Notes to Consolidated Financial Statements
Note 1 – Organization and Description of Business
Our consolidated financial statements include the accounts of Shoe Carnival, Inc. and its wholly-owned subsidiaries SCHC, Inc. and Shoe Carnival Ventures, LLC, and SCLC, Inc., a wholly-owned subsidiary of SCHC, Inc. (collectively referred to as “we”, “our”, “us” or the “Company”). All intercompany accounts and transactions have been eliminated. Our primary activity is the sale of footwear and related products through our retail stores in 35 states within the continental United States and in Puerto Rico. We also offer online shopping on our mobile app and our e-commerce site at www.shoecarnival.com.
Note 2 – Summary of Significant Accounting Policies
Fiscal Year
Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31. Unless otherwise stated, references to years 2019, 2018 and 2017 relate to the fiscal years ended February 1, 2020, February 2, 2019 and February 3, 2018, respectively. Fiscal year 2017 consisted of 53 weeks and the other fiscal years consisted of 52 weeks.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the financial statement reporting date in addition to the reported amounts of certain revenues and expenses for the reporting period. The assumptions used by management in future estimates could change significantly due to changes in circumstances and actual results could differ from those estimates.
Cash and Cash Equivalents
We had cash and cash equivalents of $61.9 million at February 1, 2020 and $67.0 million at February 2, 2019. Credit and debit card receivables and receivables due from a third party totaling $10.0 million and $8.2 million were included in cash equivalents at February 1, 2020 and February 2, 2019, respectively. Credit and debit card receivables generally settle within three days; receivables due from a third party generally settle within 15 days.
We consider all short-term investments with an original maturity date of three months or less to be cash equivalents. As of February 1, 2020 and February 2, 2019, all invested cash was held in money market mutual funds. While investments are not considered by management to be at significant risk, they could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to either invested cash or cash held in our bank accounts.
Fair Value Measurements
Certain assets are valued and disclosed at fair value. Financial assets include cash and cash equivalents. Nonfinancial assets consist of long-lived assets that are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Accounting guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
44
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
The three levels of the fair value hierarchy are described as follows:
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 – Inputs to the valuation methodology include:
|
•
|
quoted prices for similar assets or liabilities in active markets;
|
|
•
|
quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
•
|
inputs other than quoted prices that are observable for the asset or liability;
|
|
•
|
inputs that are derived principally from or corroborated by observable market; and
|
|
•
|
data by correlation or other means.
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs.
Merchandise Inventories and Cost of Sales
Merchandise inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. For determining net realizable value, we estimate the future demand and related sale price of merchandise contained in inventory as of the balance sheet date. The stated value of merchandise inventories contained on our consolidated balance sheets also includes freight, certain capitalized overhead costs and reserves. Factors considered in determining if our inventory is properly stated at the lower of cost or net realizable value includes, among others, recent sale prices, the length of time merchandise has been held in inventory, quantities of various styles held in inventory, seasonality of merchandise, expected consideration to be received from our vendors and current and expected future sales trends. We also review aging trends, which include the historical rate at which merchandise has sold below cost and the value and nature of merchandise currently held in inventory and priced below original cost. We reduce the value of our inventory to its estimated net realizable value where cost exceeds the estimated future selling price. Material changes in the factors previously noted could have a significant impact on the actual net realizable value of our inventory and our reported operating results.
Cost of sales includes the cost of merchandise sold, buying, distribution, and occupancy costs, inbound freight expense, provision for inventory obsolescence, inventory shrink and credits and allowances from merchandise vendors. Cost of sales related to our e-commerce orders include charges paid to a third-party service provider in addition to the freight expense for delivering merchandise to our customer.
Leases
We lease our retail stores and our single distribution center, which has a current lease term of 15 years, expiring in 2034. We also enter into leases of equipment, copiers and billboards. Prior to the purchase of our corporate headquarters in fiscal 2019, it was also leased. All of our leases are operating leases. Therefore, how operating leases are recognized throughout the financial statements in accordance with applicable accounting guidance can have a significant impact on our financial condition and results of operations and related disclosures.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which replaced most existing lease accounting guidance. This guidance requires an entity to recognize leased assets (“right-of-use” assets or “ROU” assets) and obligations created by those leased assets on the balance sheet at their present values and to disclose key information about the entity's leasing arrangements. This new guidance was codified as Accounting Standards Codification Topic No. 842 – Leases (“ASC 842”). ASC 842 became effective for us on February 3, 2019. We adopted ASC 842 using the effective date as the date of initial application; therefore, the comparative periods as of February 1, 2019 and for the years ended in fiscal 2018 and fiscal 2017 have not been adjusted and continue to be reported under the previous lease guidance as described in ASC 840. ASC 840 did not require recognition of ROU assets and related lease liabilities associated with operating leases. Therefore, the adoption of this guidance had a material impact on our consolidated balance sheet but did not have a material impact on our consolidated statements of income or our consolidated statements of cash flow.
