ITEM 1. FINANCIAL STATEMENTS
SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands, except share data)
|
|
October 29,
2016
|
|
|
January 30,
2016
|
|
|
October 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,509
|
|
|
$
|
68,814
|
|
|
$
|
49,035
|
|
Accounts receivable
|
|
|
3,540
|
|
|
|
2,131
|
|
|
|
2,665
|
|
Merchandise inventories
|
|
|
314,925
|
|
|
|
292,878
|
|
|
|
318,878
|
|
Deferred income taxes
|
|
|
0
|
|
|
|
1,061
|
|
|
|
1,236
|
|
Other
|
|
|
5,630
|
|
|
|
5,193
|
|
|
|
5,611
|
|
Total Current Assets
|
|
|
357,604
|
|
|
|
370,077
|
|
|
|
377,425
|
|
Property and equipment – net
|
|
|
102,932
|
|
|
|
103,386
|
|
|
|
106,374
|
|
Deferred income taxes
|
|
|
8,163
|
|
|
|
7,158
|
|
|
|
5,655
|
|
Other noncurrent assets
|
|
|
970
|
|
|
|
472
|
|
|
|
348
|
|
Total Assets
|
|
$
|
469,669
|
|
|
$
|
481,093
|
|
|
$
|
489,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
69,986
|
|
|
$
|
72,086
|
|
|
$
|
75,006
|
|
Accrued and other liabilities
|
|
|
18,936
|
|
|
|
15,848
|
|
|
|
18,129
|
|
Total Current Liabilities
|
|
|
88,922
|
|
|
|
87,934
|
|
|
|
93,135
|
|
Deferred lease incentives
|
|
|
30,320
|
|
|
|
31,971
|
|
|
|
30,595
|
|
Accrued rent
|
|
|
11,465
|
|
|
|
11,224
|
|
|
|
11,221
|
|
Deferred compensation
|
|
|
10,171
|
|
|
|
9,612
|
|
|
|
9,892
|
|
Other
|
|
|
767
|
|
|
|
550
|
|
|
|
424
|
|
Total Liabilities
|
|
|
141,645
|
|
|
|
141,291
|
|
|
|
145,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 50,000,000 shares authorized, 20,569,198 shares, 20,604,178 shares and 20,604,178
shares issued, respectively
|
|
|
206
|
|
|
|
206
|
|
|
|
206
|
|
Additional paid-in capital
|
|
|
64,957
|
|
|
|
66,805
|
|
|
|
65,807
|
|
Retained earnings
|
|
|
314,851
|
|
|
|
294,308
|
|
|
|
291,419
|
|
Treasury stock, at cost, 2,146,622 shares, 955,612 shares and 576,724
shares, respectively
|
|
|
(51,990
|
)
|
|
|
(21,517
|
)
|
|
|
(12,897
|
)
|
Total Shareholders’ Equity
|
|
|
328,024
|
|
|
|
339,802
|
|
|
|
344,535
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
469,669
|
|
|
$
|
481,093
|
|
|
$
|
489,802
|
|
See notes to Condensed Consolidated Financial Statements.
SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share data)
|
|
Thirteen
Weeks Ended
October 29,
2016
|
|
|
Thirteen
Weeks Ended
October 31,
2015
|
|
|
Thirty-Nine
Weeks Ended
October 29,
2016
|
|
|
Thirty-Nine
Weeks Ended
October 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
274,524
|
|
|
$
|
269,713
|
|
|
$
|
766,901
|
|
|
$
|
750,302
|
|
Cost of sales (including buying, distribution and occupancy costs)
|
|
|
192,514
|
|
|
|
188,396
|
|
|
|
542,105
|
|
|
|
528,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
82,010
|
|
|
|
81,317
|
|
|
|
224,796
|
|
|
|
222,280
|
|
Selling, general and administrative expenses
|
|
|
66,558
|
|
|
|
66,144
|
|
|
|
185,399
|
|
|
|
182,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15,452
|
|
|
|
15,173
|
|
|
|
39,397
|
|
|
|
40,080
|
|
Interest income
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
(36
|
)
|
Interest expense
|
|
|
43
|
|
|
|
42
|
|
|
|
127
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15,410
|
|
|
|
15,133
|
|
|
|
39,276
|
|
|
|
39,990
|
|
Income tax expense
|
|
|
5,738
|
|
|
|
5,747
|
|
|
|
14,839
|
|
|
|
15,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,672
|
|
|
$
|
9,386
|
|
|
$
|
24,437
|
|
|
$
|
24,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.54
|
|
|
$
|
0.47
|
|
|
$
|
1.31
|
|
|
$
|
1.23
|
|
Diluted
|
|
$
|
0.54
|
|
|
$
|
0.47
|
|
|
$
|
1.31
|
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,609
|
|
|
|
19,444
|
|
|
|
18,220
|
|
|
|
19,542
|
|
Diluted
|
|
|
17,614
|
|
|
|
19,452
|
|
|
|
18,225
|
|
|
|
19,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.07
|
|
|
$
|
0.065
|
|
|
$
|
0.205
|
|
|
$
|
0.19
|
|
See notes to condensed consolidated financial statements.
SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Unaudited
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
(In thousands)
|
|
Issued
|
|
|
Treasury
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
Balance at January 30, 2016
|
|
|
20,604
|
|
|
|
(956
|
)
|
|
$
|
206
|
|
|
$
|
66,805
|
|
|
$
|
294,308
|
|
|
$
|
(21,517
|
)
|
|
$
|
339,802
|
|
Dividends declared ($0.205 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,894
|
)
|
|
|
|
|
|
|
(3,894
|
)
|
Stock-based compensation income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Employee stock purchase plan purchases
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
194
|
|
|
|
186
|
|
Restricted stock awards
|
|
|
(35
|
)
|
|
|
225
|
|
|
|
|
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
5,072
|
|
|
|
0
|
|
Shares surrendered by employees to pay taxes on restricted stock
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311
|
)
|
|
|
(311
|
)
|
Purchase of common stock for treasury
|
|
|
|
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,428
|
)
|
|
|
(35,428
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,230
|
|
|
|
|
|
|
|
|
|
|
|
3,230
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,437
|
|
|
|
|
|
|
|
24,437
|
|
Balance at October 29, 2016
|
|
|
20,569
|
|
|
|
(2,147
|
)
|
|
$
|
206
|
|
|
$
|
64,957
|
|
|
$
|
314,851
|
|
|
$
|
(51,990
|
)
|
|
$
|
328,024
|
|
See notes to Condensed Consolidated Financial Statements.
SHOE CARNIVAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
|
|
Thirty-nine
Weeks Ended
October 29,
2016
|
|
|
Thirty-nine
Weeks Ended
October 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,437
|
|
|
$
|
24,599
|
|
Adjustments to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,698
|
|
|
|
17,132
|
|
Stock-based compensation
|
|
|
3,438
|
|
|
|
2,595
|
|
Loss on retirement and impairment of assets
|
|
|
500
|
|
|
|
958
|
|
Deferred income taxes
|
|
|
56
|
|
|
|
(1,707
|
)
|
Lease incentives
|
|
|
1,838
|
|
|
|
4,116
|
|
Other
|
|
|
(3,064
|
)
|
|
|
(3,597
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,409
|
)
|
|
|
55
|
|
Merchandise inventories
|
|
|
(22,047
|
)
|
|
|
(31,001
|
)
|
Accounts payable and accrued liabilities
|
|
|
(1,298
|
)
|
|
|
9,699
|
|
Other
|
|
|
1,303
|
|
|
|
456
|
|
Net cash provided by operating activities
|
|
|
21,452
|
|
|
|
23,305
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(17,426
|
)
|
|
|
(22,313
|
)
|
Proceeds from notes receivable
|
|
|
0
|
|
|
|
250
|
|
Net cash used in investing activities
|
|
|
(17,426
|
)
|
|
|
(22,063
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock
|
|
|
186
|
|
|
|
335
|
|
Dividends paid
|
|
|
(3,780
|
)
|
|
|
(3,782
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
2
|
|
|
|
91
|
|
Purchase of common stock for treasury
|
|
|
(35,428
|
)
|
|
|
(10,181
|
)
|
Shares surrendered by employees to pay taxes on restricted stock
|
|
|
(311
|
)
|
|
|
(46
|
)
|
Net cash used in financing activities
|
|
|
(39,331
|
)
|
|
|
(13,583
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(35,305
|
)
|
|
|
(12,341
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
68,814
|
|
|
|
61,376
|
|
Cash and Cash Equivalents at end of period
|
|
$
|
33,509
|
|
|
$
|
49,035
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
127
|
|
|
$
|
125
|
|
Cash paid during period for income taxes
|
|
$
|
11,786
|
|
|
$
|
15,561
|
|
Capital expenditures incurred but not yet paid
|
|
$
|
994
|
|
|
$
|
2,494
|
|
See notes to condensed consolidated financial statements.
SHOE CARNIVAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1 - Basis of Presentation
In our opinion, the accompanying Unaudited
Condensed Consolidated Financial Statements and notes have been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission (the "SEC") for interim financial information and contain all normal recurring adjustments necessary
to present fairly our financial position and the results of our operations and our cash flows for the periods presented. Certain
information and disclosures normally included in the notes to Condensed Consolidated Financial Statements have been condensed
or omitted according to the rules and regulations of the SEC, although we believe 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. The Unaudited Condensed Consolidated Financial Statements should be read in conjunction
with the audited Condensed Consolidated Financial Statements and the notes thereto contained in our Annual Report on Form 10-K
for the fiscal year ended January 30, 2016.
Note 2 - Net Income Per Share
The following tables set forth the computation
of basic and diluted earnings per share as shown on the face of the accompanying Condensed Consolidated Statements of Income:
|
|
Thirteen Weeks Ended
|
|
|
|
October 29, 2016
|
|
|
October 31, 2015
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share:
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Net income
|
|
$
|
9,672
|
|
|
|
|
|
|
|
|
|
|
$
|
9,386
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating securities
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
Net income available for basic common shares and basic earnings
per share
|
|
$
|
9,458
|
|
|
|
17,609
|
|
|
$
|
0.54
|
|
|
$
|
9,199
|
|
|
|
19,444
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,672
|
|
|
|
|
|
|
|
|
|
|
$
|
9,386
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating securities
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
Adjustment for dilutive potential common shares
|
|
|
0
|
|
|
|
5
|
|
|
|
|
|
|
|
0
|
|
|
|
8
|
|
|
|
|
|
Net income available for diluted common shares and diluted
earnings per share
|
|
$
|
9,458
|
|
|
|
17,614
|
|
|
$
|
0.54
|
|
|
$
|
9,199
|
|
|
|
19,452
|
|
|
$
|
0.47
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29, 2016
|
|
|
October 31, 2015
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share:
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Net income
|
|
$
|
24,437
|
|
|
|
|
|
|
|
|
|
|
$
|
24,599
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating securities
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
|
(479
|
)
|
|
|
|
|
|
|
|
|
Net income available for basic common shares and basic earnings
per share
|
|
$
|
23,922
|
|
|
|
18,220
|
|
|
$
|
1.31
|
|
|
$
|
24,120
|
|
|
|
19,542
|
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,437
|
|
|
|
|
|
|
|
|
|
|
$
|
24,599
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating securities
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
|
(479
|
)
|
|
|
|
|
|
|
|
|
Adjustment for dilutive potential common shares
|
|
|
0
|
|
|
|
5
|
|
|
|
|
|
|
|
0
|
|
|
|
11
|
|
|
|
|
|
Net income available for diluted common shares and diluted
earnings per share
|
|
$
|
23,922
|
|
|
|
18,225
|
|
|
$
|
1.31
|
|
|
$
|
24,120
|
|
|
|
19,553
|
|
|
$
|
1.23
|
|
Our basic and diluted earnings per share
are computed using the two-class method. The two-class method is an earnings allocation that determines net income per share for
each class of common stock and participating securities according to their participation rights in dividends and undistributed
earnings or losses. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating
securities. During periods of undistributed losses, however, no effect is given to our participating securities since they do not
share in the losses. Per share amounts are computed by dividing net income available to common shareholders by the weighted average
shares outstanding during each period. No options to purchase shares of common stock were excluded in the computation of diluted
shares for the periods presented.
