021. Gross profit margin in the first quarter 2022 was 35.5% compared to 39.6% in the first quarter 2021. Merchandise margin decreased 1.3% and buying, distribution and occupancy costs increased 2.8% as a percentage of net sales compared to the first quarter 2021. The changes were primarily a result of inflation on transportation and fuel costs in the first quarter 2022.

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

SG&A increased $4.9 million in the first quarter 2022 to $77.5 million compared to $72.6 million in the first quarter 2021. The overall increase in SG&A during the first quarter 2022 was primarily attributable to continued investment in advertising and store level wages, partially offset by lower levels of incentive compensation. As a percentage of net sales, SG&A was 24.4% in the first quarter 2022 compared to 22.1% in the first quarter 2021.

Income Taxes

The effective income tax rate for the first quarter 2022 was 23.8% compared to 24.8% for the first quarter 2021. Our provision for income taxes is based on the current estimate of our annual effective tax rate and is adjusted as necessary for quarterly events. The lower quarterly effective tax rate was primarily due to a lower level of expected non-deductible compensation in fiscal 2022. For the full 2022 fiscal year, we expect our tax rate to be between 24% and 25% compared to the 25.3% effective tax rate recognized during the full 2021 fiscal year.

Liquidity and Capital Resources

Our primary sources of liquidity are $97.1 million of cash, cash equivalents and marketable securities on hand at the end of the first quarter 2022, cash generated from operations and availability under our $100 million credit facility. While the effects of the COVID-19 pandemic and other economic uncertainty associated with inflation, constrained supply chains and the Eastern European conflict, among 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 strategic acquisitions of other footwear retailers.

Cash Flow - Operating Activities

Net cash generated from operating activities was $17.7 million in the first quarter 2022 compared to $76.5 million during the first quarter 2021. The change in operating cash flow was primarily driven by increased earnings in the first quarter 2021 and timing of inventory purchases.

Working capital increased on a year-over-year basis and totaled $271.8 million at April 30, 2022 compared to $262.3 million at May 1, 2021. The increase was primarily attributable to higher merchandise inventory levels offset by lower cash balances due to the acquisition of Shoe Station and share repurchases. Our current ratio was 2.4 as of April 30, 2022 compared to 2.3 as of May 1, 2021.

Cash Flow - Investing Activities

Our cash outflows for investing activities are normally for capital expenditures. During the first quarters of 2022 and 2021, we expended $26.9 million and $4.1 million, respectively, for the purchase of property and equipment, primarily related to our store portfolio modernization plan.

We invest in publicly traded mutual funds designed to mitigate income statement volatility associated with our nonqualified deferred compensation plan. The balance of these marketable securities was $11.0 million at April 30, 2022. Additional information can be found in Note 4 - "Fair Value Measurements" to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on Form 10-Q.

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 the first quarter 2022, net cash used in financing activities was $25.1 million compared to $4.3 million during the first quarter 2021. The increase in net cash used in financing activities was primarily due to the repurchase of $20.5 million of shares in the first quarter 2022 associated with our Board of Directors' authorized share repurchase program.

Capital Expenditures

Capital expenditures for fiscal 2022, including actual expenditures in the first quarter 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 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 COVID-19, ongoing supply chain disruptions, and other macroeconomic uncertainty. Furthermore, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, the number of stores relocated, the amount of lease incentives, if any, received from landlords and the number of stores remodeled. 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.

Store Portfolio

We opened one Shoe Carnival branded store and one Shoe Station branded store in the first quarter 2022. Increasing market penetration by adding new stores is a key component of our growth strategy. Through a combination of both organic and acquired store growth, we aim to add approximately 10 new stores in fiscal 2022, over 20 new stores in fiscal 2023, and over 25 new stores annually by fiscal 2024, across both banners. We believe our current store footprint provides for growth in new markets within the United States as well as fill-in opportunities within existing markets. In the near term, we expect to pursue fill-in opportunities for store growth across large and mid-size markets as we continue to leverage customer data from our customer relationship management program. We believe more attractive real estate options will be available with the addition of the Shoe Station retail concept to our portfolio. However, our future store growth may continue to be impacted by the COVID-19 pandemic and other macroeconomic uncertainty.

Over the last several years, we performed a store rationalization and performance improvement plan. As part of the plan, which is now complete, we identified underperforming stores and worked to address the performance of these stores through renegotiation of lease terms, relocation or closure. While we continue to actively monitor the store portfolio, we do not expect any further significant closures over the next several years.

Credit Facility

On March 23, 2022, we entered into a new $100 million Amended and Restated Credit Agreement (the "New Credit Agreement"), which replaced our existing credit agreement. The New Credit Agreement is collateralized by our inventory, expires on March 23, 2027, and uses a Secured Overnight Financing Rate ("SOFR") as quoted by The Federal Reserve Bank of New York as the basis for financing charges. Material covenants associated with the New Credit Agreement require that we maintain a minimum net worth of $250 million and a consolidated interest coverage ratio of not less than 3.0 to 1.0. We were in compliance with these covenants as of April 30, 2022.

The New Credit Agreement contains certain restrictions. However, as long as our consolidated EBITDA is positive and there are either no or low borrowings outstanding, we expect these restrictions would have no impact on our ability pay cash dividends, execute share

repurchases or facilitate acquisitions from cash on hand. The New Credit Agreement stipulates that cash dividends and share repurchases of $15 million or less per fiscal year can be made without restriction as long as there is no default or event of default before and immediately after such distributions. We are also permitted to make acquisitions and pay cash dividends or repurchase shares in excess of $15 million in a fiscal year provided that (a) no default or event of default exists before and immediately after the transaction and (b) on a proforma basis, the ratio of (i) the sum of (A) our consolidated funded indebtedness plus (B) three times our consolidated rental expense to (ii) the sum of (A) our consolidated EBITDA plus (B) our consolidated rental expense is . . .

Jun 03, 2022

COMTEX_408164659/2041/2022-06-03T16:06:42

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