45
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Under the new guidance, companies may elect certain optional practical expedients. We elected the practical expedient that permits us not to recognize ROU assets and related liabilities that arise from short-term leases (i.e. leases with terms of twelve months or less). We elected the practical expedient that permits us to account for lease and non-lease components as a single lease component for new and modified leases, effective upon adoption of the new guidance. We did not elect the transition practical expedient that permit companies to use hindsight when determining lease term and impairment of ROU assets. We also did not elect the transition package of practical expedients that is permitted by the guidance; therefore, we were required to reassess previous accounting conclusions regarding whether existing arrangements are, or contain, leases, the classification of existing leases and the treatment of initial direct costs.
At adoption, initial recognition of operating lease liabilities totaled $251.7 million as of February 3, 2019. We recorded corresponding operating lease ROU assets based on the operating lease liabilities, reduced by net accrued rent, unamortized deferred lease incentives and prepaid rent totaling $25.8 million. Moreover, as of the adoption date, we recorded $2.6 million of lease-related capitalized costs to beginning retained earnings, net of tax, that did not meet the definition of initial direct costs in accordance with the new guidance.
See Note 8 – “Leases” for additional discussion of our lease policies as well as additional disclosures related to our leases.
Revenue Recognition
Substantially all of our revenue is for a single performance obligation and is recognized when control passes to customers. We consider control to have transferred when we have a present right to payment, the customer has title to the product, physical possession of the product has been transferred to the customer and the risks and rewards of the product that we retain are minimal. The redemption of loyalty points under our Shoe Perks loyalty rewards program and redemptions of gift cards are accounted for as separate performance obligations.
We adopted and applied the new revenue guidance in Accounting Standards Codification Topic No. 606 – Revenue from Contracts with Customers (“ASC 606”) as of February 4, 2018 using the modified retrospective transition approach. Based on this approach, the consolidated financial statements for fiscal 2017 were not restated and are reported under the prior revenue guidance. At adoption, we elected the practical expedient to treat shipping and handling activities associated with freight charges that occur after control of the product transfers to the customer as fulfillment activities. These costs are expensed as incurred and included in cost of sales in our consolidated statements of income. We also elected the practical expedient for sales tax collected, which allows us to exclude from our transaction price any amounts collected from customers for sales tax and other similar taxes. There were no changes to our comparative reporting of shipping and handling costs included in cost of sales or accounting for sales tax as a result of the adoption of ASC 606.
See Note 4 – “Revenue” for additional discussion of our revenue recognition policies as well as additional disclosures on revenue from contracts with customers.
Property and Equipment- Net
Property and equipment is stated at cost. Depreciation and amortization of property, equipment and leasehold improvements are taken on the straight-line method over the shorter of the estimated useful lives of the assets or the applicable lease terms. Lives used in computing depreciation and amortization range from two to twenty-five years. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures that materially increase values, improve capacities or extend useful lives are capitalized. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in operations.
Cloud Computing Arrangements that are Service Contracts
We account for the costs to implement hosted cloud computing arrangements that are considered to be service contracts in current and noncurrent other assets. We capitalize these costs based on the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We amortize the costs over the related service contract period for the hosted arrangement. For fiscal 2019, the amortization of the implementation costs and the related service contract fees are included in selling, general and administrative expenses.
46
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Long-Lived Asset Impairment Testing
We periodically evaluate our long-lived assets if events or circumstances indicate the carrying value may not be recoverable. The carrying value of long-lived assets is considered impaired when the carrying value of the assets exceeds the expected future cash flows to be derived from their use. Assets are grouped, and the evaluation is performed, at the lowest level for which there are identifiable cash flows, which is generally at a store level. Store level asset groupings typically include property and equipment and operating lease right-of-use assets. If the estimated, undiscounted future cash flows for a store are determined to be less than the carrying value of the store’s assets, an impairment loss is recorded for the difference between estimated fair value and carrying value. Assets subject to impairment are adjusted to estimated fair value and, if applicable, an impairment loss is recorded in selling, general and administrative expenses. If the operating lease right-of-use asset is impaired, we would amortize the remaining right-of-use asset on a straight-line basis over the remaining lease term.
We estimate the fair value of our long-lived assets using store specific cash flow assumptions discounted by a rate commensurate with the risk involved with such assets while incorporating marketplace assumptions. Our estimates are derived from 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. We estimate the fair value of operating right-of-use assets using the market value of rents applicable to the leased asset, discounted using the remaining lease term.
External factors, such as the local environment in which the store resides, including store 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 may have an effect on the impairment recorded. If actual operating results or market conditions differ from those anticipated, the carrying value of certain of our assets may prove unrecoverable and we may incur additional impairment charges in the future.
Insurance Reserves
We self-insure a significant portion of our workers’ compensation, general liability and employee health care costs and also maintain insurance in each area of risk to protect us from individual and aggregate losses over specified dollar values. Self-insurance reserves include estimates of claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported. These estimates take into consideration a number of factors, including historical claims experience, severity factors, statistical trends and, in certain instances, valuation assistance provided by independent third parties. As of February 1, 2020 and February 2, 2019, our self-insurance reserves totaled $2.7 million and $3.4 million, respectively. We record self-insurance expense as a component of selling, general and administrative expenses in our consolidated statements of income. While we believe that the recorded amounts are adequate, there can be no assurance that changes to management’s estimates will not occur due to limitations inherent in the estimating process. If actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Consideration Received From a Vendor
Consideration is primarily received from merchandise vendors and includes co-operative advertising/promotion, margin assistance, damage allowances and rebates earned for a specific level of purchases over a defined period. Consideration principally takes the form of credits that we can apply against trade amounts owed.