Note 3 - Recently Issued Accounting
Pronouncements
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued guidance on the recognition of revenue for all contracts with customers designed
to improve comparability and enhance financial statement disclosures. Subsequently, the FASB has also issued accounting
standards updates which clarify the guidance. The underlying principle of this comprehensive model is that revenue is
recognized to depict the transfer of promised goods or services to customers in an amount that reflects the payment to which
the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB subsequently issued
guidance which approved a one year deferral of the guidance until annual reporting periods (including interim reporting
periods within those periods) beginning after December 15, 2017. Early adoption is permitted as of the original effective
date for annual reporting periods (including interim reporting periods within those periods) beginning after December 15,
2016. We are evaluating the impact of this guidance on our condensed consolidated financial position, results of operations
and cash flows.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory by requiring inventory
to be measured at the lower of cost and net realizable value. The new guidance does not apply to inventory currently measured using
the last-in-first-out or the retail inventory valuation methods. This guidance is effective for annual reporting periods (including
interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is permitted. We do not believe
the guidance will have a material impact on our condensed consolidated financial position, results of operations and cash flows.
In November 2015, the FASB issued guidance
which simplifies the classification of deferred taxes by requiring an entity to classify deferred tax liabilities and assets as
noncurrent within a classified statement of financial position. We early adopted this guidance in the third quarter of fiscal 2016
and are applying this change prospectively. Prior condensed consolidated balance sheets have not been retrospectively adjusted.
The adoption resulted in a $2.7 million reclassification of net deferred tax assets from current to noncurrent on our consolidated
balance sheet as of October 29, 2016. The adoption did not have a material impact on our results of condensed consolidated operations
and cash flows.
In February 2016, the FASB issued guidance
which will replace most existing lease accounting guidance. This update requires an entity to recognize leased assets and the rights
and obligations created by those leased assets on the balance sheet and to disclose key information about the entity's leasing
arrangements. This guidance is effective for annual reporting periods (including interim reporting periods within those periods)
beginning after December 15, 2018. Early adoption is permitted. We are evaluating the impact of this guidance on our
condensed consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued guidance intended
to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification
in the statement of cash flows and forfeitures. This guidance is effective for annual reporting periods (including interim reporting
periods within those periods) beginning after December 15, 2016. Early adoption is permitted. We are evaluating the impact of this
guidance on our condensed consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued guidance addressing
eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for annual reporting
periods (including interim reporting periods within those periods) beginning after December 31, 2017. Early adoption is permitted.
We are evaluating the impact of this guidance on our condensed consolidated financial position, results of operations and cash
flows.
Note 4 - Fair Value Measurements
The accounting standards related to fair
value measurements define fair value and provide a consistent framework for measuring fair value under the authoritative literature.
Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent
sources, while unobservable inputs reflect market assumptions. This guidance only applies when other standards require or permit
the fair value measurement of assets and liabilities. The guidance does not expand the use of fair value measurements. A fair value
hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels:
|
·
|
Level 1 – Quoted prices in active markets for identical assets or liabilities;
|
|
·
|
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by
market data; and
|
|
·
|
Level 3 – Significant unobservable inputs that are not corroborated by market data. Generally,
these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information
available, including our own data. Fair values of our long-lived assets are estimated using an income-based approach and are classified
within Level 3 of the valuation hierarchy.
|
The following table presents assets
that are measured at fair value on a recurring basis at October 29, 2016, January 30, 2016 and October 31, 2015. We have no
material liabilities measured at fair value on a recurring or non-recurring basis.
|
|
Fair Value Measurements
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
As of October 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents – money market account
|
|
$
|
114
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents– money market account
|
|
$
|
5,386
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents – money market account
|
|
$
|
5,384
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,384
|
|
The fair values of cash, receivables,
accounts payable, accrued expenses and other current liabilities approximate their carrying values because of their
short-term nature. From time to time, we measure certain assets at fair value on a non-recurring basis, specifically
long-lived assets evaluated for impairment. These are typically store specific assets, which are reviewed for impairment
whenever events or changes in circumstances indicate that recoverability of their carrying value is questionable. If
the expected, undiscounted future cash flows related to a store’s assets are less than their carrying value, an
impairment loss would be recognized for the difference between estimated fair value and carrying value and recorded in
selling, general and administrative expenses. We estimate the fair value of store assets using an income-based approach
considering the cash flows expected over the remaining lease term for each location. These projections are primarily based on
management’s estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options
and resulting cash flows and, by their nature, include judgments about how current initiatives will impact future
performance. External factors, such as the local environment in which the store resides, including strip-mall traffic and
competition, are evaluated in terms of their effect on sales trends. Changes in sales and operating income assumptions or
unfavorable changes in external factors can significantly impact the estimated future cash flows. An increase or decrease
in the projected cash flow can significantly decrease or increase the fair value of these assets, which would have an effect
on the impairment recorded.
