ITEM
1. FINANCIAL STATEMENTS
SHOE
CARNIVAL, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands,
except share data)
|
|
October
28,
2017
|
|
January
28,
2017
|
|
October
29,
2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,050
|
|
|
$
|
62,944
|
|
|
$
|
33,509
|
|
Accounts
receivable
|
|
|
7,365
|
|
|
|
4,424
|
|
|
|
3,540
|
|
Merchandise
inventories
|
|
|
302,935
|
|
|
|
279,646
|
|
|
|
314,925
|
|
Other
|
|
|
6,883
|
|
|
|
4,737
|
|
|
|
5,630
|
|
Total Current Assets
|
|
|
338,233
|
|
|
|
351,751
|
|
|
|
357,604
|
|
Property and equipment
- net
|
|
|
93,041
|
|
|
|
96,216
|
|
|
|
102,932
|
|
Deferred income taxes
|
|
|
10,769
|
|
|
|
9,600
|
|
|
|
8,163
|
|
Other
noncurrent assets
|
|
|
663
|
|
|
|
911
|
|
|
|
970
|
|
Total
Assets
|
|
$
|
442,706
|
|
|
$
|
458,478
|
|
|
$
|
469,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
59,355
|
|
|
$
|
67,808
|
|
|
$
|
69,986
|
|
Accrued
and other liabilities
|
|
|
21,933
|
|
|
|
18,488
|
|
|
|
18,936
|
|
Total Current Liabilities
|
|
|
81,288
|
|
|
|
86,296
|
|
|
|
88,922
|
|
Deferred lease incentives
|
|
|
29,297
|
|
|
|
30,751
|
|
|
|
30,320
|
|
Accrued rent
|
|
|
10,689
|
|
|
|
11,255
|
|
|
|
11,465
|
|
Deferred compensation
|
|
|
10,974
|
|
|
|
10,465
|
|
|
|
10,171
|
|
Other
|
|
|
884
|
|
|
|
829
|
|
|
|
767
|
|
Total
Liabilities
|
|
|
133,132
|
|
|
|
139,596
|
|
|
|
141,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, 50,000,000 shares authorized, 20,535,261 shares, 20,569,198 shares and 20,569,198
shares issued, respectively
|
|
|
205
|
|
|
|
206
|
|
|
|
206
|
|
Additional
paid-in capital
|
|
|
62,609
|
|
|
|
65,272
|
|
|
|
64,957
|
|
Retained
earnings
|
|
|
331,898
|
|
|
|
312,641
|
|
|
|
314,851
|
|
Treasury
stock, at cost, 3,583,491 shares, 2,433,925 shares and 2,146,622 shares, respectively
|
|
|
(85,138
|
)
|
|
|
(59,237
|
)
|
|
|
(51,990
|
)
|
Total
Shareholders’ Equity
|
|
|
309,574
|
|
|
|
318,882
|
|
|
|
328,024
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
442,706
|
|
|
$
|
458,478
|
|
|
$
|
469,669
|
|
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
28,
2017
|
|
Thirteen
Weeks
Ended
October
29,
2016
|
|
Thirty-nine
Weeks
Ended
October
28,
2017
|
|
Thirty-nine
Weeks
Ended
October
29,
2016
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
287,469
|
|
|
$
|
274,524
|
|
|
$
|
775,922
|
|
|
$
|
766,901
|
|
Cost
of sales (including buying, distribution and occupancy costs)
|
|
|
201,802
|
|
|
|
192,514
|
|
|
|
549,872
|
|
|
|
542,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
85,667
|
|
|
|
82,010
|
|
|
|
226,050
|
|
|
|
224,796
|
|
Selling,
general and administrative expenses
|
|
|
67,787
|
|
|
|
66,558
|
|
|
|
188,519
|
|
|
|
185,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
17,880
|
|
|
|
15,452
|
|
|
|
37,531
|
|
|
|
39,397
|
|
Interest
income
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Interest
expense
|
|
|
57
|
|
|
|
43
|
|
|
|
248
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
17,824
|
|
|
|
15,410
|
|
|
|
37,286
|
|
|
|
39,276
|
|
Income
tax expense
|
|
|
7,127
|
|
|
|
5,738
|
|
|
|
14,462
|
|
|
|
14,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,697
|
|
|
$
|
9,672
|
|
|
$
|
22,824
|
|
|
$
|
24,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.54
|
|
|
$
|
1.38
|
|
|
$
|
1.31
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
0.54
|
|
|
$
|
1.38
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,957
|
|
|
|
17,609
|
|
|
|
16,287
|
|
|
|
18,220
|
|
Diluted
|
|
|
15,966
|
|
|
|
17,614
|
|
|
|
16,293
|
|
|
|
18,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$
|
0.075
|
|
|
$
|
0.07
|
|
|
$
|
0.22
|
|
|
$
|
0.205
|
|
See
notes to Condensed Consolidated Financial Statements.