Consideration is recorded as a reduction of the price paid for the vendor’s products and recorded as a reduction of our cost of sales unless the consideration represents a reimbursement of a specific, incremental, identifiable cost; in such a scenario, it is recorded as an offset to the same financial statement line item.
Consideration received after the related merchandise has been sold is recorded as an offset to cost of sales in the period negotiations are finalized. For consideration received on merchandise still in inventory, the allowance is recorded as a reduction to the cost of on-hand inventory and recorded as a reduction of our cost of sales at the time of sale. Should the consideration received be related to something other than the vendor’s product and such consideration received exceeds the incremental costs incurred, then the excess consideration is recorded as a reduction to the cost of on-hand inventory and allocated to cost of sales in future periods utilizing an average inventory turn rate.
47
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Advertising Costs
Print, television, radio, outdoor media, digital media and internal production costs are expensed when incurred. External production costs are expensed in the period the advertisement first takes place. Advertising expenses included in selling, general and administrative expenses were $40.0 million, $41.2 million and $40.1 million in fiscal years 2019, 2018 and 2017, respectively.
Store Opening and Start-up Costs
Non-capital expenditures, such as payroll, supplies and rent incurred prior to the opening of a new store, are charged to expense in the period they are incurred. Advertising related to new stores is expensed pursuant to the aforementioned advertising policy.
Stock-Based Compensation
We recognize compensation expense for stock-based awards based on a fair value based method. Stock-based awards may include stock units, restricted stock, stock appreciation rights, stock options and other stock-based awards under our stock-based compensation plans. Additionally, we recognize stock-based compensation expense for the discount on shares sold to employees through our employee stock purchase plan. This discount represents the difference between the market price and the employee purchase price. Stock-based compensation expense is included in selling, general and administrative expense.
We account for forfeitures as they occur in calculating stock-based compensation expense for the period. For performance-based stock awards, we estimate the probability of vesting based on the likelihood that the awards will meet their performance goals.
Segment Information
We are a family footwear retailer that offers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with emphasis on national name brands. We operate our business as one reportable segment based on the similar nature of products sold; merchandising, distribution, and marketing processes involved; target customers; and economic characteristics of our stores and e-commerce platform. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores.
Income Taxes
We compute income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest expense and penalties, if any, related to uncertain tax positions in income tax expense.
On December 22, 2017, the U.S. government enacted the U.S. Tax Cuts and Jobs Act (the “Tax Act”), which made significant changes to the Internal Revenue Code of 1986, as amended, including, but not limited to, reducing the U.S. corporate statutory tax rate from 35% to 21%, and eliminating or limiting deduction of several expenses which were previously deductible. In connection with the Tax Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period of one year from the Tax Act’s enactment date for companies to complete their accounting under the income tax guidance. For our initial analysis of the impact of the Tax Act, we recorded additional income tax expense of $4.4 million in fiscal 2017, which was related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future. We also calculated our fiscal 2017 income tax expense using a blended rate of 33.7%, which is based on the applicable tax rates before and after the Tax Act and the number of days in the fiscal year that the respective tax rates were in effect. We determined that these provisions were the only provisions of the Tax Act that impacted fiscal 2017 results. In fiscal 2018 we filed our fiscal 2017 federal income tax return and completed our assessment of the final impact of the Tax Act and recorded an income tax benefit of $0.1 million.
48
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share as shown on the face of the accompanying consolidated statements of income:
|
|
Fiscal Year Ended
|
|
|
|
February 1, 2020
|
|
|
February 2, 2019
|
|
|
February 3, 2018
|
|
|
|
(In thousands, except per share data)
|
|
Basic Net Income per Share:
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Net income
|
|
$
|
42,914
|
|
|
|
|
|
|
|
|
|
|
$
|
38,135
|
|
|
|
|
|
|
|
|
|
|
$
|
18,933
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating
securities
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
Net income available for basic
common shares and basic
net income per share
|
|
$
|
42,851
|
|
|
|
14,427
|
|
|
$
|
2.97
|
|
|
$
|
37,983
|
|
|
|
15,111
|
|
|
$
|
2.51
|
|
|
$
|
18,683
|
|
|
|
16,220
|
|
|
$
|
1.15
|
|
Diluted Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
42,914
|
|
|
|
|
|
|
|
|
|
|
$
|
38,135
|
|
|
|
|
|
|
|
|
|
|
$
|
18,933
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating
securities
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
Adjustment for dilutive potential
common shares
|
|
|
1
|
|
|
|
259
|
|
|
|
|
|
|
|
4
|
|
|
|
388
|
|
|
|
|
|
|
|
0
|
|
|
|
7
|
|
|
|
|
|
Net income available for diluted
common shares and diluted
net income per share
|
|
$
|
42,852
|
|
|
|
14,686
|
|
|
$
|
2.92
|
|
|
$
|
37,987
|
|
|
|
15,499
|
|
|
$
|
2.45
|
|
|
$
|
18,683
|
|
|
|
16,227
|
|
|
$
|
1.15
|
|
Our basic and diluted net income 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. 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 – Fair Value of Financial Instruments
The following table presents financial instruments that are measured at fair value on a recurring basis at February 1, 2020 and February 2, 2019:
|
|
Fair Value Measurements
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents – money market mutual funds
|
|
$
|
48,080
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
48,080
|
|
As of February 2, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents – money market mutual funds
|
|
$
|
68,500
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
68,500
|
|
The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.