During the thirteen and thirty-nine weeks ended
October 29, 2016, we recorded an impairment charge of $193,000 on long-lived assets held and used. Subsequent to this impairment,
these long-lived assets had a remaining unamortized basis of $337,000. During the thirteen weeks ended October 31, 2015, we recorded
an impairment charge of $161,000 on long-lived assets held and used. Subsequent to this impairment, these long-lived assets had
a remaining unamortized basis of $69,000. During the thirty-nine weeks ended October 31, 2015, we recorded an impairment charge
of $212,000 on long-lived assets held and used. Subsequent to this impairment, these long-lived assets had a remaining unamortized
basis of $211,000.
We operate nine stores in Puerto Rico
with combined net book value of long-lived assets of $4.5 million. Puerto Rico is experiencing an economic crisis characterized
by a deep recession and defaults on its public sector debt. Our estimate of undiscounted cash flows indicates that the carrying
amounts of long-lived assets are expected to be recovered. Our estimate of cash flows might change in future periods pending further
developments in the economic environment in Puerto Rico.
Note 5 - Stock-Based Compensation
Stock-based compensation
includes stock options, cash-settled stock appreciation rights (SARs) and restricted stock awards. Additionally, we recognize stock-based
compensation expense for the discount on shares sold to employees through our employee stock purchase plan. For the thirteen and
thirty-nine weeks ended October 29, 2016, stock-based compensation expense for the employee stock purchase plan was $9,000 before
the income tax benefit of
$3,000 and $33,000 before the income tax
benefit of $12,000, respectively. For the thirteen and thirty-nine weeks ended October 31, 2015, stock-based compensation expense
for the employee stock purchase plan was $9,000 before the income tax benefit of $3,000 and $32,000 before the income tax benefit
of $12,000, respectively.
The following section summarizes the share
transactions for our restricted stock awards:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
Restricted stock at January 30, 2016
|
|
|
829,492
|
|
|
$
|
22.13
|
|
Granted
|
|
|
225,003
|
|
|
|
24.98
|
|
Vested
|
|
|
(33,297
|
)
|
|
|
25.66
|
|
Forfeited
|
|
|
(34,980
|
)
|
|
|
21.55
|
|
Restricted stock at October 29, 2016
|
|
|
986,218
|
|
|
$
|
22.68
|
|
The weighted-average
grant date fair value of stock awards granted during the thirty-nine week periods ended October 29, 2016 and October 31, 2015 was
$24.98 and $24.43, respectively. The total fair value at grant date of previously non-vested stock awards that vested during the
first nine months of fiscal 2016 was $854,000. The total fair value at grant date of previously non-vested stock awards that vested
during the first nine months of fiscal 2015 was $106,000.
The following section summarizes information
regarding stock-based compensation expense recognized for restricted stock awards:
(In thousands)
|
|
Thirteen
Weeks Ended
October 29,
2016
|
|
|
Thirteen
Weeks Ended
October 31,
2015
|
|
|
Thirty-Nine
Weeks Ended
October 29,
2016
|
|
|
Thirty-Nine
Weeks Ended
October 31,
2015
|
|
Stock-based compensation expense before the recognized income tax benefit
|
|
$
|
1,295
|
|
|
$
|
810
|
|
|
$
|
3,197
|
|
|
$
|
2,344
|
|
Income tax benefit
|
|
$
|
482
|
|
|
$
|
308
|
|
|
$
|
1,208
|
|
|
$
|
902
|
|
As of October 29, 2016,
approximately $8.7 million of unrecognized compensation expense remained related to both our performance-based and service-based
restricted stock awards. The cost is expected to be recognized over a weighted average period of approximately 2.0 years. This
incorporates our current assumptions with respect to the estimated requisite service period required to achieve the designated
performance conditions for performance-based stock awards.
The following table summarizes the SARs
activity:
|
|
|
Number of
Shares
|
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Outstanding at January 30, 2016
|
|
|
147,550
|
|
|
$
|
24.26
|
|
|
|
|
|
Forfeited
|
|
|
(6,500
|
)
|
|
|
24.26
|
|
|
|
|
|
Exercised
|
|
|
(22,375
|
)
|
|
|
24.26
|
|
|
|
|
|
Outstanding at October 29, 2016
|
|
|
118,675
|
|
|
$
|
24.26
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 29, 2016
|
|
|
25,557
|
|
|
$
|
24.26
|
|
|
|
3.4
|
|
SARs were granted during the first quarter of fiscal 2015 to
certain non-executive employees, such that one-third of the shares underlying the SARs will vest and become fully exercisable on
each of the first three anniversaries of the date of the grant and were assigned a five-year term from the date of grant, after
which any unexercised SARs will
expire. Each SAR entitles the holder, upon exercise of their
vested shares, to receive cash in an amount equal to the closing price of our stock on the date of exercise less the exercise price,
with a maximum amount of gain defined. The SARs granted during the first quarter of fiscal 2015 were issued with a defined maximum
gain of $10.00 over the exercise price of $24.26.
The fair value of these
liability awards are remeasured, using a trinomial lattice model, at each reporting period until the date of settlement. Increases
or decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards. The
weighted-average fair value of outstanding, non-vested SAR awards as of October 29, 2016 and October 31, 2015 was $4.53 and $3.70,
respectively.