SHOE
CARNIVAL, INC.
CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Unaudited
|
Common
Stock
|
|
Additional
Paid-In
|
|
Retained
|
|
Treasury
Stock
|
|
|
(In
thousands)
|
Issued
|
|
Treasury
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Total
|
Balance at January 28, 2017
|
|
20,569
|
|
|
|
(2,434
|
)
|
|
$
|
206
|
|
|
$
|
65,272
|
|
|
$
|
312,641
|
|
|
$
|
(59,237
|
)
|
|
$
|
318,882
|
|
Adoption
of Accounting Standards Update No. 2016-09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188
|
)
|
|
|
188
|
|
|
|
|
|
|
|
0
|
|
Dividends
declared ($0.22 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,755
|
)
|
|
|
|
|
|
|
(3,755
|
)
|
Stock option exercises
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
84
|
|
|
|
26
|
|
Employee
stock purchase plan purchases
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
211
|
|
|
|
170
|
|
Restricted stock awards
|
|
(34
|
)
|
|
|
139
|
|
|
|
(1
|
)
|
|
|
(4,546
|
)
|
|
|
|
|
|
|
4,547
|
|
|
|
0
|
|
Shares
surrendered by employees to pay taxes on restricted stock
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(945
|
)
|
|
|
(945
|
)
|
Purchase
of common stock for treasury
|
|
|
|
|
|
(1,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,798
|
)
|
|
|
(29,798
|
)
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,170
|
|
|
|
|
|
|
|
|
|
|
|
2,170
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,824
|
|
|
|
|
|
|
|
22,824
|
|
Balance at October
28, 2017
|
|
20,535
|
|
|
|
(3,583
|
)
|
|
$
|
205
|
|
|
$
|
62,609
|
|
|
$
|
331,898
|
|
|
$
|
(85,138
|
)
|
|
$
|
309,574
|
|
See
notes to Condensed Consolidated Financial Statements.
SHOE
CARNIVAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
|
|
Thirty-nine
Weeks Ended
October 28,
2017
|
|
Thirty-nine
Weeks Ended
October 29,
2016
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
22,824
|
|
|
$
|
24,437
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
17,944
|
|
|
|
17,698
|
|
Stock-based
compensation
|
|
|
2,073
|
|
|
|
3,438
|
|
Loss
on retirement and impairment of assets
|
|
|
1,831
|
|
|
|
500
|
|
Deferred
income taxes
|
|
|
(1,169
|
)
|
|
|
56
|
|
Lease
incentives
|
|
|
3,515
|
|
|
|
1,838
|
|
Other
|
|
|
(5,212
|
)
|
|
|
(3,064
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,047
|
)
|
|
|
(1,409
|
)
|
Merchandise
inventories
|
|
|
(23,289
|
)
|
|
|
(22,047
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(8,446
|
)
|
|
|
(1,298
|
)
|
Other
|
|
|
940
|
|
|
|
1,303
|
|
Net
cash provided by operating activities
|
|
|
8,964
|
|
|
|
21,452
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(16,708
|
)
|
|
|
(17,426
|
)
|
Net
cash used in investing activities
|
|
|
(16,708
|
)
|
|
|
(17,426
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Borrowings
under line of credit
|
|
|
88,600
|
|
|
|
0
|
|
Payments
on line of credit
|
|
|
(88,600
|
)
|
|
|
0
|
|
Proceeds
from issuance of stock
|
|
|
196
|
|
|
|
186
|
|
Dividends
paid
|
|
|
(3,603
|
)
|
|
|
(3,780
|
)
|
Excess
tax benefits from stock-based compensation
|
|
|
0
|
|
|
|
2
|
|
Purchase
of common stock for treasury
|
|
|
(29,798
|
)
|
|
|
(35,428
|
)
|
Shares
surrendered by employees to pay taxes on restricted stock
|
|
|
(945
|
)
|
|
|
(311
|
)
|
Net
cash used in financing activities
|
|
|
(34,150
|
)
|
|
|
(39,331
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(41,894
|
)
|
|
|
(35,305
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
62,944
|
|
|
|
68,814
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
21,050
|
|
|
$
|
33,509
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during period for interest
|
|
$
|
250
|
|
|
$
|
127
|
|
Cash
paid during period for income taxes
|
|
$
|
12,791
|
|
|
$
|
11,786
|
|
Capital
expenditures incurred but not yet paid
|
|
$
|
953
|
|
|
$
|
994
|
|
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 Consolidated Financial Statements and the notes thereto contained
in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
As used herein, the terms “we,” “our,” “us” and “Shoe Carnival” refer to Shoe
Carnival, Inc. and its subsidiaries.