49
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Note 4 – Revenue
Disaggregation of Revenue by Product Category
Revenue is disaggregated by product category below. Net sales and percentage of net sales for the fiscal years 2019, 2018 and 2017 are as follows:
(In thousands)
|
|
February 1,
2020
|
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
Non-Athletics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women's
|
|
$
|
255,773
|
|
|
25
|
%
|
|
$
|
250,320
|
|
|
24
|
%
|
|
$
|
244,945
|
|
|
24
|
%
|
Men's
|
|
|
149,075
|
|
|
14
|
|
|
|
144,628
|
|
|
14
|
|
|
|
141,295
|
|
|
14
|
|
Children's
|
|
|
54,707
|
|
|
5
|
|
|
|
51,963
|
|
|
5
|
|
|
|
50,255
|
|
|
5
|
|
Total
|
|
|
459,555
|
|
|
44
|
|
|
|
446,911
|
|
|
43
|
|
|
|
436,495
|
|
|
43
|
|
Athletics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women's
|
|
|
175,298
|
|
|
17
|
|
|
|
179,411
|
|
|
18
|
|
|
|
177,627
|
|
|
17
|
|
Men's
|
|
|
210,157
|
|
|
20
|
|
|
|
215,796
|
|
|
21
|
|
|
|
219,224
|
|
|
22
|
|
Children's
|
|
|
139,625
|
|
|
14
|
|
|
|
138,686
|
|
|
14
|
|
|
|
138,074
|
|
|
14
|
|
Total
|
|
|
525,080
|
|
|
51
|
|
|
|
533,893
|
|
|
53
|
|
|
|
534,925
|
|
|
53
|
|
Accessories
|
|
|
48,402
|
|
|
5
|
|
|
|
45,100
|
|
|
4
|
|
|
|
43,606
|
|
|
4
|
|
Other
|
|
|
3,514
|
|
|
0
|
|
|
|
3,746
|
|
|
0
|
|
|
|
4,128
|
|
|
0
|
|
Total
|
|
$
|
1,036,551
|
|
|
100
|
%
|
|
$
|
1,029,650
|
|
|
100
|
%
|
|
$
|
1,019,154
|
|
|
100
|
%
|
Accounting Policy and Performance Obligations
We operate as a multi-channel, family footwear retailer and provide the convenience of shopping at our brick-and-mortar stores or shopping online through our e-commerce and mobile platforms. As part of our multi-channel strategy, we offer Shoes 2U, a program that enables us to ship product to a customer’s home or selected store if the product is not in stock. We also offer “buy online, pick up in store” services for our customers. “Buy online, pick up in store” provides the convenience of local pickup for our customers.
For our brick-and-mortar stores, we satisfy our performance obligation and control is transferred at the point of sale when the customer takes possession of the products. This also includes the “buy online, pick up in store” scenario described above and includes Shoes 2U when customers choose to pick up their goods in-store. For sales made through our e-commerce site or mobile app in which the customer chooses home delivery, we transfer control and recognize revenue when the product is shipped from our stores or distribution center. This also includes Shoes 2U when the customer chooses home delivery.
We offer our customers sales incentives including coupons, discounts, and free merchandise. Sales are recorded net of such incentives and returns and allowances. If an incentive involves free merchandise, that merchandise is recorded as a zero sale and the cost is included in cost of sales. Gift card revenue is recognized at the time of redemption. When a customer makes a purchase as part of our rewards program, we allocate the transaction price between the goods purchased and the loyalty reward points and recognize the loyalty revenue based on estimated customer redemptions.
Transaction Price and Payment Terms
The transaction price is the amount of consideration we expect to receive from our customers and is reduced by any stated promotional discounts at the time of purchase. The transaction price may be variable due to terms that permit customers to exchange or return products for a refund within a limited period of time. The implicit contract with the customer reflected in the transaction receipt states the final terms of the sale, including the description, quantity, and price of each product purchased. The customer agrees to a stated price in the contract that does not vary over the term of the contract and may include revenue to offset shipping costs. Taxes imposed by governmental authorities such as sales taxes are excluded from net sales.