The fair value was estimated
using a trinomial lattice model with the following assumptions:
|
|
October 29, 2016
|
|
|
October 31, 2015
|
|
Risk free interest rate yield curve
|
|
|
0.18% - 1.33
|
%
|
|
|
0.01% - 1.52
|
%
|
Expected dividend yield
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
Expected volatility
|
|
|
35.06
|
%
|
|
|
35.34
|
%
|
Maximum life
|
|
|
3.4 Years
|
|
|
|
4.4 Years
|
|
Exercise multiple
|
|
|
1.34
|
|
|
|
1.34
|
|
Maximum payout
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
Employee exit rate
|
|
|
2.2% - 9.0
|
%
|
|
|
2.2% - 9.0
|
%
|
The risk free interest rate was based on
the U.S. Treasury yield curve in effect at the end of the reporting period. The expected dividend yield was based on our historical
quarterly cash dividends, with the assumption that quarterly dividends would continue at that rate. Expected volatility was based
on the historical volatility of our stock. The exercise multiple and employee exit rate were based on historical option data.
The following table summarizes information
regarding stock-based compensation expense recognized for SARs:
(In thousands)
|
|
Thirteen
Weeks Ended
October 29,
2016
|
|
|
Thirteen
Weeks Ended
October 31,
2015
|
|
|
Thirty-Nine
Weeks Ended
October 29,
2016
|
|
|
Thirty-Nine
Weeks Ended
October 31,
2015
|
|
Stock-based compensation expense before the recognized income tax benefit
|
|
$
|
12
|
|
|
$
|
24
|
|
|
$
|
208
|
|
|
$
|
219
|
|
Income tax benefit
|
|
$
|
4
|
|
|
$
|
9
|
|
|
$
|
79
|
|
|
$
|
84
|
|
As of October 29, 2016,
approximately $155,000 in unrecognized compensation expense remained related to non-vested SARs. This expense is expected to be
recognized over a weighted-average period of approximately 0.9 years.
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; the potential
impact of national and international security concerns on the retail environment; changes in our relationships with key suppliers;
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 hurricanes or other 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; our ability to manage our third-party vendor relationships; our ability to successfully execute our growth
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 growth plans; higher than anticipated costs or impairment charges associated with the closing of underperforming stores; our
ability to successfully grow our e-commerce sales; the inability of manufacturers to deliver products in a timely manner; changes
in the political and economic environments in China, Brazil, Europe and East Asia, where the primary manufacturers of footwear
are located; the impact of regulatory changes in the United States and the countries where our manufacturers are located; the continued
favorable trade relations between the United States and China and the other countries which are the major manufacturers of footwear;
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 January 30, 2016.
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. FINANCIAL STATEMENTS of this Quarterly Report
on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended January 30, 2016 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 over 400 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 fashion 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, jewelry, scarves 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, and introduces our concept to consumers
who are new to Shoe Carnival, in both existing and new markets.
Critical Accounting Policies
It is necessary for us to include certain
judgments in our reported financial results. These judgments involve estimates based in part on our historical experience
and incorporate 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 and income taxes
and are discussed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2016.
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 January 30,
2016. 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
|
|
April 30, 2016
|
|
|
405
|
|
|
|
3
|
|
|
|
4
|
|
|
|
404
|
|
|
|
(13,000
|
)
|
|
|
4,452,000
|
|
|
|
2.7
|
%
|
July 30, 2016
|
|
|
404
|
|
|
|
9
|
|
|
|
0
|
|
|
|
413
|
|
|
|
79,000
|
|
|
|
4,531,000
|
|
|
|
0.5
|
%
|
October 29, 2016
|
|
|
413
|
|
|
|
3
|
|
|
|
1
|
|
|
|
415
|
|
|
|
13,000
|
|
|
|
4,544,000
|
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date 2016
|
|
|
405
|
|
|
|
15
|
|
|
|
5
|
|
|
|
415
|
|
|
|
79,000
|
|
|
|
4,544,000
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2, 2015
|
|
|
400
|
|
|
|
7
|
|
|
|
6
|
|
|
|
401
|
|
|
|
15,000
|
|
|
|
4,434,000
|
|
|
|
3.0
|
%
|
August 1, 2015
|
|
|
401
|
|
|
|
5
|
|
|
|
6
|
|
|
|
400
|
|
|
|
(9,000
|
)
|
|
|
4,425,000
|
|
|
|
0.5
|
%
|
October 31, 2015
|
|
|
400
|
|
|
|
6
|
|
|
|
2
|
|
|
|
404
|
|
|
|
40,000
|
|
|
|
4,465,000
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date 2015
|
|
|
400
|
|
|
|
18
|
|
|
|
14
|
|
|
|
404
|
|
|
|
46,000
|
|
|
|
4,465,000
|
|
|
|
3.3
|
%
|
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 the 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
Weeks Ended
October 29, 2016
|
|
Thirteen
Weeks Ended
October 31, 2015
|
|
Thirty-Nine
Weeks Ended
October 29, 2016
|
|
Thirty-Nine
Weeks Ended
October 31, 2015
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales (including buying, distribution and occupancy costs)
|
|
|
70.1
|
|
|
|
69.9
|
|
|
|
70.7
|
|
|
|
70.4
|
|
Gross profit
|
|
|
29.9
|
|
|
|
30.1
|
|
|
|
29.3
|
|
|
|
29.6
|
|
Selling, general and administrative expenses
|
|
|
24.3
|
|
|
|
24.5
|
|
|
|
24.2
|
|
|
|
24.3
|
|
Operating income
|
|
|
5.6
|
|
|
|
5.6
|
|
|
|
5.1
|
|
|
|
5.3
|
|
Interest (income) expense, net
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Income before income taxes
|
|
|
5.6
|
|
|
|
5.6
|
|
|
|
5.1
|
|
|
|
5.3
|
|
Income tax expense
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
2.0
|
|
Net income
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
3.2
|
%
|
|
|
3.3
|
%
|
Executive
Summary for Third Quarter Ended October 29, 2016
Our third quarter operating results were
below our expectations due to slower sales in the second half of the quarter. While we recorded comparable store sales increases
in athletic merchandise in each month of the third quarter, sales of our fall and winter merchandise were not as strong as the
prior year, resulting in a high single-digit decline in
comparable store sales in our boot categories for the quarter. Additional
highlights for the third quarter of fiscal 2016 are as follows:
|
·
|
Net sales increased $4.8 million or 1.8% in the third quarter of fiscal 2016 compared to the same
period last year primarily as a result of store growth. Despite a 0.4% decrease in comparable store sales and a mid single-digit
decline in store traffic during the quarter, we experienced increases in our conversion rate, average sales per transaction, average
units per transaction and average unit retail. Although overall sales of men’s, women’s and children’s non-athletic
product were down on a comparable store basis, particularly in our boot categories, we posted a low single-digit increase in adult
athletics and we continued to produce positive results with sandals.