50
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Our brick-and-mortar stores accept various forms of payment from customers at the point of sale. These include cash, checks, credit/debit cards and gift cards. Our e-commerce and mobile platforms accept credit/debit cards, PayPal, Apple Pay and gift cards as forms of payment. Payments made for products are generally collected when control passes to the customer, either at the point of sale or at the time the customer order is shipped. For Shoes 2U transactions, customers may order the product at the point of sale. For these transactions, customers pay in advance and unearned revenue is recorded as a contract liability. We recognize the related revenue when control has been transferred to the customer (i.e., when the product is picked up by the customer or shipped to the customer). Unearned revenue related to Shoes 2U was not material to our consolidated financial statements at February 1, 2020 and February 2, 2019.
Returns and Refunds
Brick-and-mortar and online customers can exchange or return products for a refund within a limited period of time. We have established a returns allowance based upon historical experience in order to estimate these transactions. This allowance is recorded as a reduction in sales with a corresponding refund liability recorded in accrued and other liabilities. The estimated cost of merchandise inventory is recorded as a reduction to cost of sales and an increase in merchandise inventories. At February 1, 2020, approximately $718,000 of refund liabilities and $500,000 of right of return assets associated with estimated product returns were recorded in our consolidated balance sheet. At February 2, 2019, approximately $600,000 of refund liabilities and $410,000 of right of return assets associated with estimated product returns were recorded in our consolidated balance sheet.
Contract Liabilities
We sell gift cards in our brick-and-mortar stores and through our e-commerce and mobile platforms. Gift card purchases are recorded as an increase to contract liabilities at the time of purchase and a decrease to contract liabilities when a customer redeems a gift card. Estimated breakage is determined based on historical breakage percentages and recognized as revenue based on expected gift card usage. We do not record breakage revenue when escheat liability to relevant jurisdictions exists. At February 1, 2020 and February 2, 2019, approximately $1.5 million and $1.6 million of contract liabilities associated with unredeemed gift cards were recorded in our consolidated balance sheets, respectively. We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions within two years. Breakage revenue associated with our gift cards of $143,000 and $179,000 was recognized in net sales during fiscal 2019 and fiscal 2018, respectively.
Our Shoe Perks rewards program allows customers to accrue points and provides customers with the opportunity to earn rewards. Points under Shoe Perks are earned primarily by making purchases either in-store or through our online platform. Once a certain threshold of accumulated points is reached, the customer earns a reward certificate, which is redeemable at any of our stores or online.
When a Shoe Perks customer makes a purchase, we allocate the transaction price between the goods purchased and the loyalty reward points earned based on the relative standalone selling price. The portion allocated to the points program is recorded as a contract liability for rewards that are expected to be redeemed. We then recognize revenue based on an estimate of when customers redeem rewards, which incorporates an estimate of points expected to expire using historical rates. During fiscal 2019 and 2018, approximately $2.4 million and $1.5 million, respectively, of loyalty rewards were recognized in net sales. At February 1, 2020 and February 2, 2019, approximately $679,000 and $245,000 of contract liabilities associated with loyalty rewards were recorded in our consolidated balance sheets, respectively. We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions in less than one year.
51
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Note 5 – Property and Equipment and Hosted Cloud Computing Arrangements
The following is a summary of property and equipment:
(In thousands)
|
|
February 1,
2020
|
|
|
February 2,
2019
|
|
Land
|
|
$
|
1,564
|
|
|
$
|
0
|
|
Buildings
|
|
|
6,636
|
|
|
|
0
|
|
Furniture, fixtures and equipment
|
|
|
153,198
|
|
|
|
156,596
|
|
Leasehold improvements
|
|
|
105,611
|
|
|
|
110,824
|
|
Total
|
|
|
267,009
|
|
|
|
267,420
|
|
Less accumulated depreciation and amortization
|
|
|
(199,228
|
)
|
|
|
(196,815
|
)
|
Property and equipment – net
|
|
$
|
67,781
|
|
|
$
|
70,605
|
|
In fiscal 2019, we recorded an impairment charge of $1.2 million on long-lived assets held and used, which was included in selling, general and administrative expenses for the period. Subsequent to this impairment, these long-lived assets had no remaining unamortized basis. There were no impairments of long-lived assets recorded during fiscal 2018. In fiscal 2017, we recorded an impairment charge of $5.1 million on long-lived assets held and used, which was included in selling, general and administrative expenses for the period. Subsequent to this impairment, these long-lived assets had a remaining unamortized basis of $4.7 million.
We have engaged several third party providers of cloud computing arrangements that are service contracts to host our Customer Relationship Management (“CRM”) platform and our transportation, warehouse and e-commerce order management systems. Total gross capitalized costs as of February 1, 2020 and February 2, 2019 were $8.1 million and $1.2 million, respectively, for these arrangements. Accumulated amortization totaled $122,000 at February 1, 2020 and was $0 at February 2, 2019. Total amortization expense was $122,000 during fiscal year 2019. As of February 1, 2020, $713,000 is classified in Other current assets and $7.3 million is classified as Other noncurrent assets in our consolidated balance sheet, net of accumulated amortization.
Note 6 – Accrued and Other Liabilities
Accrued and other liabilities consisted of the following:
(In thousands)
|
|
February 1,
2020
|
|
|
February 2,
2019
|
|
Employee compensation and benefits
|
|
$
|
7,687
|
|
|
$
|
9,771
|
|
Self-insurance reserves
|
|
|
2,698
|
|
|
|
3,447
|
|
Gift cards
|
|
|
1,538
|
|
|
|
1,558
|
|
Sales and use tax
|
|
|
2,317
|
|
|
|
2,131
|
|
Other
|
|
|
4,455
|
|
|
|
5,162
|
|
Total accrued and other liabilities
|
|
$
|
18,695
|
|
|
$
|
22,069
|
|
Note 7 – Debt
On March 27, 2017 we entered into a second amendment of our current unsecured credit agreement (the “Credit Agreement”) to extend the expiration date by five years and renegotiate certain terms and conditions. The Credit Agreement, as amended, continues to provide for up to $50.0 million in cash advances and commercial and standby letters of credit with borrowing limits based on eligible inventory, which amount may be increased from time to time by up to an additional $50 million, if certain conditions are met. These conditions include consent from the current lenders if additional capacity is sought from those lenders.
52
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
The Credit Agreement contains covenants which stipulate: (1) Total Shareholders’ Equity (as defined in the Credit Agreement) will not fall below $250.0 million at the end of each fiscal quarter; (2) the ratio of funded debt plus three times rent to EBITDA (as defined in the Credit Agreement) plus rent will not exceed 2.5 to 1.0; (3) the aggregate amount of cash dividends for a fiscal year will not exceed $10 million; and (4) distributions in the form of redemptions of Equity Interests (as defined in the Credit Agreement) can 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. Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest at their discretion. No borrowings were outstanding as of February 1, 2020 and February 2, 2019. As of February 1, 2020, there were $1.2 million in letters of credit outstanding and $48.8 million available to us for borrowing under the Credit Agreement.
The credit facility bears interest, at our option, at (1) the agent bank’s prime rate as defined in the Credit Agreement plus 1.0%, with the prime rate defined as the greater of (a) the Federal Fund rate plus 0.50% or (b) the interest rate announced from time to time by the agent bank as its “prime rate” or (2) LIBOR plus 1.25% to 2.50%, depending on our achievement of certain performance criteria. A commitment fee is charged at 0.20% to 0.35% per annum, depending on our achievement of certain performance criteria, on the unused portion of the bank group’s commitment. The Credit Agreement expires on March 27, 2022.
Note 8 – Leases
Accounting Policy for Leases
We evaluate whether a contract is a lease at its inception, and if it is a lease, the type of lease. All of our leases are classified as operating leases as of February 1, 2020. Leases with terms of twelve months or less are immaterial and are expensed as incurred. We do not have any leases with related parties. In addition, we do not have any sublease arrangements with any related party or third party. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In accordance with ASC 842, on the lease commencement date we recognize an ROU asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term. As the rate implicit in our leases is not readily determinable, we utilize an incremental borrowing rate for the initial measurement of ROU assets and liabilities, which is determined through the development of a synthetic credit rating. For leases existing before the adoption of ASC 842, we used an incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of ASC 842, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.
Our leases typically provide for fixed minimum rental payments, and certain leases provide for contingent rental payments based upon various specified percentages of sales above minimum levels. In addition to rental payments, we are required to pay certain non-lease components, such as real estate taxes, insurance and common area maintenance (“CAM”), on most of our real estate leases. Such non-lease components are typically variable in nature. Certain real estate leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes.
In addition to fixed minimum rental payments set forth in our leases, the measurement of ROU assets and liabilities can also include prepaid rent, landlord incentives (such as construction and tenant improvement allowances), fixed payments related to lease components (such as rent escalation payments scheduled at the lease commencement date), fixed payments related to non-lease components (such as taxes, insurance, and CAM) and initial direct costs incurred in conjunction with securing a lease.
The measurement of ROU assets and liabilities excludes amounts related to variable payments related to lease components (such as contingent rent payments based on performance), variable payments related to non-lease components (such as real estate taxes, insurance and CAM) and non-store related leases with an initial term of 12 months or less.
53
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Our real estate leases typically include options to extend the lease or to terminate the lease at our sole discretion. Options to extend real estate leases typically include one or more options to renew, with renewal terms that typically extend the lease term for five years or more. Many of our leases also contain “co-tenancy” provisions, including the required presence and continued operation of certain anchor tenants in the adjoining retail space. If a co-tenancy violation occurs, we have the right to a reduction of rent for a defined period after which we have the option to terminate the lease if the violation is not cured. In addition to co-tenancy provisions, certain leases contain “go-dark” provisions that allow us to cease operations while continuing to pay rent through the end of the lease term. When determining the lease term, we include options that are reasonably certain to be exercised.
Operating lease liabilities are increased by interest and reduced by payments each period, and ROU assets are amortized over the lease term. Interest on operating lease liabilities and the amortization of ROU assets results in straight-line rent expense over the lease term. We record variable lease expense associated with contingent rent, reduced rent due to co-tenancy violations, and other variable non-lease components when incurred.
For new leases, renewals or amendments, we make certain estimates and assumptions regarding property values, market rents, property lives, discount rates and probable terms. These estimates and assumptions can impact: (1) lease classification and the related accounting treatment; (2) rent holidays, escalations or deferred lease incentives, which are taken into consideration when calculating straight-line expense; (3) the term over which leasehold improvements for each store are amortized; and (4) the values and lives of adjustments to initial ROU assets. The amount of amortized rent expense would vary if different estimates and assumptions were used.