|
|
·
|
Our gross profit margin decreased to 29.9% in the third quarter of fiscal 2016 from 30.1% in the
prior year. Our merchandise margin increased 0.1% primarily due to margin increases on the sales of both our athletic and non-athletic
product for the quarter partially offset by an increase in expense related to our multi-channel sales initiatives. Buying, distribution and occupancy costs, as a percentage of sales,
increased 0.3% due to the deleveraging effect of lower same store sales and new store growth.
|
|
·
|
We repurchased 375,631 shares of common stock during the quarter at a total cost of $10.2 million
under our share repurchase program and ended the fiscal quarter with $33.5 million in cash and cash equivalents. We ended the quarter
with no interest bearing debt.
|
|
·
|
We opened three stores including two small-market stores during the third quarter of fiscal 2016,
bringing our total to five small-market stores opened in fiscal 2016. In aggregate, we expect to open seven small-market stores
in fiscal 2016 out of a total of 19 new store openings planned for the year. We continue to expect consistent small market unit
growth over the next several years as we expand into new and existing markets. Two stores were relocated and one store was closed
during the third quarter of fiscal 2016, ending the quarter with 415 stores.
|
|
·
|
During the third quarter of fiscal 2016, we completed the launch of a new online service which
gives our customers the option to buy online, pick up in store and buy online, ship to store. This feature provides the convenience
of local pickup for our customers with the added benefit of driving traffic back to our stores. This launch represents our continued
effort to evolve our customer experience and focus on multi-channel initiatives that we believe will better position us for long-term
growth as consumer shopping habits evolve.
|
|
·
|
During the third quarter of fiscal 2016, we increased membership in our Shoe Perks customer loyalty
program by an additional 1.1 million members, which bring total membership to 12.1 million customers. For the quarter, member sales
accounted for approximately 67% of our total business and members on average spent 18% more per transaction than non-members. We
believe our Shoe Perks program affords us tremendous opportunity to communicate, build relationships and engage with our most loyal
shoppers, which we believe will result in long-term sales gains.
|
Results of Operations for the Third
Quarter Ended October 29, 2016
Net Sales
Net sales increased $4.8 million to $274.5
million during the third quarter of fiscal 2016, a 1.8% increase over the prior year's third quarter net sales of $269.7 million.
Of this increase in net sales, $7.4 million was attributable to the sales generated by the 23 new stores we opened since the beginning
of the third quarter of fiscal 2015. This increase was partially offset by a 0.4%, or $0.7 million, decrease in comparable store
sales and a $1.9 million loss in sales from the eight stores closed since the beginning of the third quarter of fiscal 2015. Slower
than anticipated sales in non-athletic footwear, particularly boots, and a mid single-digit decline in store traffic were the primary
factors in our comparable store sales decrease during the third quarter.
Gross Profit
Gross profit increased to
$82.0 million during the third quarter of fiscal 2016 compared to gross profit of $81.3 million for the third quarter of
fiscal 2015. Our gross profit margin decreased to 29.9% compared to 30.1% in the third quarter of fiscal 2015. Our
merchandise margin increased 0.1% primarily due to margin increases on the sales of both our athletic and non-athletic
product for the quarter partially offset by an increase in expense related to our multi-channel sales initiatives. Buying,
distribution and occupancy costs, however, increased 0.3% as a percentage of sales during the third
quarter of fiscal 2016 compared to the same period last year primarily due to the deleveraging effect of lower
same store sales and new store growth.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased $414,000 in the third quarter of fiscal 2016 to $66.6 million compared to the same prior year period. As a percentage
of sales, these expenses decreased to 24.3% in the third quarter of fiscal 2016 from 24.5% in the third quarter of fiscal 2015.
Significant changes in expenses between the comparative periods included the following:
|
·
|
On an overall basis, the net change in selling, general and administrative expenses was
primarily driven by increases in wages, depreciation and stock-based compensation expense and reductions in incentive
compensation, employee health care and advertising expense during the third quarter of fiscal 2016 compared to the third
quarter of the prior year.
|
|
·
|
We incurred additional selling expense of $897,000 during the third quarter of fiscal 2016 compared
to the third quarter of last year related to the operation of 23 new stores opened since the beginning of the third quarter of
fiscal 2015, net of expense reductions associated with the closure of eight stores since the beginning of the same period.
|
|
·
|
Stock-based compensation expense increased $473,000 in the third quarter of fiscal 2016 compared
to the same period last year. This was primarily attributable to performance and service-based stock awards granted in fiscal 2016.
|
|
·
|
Incentive compensation decreased $790,000 in the third quarter of fiscal 2016 compared to the same
period last year. This decrease was primarily attributable to lower financial performance against the defined metrics associated
with our performance-based compensation in the third quarter of fiscal 2016.
|
Pre-opening costs included in selling,
general and administrative expenses were $351,000 in the third quarter of fiscal 2016 compared to $500,000 in the third quarter
last year. We opened three new stores in the third quarter of fiscal 2016 compared to six new stores in the third quarter of fiscal
2015. 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.
Store closing costs in selling, general
and administrative expenses were $335,000, or 0.1% as a percentage of sales, in the third quarter of fiscal 2016. Store closing
costs were $611,000, or 0.2% as a percentage of sales, in the third quarter last year. One store was closed in the third quarter
of fiscal 2016 compared to two stores in the third quarter of fiscal 2015.
Income Taxes
The effective income tax rate for the third
quarter of fiscal 2016 was 37.2% as compared to 38.0% for the same time period in fiscal 2015. 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.
Results of Operations for Nine Month
Period Ended October 29, 2016
Net Sales
Net sales increased $16.6 million to $766.9
million during the nine-month period ended October 29, 2016, a 2.2% increase compared to net sales of $750.3 million for the nine-month
period ended October 31, 2015. Of the $16.6 million increase in net sales, approximately $18.6 million was attributable to the
35 new stores we opened since the beginning of fiscal 2015 and $7.2 million was attributable to our 0.9% increase in comparable
store sales for the nine-month period ended October 29, 2016. These increases were partially offset by a loss of $9.2 million in
sales from the 20 stores closed since the beginning of fiscal 2015.
Gross Profit
Gross profit increased to $224.8 million during
the first nine months of fiscal 2016 compared to gross profit of $222.3 million in the first nine months of fiscal 2015. Our gross
profit margin decreased to 29.3% compared to 29.6% in the first nine months of fiscal 2015. Our merchandise margin decreased 0.4%
primarily due to expenses related to our multi-channel sales initiatives. Buying, distribution and occupancy costs decreased 0.1%
as a percentage of sales during the first nine months of fiscal 2016 compared to the same period last year primarily due a decrease
in outbound freight costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased $3.2 million in the first nine months of fiscal 2016 to $185.4 million compared to the same prior year period. As a percentage
of sales, these expenses decreased to 24.2% in the first nine months of fiscal 2016 from 24.3% in the third quarter of fiscal 2015.
Significant changes in expenses between the comparative periods included the following:
|
·
|
On an overall basis, the net change in selling, general and administrative expenses was primarily
driven by increases in wages, other employee benefits and stock-based compensation expense and reductions in incentive compensation,
employee health care and fixed asset write-offs during the first nine months of fiscal 2016 compared to the first nine months of
the prior year.
|
|
·
|
We incurred additional selling expense of $1.0 million during the first nine months of fiscal 2016
compared to the first nine months of last year related to the operation of 35 new stores opened since the beginning of fiscal 2015,
net of expense reductions associated with the closure of 20 stores since the beginning of the same period.
|
|
·
|
Stock-based compensation expense increased $843,000 in the first nine months of fiscal 2016 compared
to the same period last year. This was primarily attributable to management assumptions related to the timing and probability of
the vesting of performance-based stock awards and the net impact of the related adjustments on stock-based compensation expense
and grants of awards in fiscal 2016.
|
|
·
|
Incentive compensation decreased $1.4 million in the first nine months of fiscal 2016 compared
to the same period last year. This decrease was primarily attributable to lower financial performance against the defined metrics
associated with our performance-based compensation in the first nine months of fiscal 2016.
|
In the first nine months of fiscal 2016,
pre-opening costs included in selling, general and administrative expenses were $815,000, or 0.1% as a percentage of sales, compared
to $1.1 million, or 0.2% as a percentage of sales, in the same period last year. 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.
Store closing costs and non-cash impairment
charges included in selling, general and administrative expenses were $631,000, or 0.1% as a percentage of sales, in the first
nine months of fiscal 2016. Store closing costs and non-cash impairment charges of long-lived assets were $1.8 million, or 0.2%
as a percentage of sales, in the first nine months of last year. We closed five stores in the first nine months of fiscal 2016
and 14 stores were closed in the first nine months of fiscal 2015.
Income Taxes
The effective income tax rate for the first
nine months of fiscal 2016 was 37.8% compared to 38.5% for the same period in fiscal 2015. 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.
Liquidity and Capital Resources
We anticipate that our existing cash and
cash flows from operations will be sufficient to fund our planned store expansion along with other capital expenditures, working
capital needs, potential dividend payments, potential share repurchases under our share repurchase program, and various other commitments
and obligations, as they arise, for at least the next 12 months.
Cash Flow - Operating Activities
Our net cash provided by operating activities
was $21.5 million in the first nine months of fiscal 2016 compared to $23.3 million in the first nine months of fiscal 2015. These
amounts reflect our income from operations adjusted for non-cash items and working capital changes. The year-over-year decrease
in operating cash flow was primarily driven by a reduction in merchandise inventories and the timing of payments for accounts payable
and accrued liabilities.
Working capital decreased to $268.7 million
at October 29, 2016, from $284.3 million at October 31, 2015, primarily due to decreases in cash and inventory partially offset
by a decrease in accounts payable compared to the third quarter of the prior year. The current ratio was 4.0 as of October 29,
2016, compared to 4.1 at October 31, 2015.