Lease-related costs reported in our consolidated statements of income post adoption of ASC 842 were as follows:
(In thousands)
|
|
2019
|
|
Operating lease cost
|
|
$
|
54,681
|
|
Variable lease costs
|
|
|
|
|
CAM, property taxes and insurance
|
|
|
20,010
|
|
Percentage rent and other variable lease costs
|
|
|
1,637
|
|
Total
|
|
$
|
76,328
|
|
Other information related to leases post adoption of ASC 842, including supplemental cash flow information, consists of:
(In thousands)
|
|
2019
|
|
Cash paid for amounts included in the measurement of
operating lease liabilities
|
|
$
|
45,933
|
|
ROU assets obtained in exchange for operating lease liabilities
|
|
$
|
31,474
|
|
|
|
|
|
|
|
|
As of
February 1, 2020
|
|
Weighted-average remaining lease term for operating leases
(in years)
|
|
6.1
|
|
Weighted-average discount rate for operating leases
|
|
|
5.5
|
%
|
54
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
The following table reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years to the operating lease liabilities recognized pursuant to ASC 842 on the consolidated balance sheet as of February 1, 2020:
(In thousands)
|
|
Operating
Leases
|
|
2020
|
|
$
|
55,246
|
|
2021
|
|
|
55,358
|
|
2022
|
|
|
48,188
|
|
2023
|
|
|
41,592
|
|
2024
|
|
|
28,134
|
|
Thereafter to 2034
|
|
|
63,446
|
|
Total undiscounted lease payments
|
|
|
291,964
|
|
Less: Imputed interest
|
|
|
54,710
|
|
Total operating lease liabilities
|
|
|
237,254
|
|
Less: Current portion of operating lease liabilities
|
|
|
43,146
|
|
Long-term portion of operating lease liabilities
|
|
$
|
$194,108
|
|
Prior to our adoption of ASC 842, we accounted for our leases using Accounting Standards Codification Topic No. 840 – Leases. Our future minimum lease payments for operating leases as of February 2, 2019 as calculated in accordance with this legacy guidance was: $60.8 million in 2019; $51.9 million in 2020; $50.7 million in 2021; $41.5 million in 2022; $34.0 million in 2023 and $56.4 million thereafter (through 2031) for a total of $295.3 million. Lease expense as calculated in accordance with this legacy guidance was $61.2 million in fiscal 2018 and $66.9 million in fiscal 2017. Lease expense in those years included fixed rent, variable and contingent rent, and CAM, but excluded taxes and insurance.
Note 9 – Income Taxes
The provision for income taxes consisted of:
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,799
|
|
|
$
|
11,468
|
|
|
$
|
14,579
|
|
State
|
|
|
2,175
|
|
|
|
1,693
|
|
|
|
2,241
|
|
Puerto Rico
|
|
|
241
|
|
|
|
700
|
|
|
|
242
|
|
Total current
|
|
|
9,215
|
|
|
|
13,861
|
|
|
|
17,062
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,749
|
|
|
|
(894
|
)
|
|
|
2,383
|
|
State
|
|
|
3
|
|
|
|
(745
|
)
|
|
|
(965
|
)
|
Puerto Rico
|
|
|
246
|
|
|
|
643
|
|
|
|
2,500
|
|
Total deferred
|
|
|
2,998
|
|
|
|
(996
|
)
|
|
|
3,918
|
|
Valuation allowance
|
|
|
(379
|
)
|
|
|
(643
|
)
|
|
|
(2,500
|
)
|
Total provision
|
|
$
|
11,834
|
|
|
$
|
12,222
|
|
|
$
|
18,480
|
|
We realized an excess tax benefit of $1.9 million in fiscal year 2019, tax benefit of $26,100 in fiscal year 2018 and tax expense of $17,800 in fiscal year 2017 as a result of the vesting of awards granted pursuant to our stock-based compensation plans described in Note 11. These amounts were recorded in tax expense in fiscal 2019 and fiscal 2018 and shareholder’s equity in fiscal 2017.
55
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows:
Fiscal years
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
U.S. Federal statutory tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
33.7
|
%
|
State and local income taxes, net of federal tax
benefit
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
3.0
|
|
Puerto Rico
|
|
|
0.5
|
|
|
|
4.2
|
|
|
|
0.7
|
|
Valuation allowance
|
|
|
(0.7
|
)
|
|
|
(1.3
|
)
|
|
|
(6.7
|
)
|
Tax effect of foreign losses
|
|
|
0.4
|
|
|
|
(2.7
|
)
|
|
|
6.3
|
|
Remeasurement of deferred tax assets and liabilities
due to the Tax Act
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
11.6
|
|
Excess tax benefit on stock-based compensation
|
|
|
(3.6
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
Other
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
0.8
|
|
Effective income tax rate
|
|
|
21.6
|
%
|
|
|
24.3
|
%
|
|
|
49.4
|
%
|
We recorded $263,000, $310,000 and $223,000 in federal employment-related tax credits in fiscal 2019, 2018 and 2017, respectively.
Deferred income taxes are the result of temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources of these differences and the tax effect of each are as follows:
(In thousands)
|
|
February 1,
2020
|
|
|
February 2,
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Lease obligations
|
|
$
|
57,891
|
|
|
$
|
7,480
|
|
Accrued compensation
|
|
|
4,844
|
|
|
|
7,843
|
|
Inventory
|
|
|
938
|
|
|
|
787
|
|
Other
|
|
|
1,282
|
|
|
|
1,490
|
|
Total deferred tax assets
|
|
|
64,955
|
|
|
|
17,600
|
|
Valuation allowance
|
|
|
(194
|
)
|
|
|
(574
|
)
|
Total deferred tax assets – net of valuation
allowance
|
|
|
64,761
|
|
|
|
17,026
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Lease right-of-use assets
|
|
|
51,367
|
|
|
|
0
|
|
Property and equipment
|
|
|
4,711
|
|
|
|
6,484
|
|
Other
|
|
|
850
|
|
|
|
920
|
|
Total deferred tax liabilities
|
|
|
56,928
|
|
|
|
7,404
|
|
Long-term deferred income taxes, net
|
|
$
|
7,833
|
|
|
$
|
9,622
|
|
At the end of fiscal 2019, we estimated foreign net operating loss carry forwards of $350,000, which expire between fiscal 2024 and fiscal 2027. At February 1, 2020, we had a valuation allowance of $194,000 against these net operating losses that would be realizable only upon the generation of future taxable income in the jurisdiction in which the losses were incurred.
At February 1, 2020 and February 2, 2019 there were no unrecognized tax liabilities or related accrued penalties or interest in other liabilities on the consolidated balance sheets.
56
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued
Note 10 – Employee Benefit Plans
Retirement Savings Plans
Our Board of Directors-approved Shoe Carnival Retirement Savings Plan (the “Domestic Savings Plan”) is open to all employees working in the continental United States who have been employed for at least one year, are at least 21 years of age and who work at least 1,000 hours in a defined year. The primary savings mechanism under the Domestic Savings Plan is a 401(k) plan under which an employee may contribute up to 20% of annual earnings with a matching Company contribution up to the first 4% at a rate of 50%. Our contributions to the participants’ accounts become fully vested when the participant reaches their third anniversary of employment with us.
Our Board of Directors-approved Shoe Carnival Puerto Rico Savings Plan (the “Puerto Rico Savings Plan”) is open to all employees working in Puerto Rico who have been employed for at least one year, are at least 21 years of age and who work at least 1,000 hours in a defined year. This plan is similar to our Domestic Savings Plan, whereby an employee may contribute up to 20% of his or her annual earnings, with a matching Company contribution up to the first 4% at a rate of 50%.
Contributions charged to expense associated with these plans were $818,000, $754,000 and $751,000 in fiscal years 2019, 2018 and 2017, respectively.
Stock Purchase Plan
On May 11, 1995, our shareholders approved the Shoe Carnival, Inc. Employee Stock Purchase Plan (the “Stock Purchase Plan”) as adopted by our Board of Directors on February 9, 1995. The Stock Purchase Plan reserves 450,000 shares of our common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes in our common stock) for issuance and sale to any employee who has been employed for more than a year at the beginning of the calendar year, and who is not a 10% owner of our common stock, at 85% of the then fair market value up to a maximum of $5,000 in any calendar year. Under the Stock Purchase Plan, 7,000, 7,000 and 10,000 shares of common stock were purchased by participants in the plan and proceeds to us for the sale of those shares were approximately $182,000, $177,000 and $205,000 for fiscal years 2019, 2018 and 2017, respectively. At February 1, 2020, there were 70,000 shares of unissued common stock reserved for future purchase under the Stock Purchase Plan.
The following table summarizes information regarding stock-based compensation expense recognized for the Stock Purchase Plan:
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Stock-based compensation expense before the
recognized income tax benefit (1)
|
|
$
|
32
|
|
|
$
|
31
|
|
|
$
|
36
|
|
Income tax benefit
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
18
|
|
(1)
|
Amounts are representative of the 15% discount employees are provided for purchases under the Stock Purchase Plan.
|
Deferred Compensation Plan
We have a non-qualified deferred compensation plan for certain key employees who, due to Internal Revenue Service guidelines, cannot take full advantage of the employer-sponsored 401(k) plan. Participants in the plan may elect on an annual basis to defer, on a pre-tax basis, portions of their current compensation until retirement, or earlier if so elected. We voluntarily match a portion of the employees’ contributions, which is subject to vesting requirements. The compensation deferred under this plan is credited with earnings or losses measured by the rate of return on investments elected by plan participants. The plan is currently unfunded. Compensation expense for our match and earnings on the deferred amounts was $2.0 million for fiscal 2019, $154,000 for fiscal 2018 and $1.8 million for fiscal 2017. The total deferred compensation liability at February 1, 2020 and February 2, 2019 was $13.9 million and $12.1 million, respectively.
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Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - continued