Cash Flow - Investing Activities
Our cash outflows for investing activities
are primarily for capital expenditures. During the first nine months of fiscal 2016, we expended $17.4 million for the purchase
of property and equipment, of which $12.9 million was for new stores, remodeling and relocations. During the first nine months
of fiscal 2015, we expended $22.3 million for the purchase of property and equipment, of which $15.0 million was for new stores,
remodeling and relocations. The remaining capital expenditures in both periods were for continued investments in technology and
normal asset replacement activities.
Cash Flow - Financing Activities
Cash outflows for financing activities are
primarily for cash dividend payments and share repurchases. 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 restricted
stock awards. Our cash inflows from financing activities have represented proceeds from the issuance of shares as a result of stock
option exercises and purchases under our Employee Stock Purchase Plan.
During the first nine months of fiscal
2016, net cash used in financing activities was $39.3 million compared to net cash used in financing activities of $13.6 million
in the first nine months of fiscal 2015. The increase in cash used in financing activities between the two respective periods was
primarily attributable to the $35.4 million of common stock repurchased under our share repurchase program during the first nine
months of fiscal 2016, compared to the $10.2 million repurchased in the first nine months of fiscal 2015.
Capital Expenditures
Capital expenditures for fiscal 2016, including
actual expenditures during the first nine months, are expected to be between $21 million and $22 million, with approximately $16
million to be used for new stores, relocations and remodels. Lease incentives to be received from landlords during fiscal 2016,
including actual amounts received during the first nine months, are expected to be approximately $4 to $5 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
We utilize a formalized 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 and utilize real estate specific software
tools for portfolio analysis. These enhancements aid us in identifying the best possible locations for future expansion and identifying
potential store closings and relocations. We believe this will enable us to realize positive long-term financial performance of
our portfolio.
In fiscal 2016, we anticipate opening 19
new stores, including seven small-market stores. We opened 15 stores in the first nine months of fiscal 2016, including five small-market
stores. Pre-opening expenses, including rent, freight, advertising, salaries and supplies, are expected to total approximately
$1.7 million for fiscal 2016, or an average of $87,000 per store. During fiscal 2015, we opened 20 new stores and expended $1.9
million on pre-opening expenses, or an average of $96,000 per store. 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 closed five stores during the
first nine months of fiscal 2016. Fourteen stores were closed during the first nine months of fiscal 2015. Currently, we have
four additional store closings scheduled for the fourth quarter of fiscal 2016. The timing and actual amount of expense
recorded in closing a store can vary significantly depending in part on the period in which management commits to a closing
plan, the remaining basis in the fixed assets to be disposed of at closing and the cost incurred in terminating the lease. We
will continue to review our annual store growth rate based on our view of the internal and external opportunities and
challenges in the marketplace.
Dividends
On September 8, 2016, our Board of Directors
approved the payment of our third quarter cash dividend to our shareholders. The dividend of $0.07 per share was paid on
October 17, 2016 to shareholders of record as of the close of business on October 3, 2016.
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.
Credit Facility
Our unsecured credit agreement
provides for up to $50.0 million in cash advances and commercial and standby letters of credit with borrowing limits based on
eligible inventory. It contains covenants which stipulate: (1) Total Shareholders’ Equity, adjusted for the effect of
any share repurchases, will not fall below that of the prior fiscal year-end; (2) the ratio of funded debt plus rent to
EBITDA plus rent will not exceed 2.5 to 1.0; and (3) cash dividends for a fiscal year will not exceed 30% of condensed
consolidated net income for the immediately preceding fiscal year, and in no event may the total distributions in any fiscal
year exceed 25% of the prior year’s ending net worth. We were in compliance with these covenants as of October 29,
2016. Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued
interest at their discretion. There were no borrowings outstanding under the credit facility and letters of credit
outstanding were $1.0 million at October 29, 2016. As of October 29, 2016, $49.0 million was available to us for
additional borrowings under the credit facility.
Share Repurchase Program
On December 9, 2015, our Board of Directors
authorized a new share repurchase program for up to $50 million of outstanding common stock, effective January 1, 2016. The purchases
may be made in the open market or through privately negotiated transactions, from time-to-time through December 31, 2016, and in
accordance with applicable laws, rules and regulations. On January 21, 2016, we entered into a stock repurchase plan for the purpose
of repurchasing shares of our common stock in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act. After
its expiration, we entered into another such plan on June 28, 2016 (collectively, the “Rule 10b5-1 Plans”). The Rule
10b5-1 Plans were established pursuant to, and as part of, our share repurchase program and permit shares to be repurchased in
accordance with pre-determined criteria when repurchases would otherwise be prohibited, such as during self-imposed blackout periods,
or under insider trading laws. The 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 conditions.
During the third quarter of fiscal 2016,
we repurchased 375,631 shares of common stock at a total cost of $10.2 million under the new share repurchase program. As of October
29, 2016, approximately 1.6 million shares at an aggregate cost of $39.7 million had been repurchased under the new share repurchase
program. The amount that remained available under the share repurchase program at October 29, 2016 was $10.3 million.
Seasonality and Quarterly Results
Our 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 the opening of a new store are charged to expense as incurred. Therefore, our results of operations may be adversely affected
in any quarter in which we incur pre-opening expenses related to the opening of new stores.
We have three distinct peak selling periods:
Easter, back-to-school and Christmas. To prepare for our peak shopping seasons, we must order and keep in stock significantly more
merchandise than we would carry during other parts of the year. Any unanticipated decrease in demand for our products during these
peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and
gross margins and negatively affect our profitability. Our operating results depend significantly upon the sales generated during
these periods.