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
28, 2017
|
|
October
29, 2016
|
|
|
(In
thousands, except per share data)
|
|
|
|
Basic
Earnings per Share:
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Net
income
|
|
$
|
10,697
|
|
|
|
|
|
|
|
|
|
|
$
|
9,672
|
|
|
|
|
|
|
|
|
|
Amount
allocated to participating securities
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
Net
income available for basic common shares and basic earnings per share
|
|
$
|
10,535
|
|
|
|
15,957
|
|
|
$
|
0.66
|
|
|
$
|
9,458
|
|
|
|
17,609
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,697
|
|
|
|
|
|
|
|
|
|
|
$
|
9,672
|
|
|
|
|
|
|
|
|
|
Amount
allocated to participating securities
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
Adjustment
for dilutive potential common shares
|
|
|
0
|
|
|
|
9
|
|
|
|
|
|
|
|
0
|
|
|
|
5
|
|
|
|
|
|
Net
income available for diluted common shares and diluted earnings per share
|
|
$
|
10,535
|
|
|
|
15,966
|
|
|
$
|
0.66
|
|
|
$
|
9,458
|
|
|
|
17,614
|
|
|
$
|
0.54
|
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
October
28, 2017
|
|
October
29, 2016
|
|
|
(In
thousands, except per share data)
|
|
|
|
Basic
Earnings per Share:
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Net
income
|
|
$
|
22,824
|
|
|
|
|
|
|
|
|
|
|
$
|
24,437
|
|
|
|
|
|
|
|
|
|
Amount
allocated to participating securities
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
Net
income available for basic common shares and basic earnings per share
|
|
$
|
22,496
|
|
|
|
16,287
|
|
|
$
|
1.38
|
|
|
$
|
23,922
|
|
|
|
18,220
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
22,824
|
|
|
|
|
|
|
|
|
|
|
$
|
24,437
|
|
|
|
|
|
|
|
|
|
Amount
allocated to participating securities
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
Adjustment
for dilutive potential common shares
|
|
|
0
|
|
|
|
6
|
|
|
|
|
|
|
|
0
|
|
|
|
5
|
|
|
|
|
|
Net
income available for diluted common shares and diluted earnings per share
|
|
$
|
22,496
|
|
|
|
16,293
|
|
|
$
|
1.38
|
|
|
$
|
23,922
|
|
|
|
18,225
|
|
|
$
|
1.31
|
|
Our basic and diluted earnings per share are computed using the two-class method. The two-class method is an earnings
allocation method 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. We will adopt this guidance effective February 4, 2018, and plan
to use the modified retrospective transition approach, which would result in an adjustment to retained earnings for the cumulative
effect, if any, of applying this guidance to contracts in effect as of the adoption date. While we have made progress on our scoping
review and assessment phase, we are still evaluating the impact this guidance will have on our financial statements and related
disclosures. At this
time the key areas of focus include timing of recognizing revenue for our multi-channel business, recognition of breakage revenue
for unredeemed gift cards, our customer loyalty program and presentation of customer related return reserves on the balance sheet.
In
July 2015, the FASB issued guidance on simplifying the measurement of inventory by requiring inventory to be measured at the lower
of cost or net realizable value. We adopted the provisions of this guidance on January 29, 2017. The adoption of this guidance did
not have a material impact on our consolidated financial position, results of operations or 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. The guidance will be effective at the beginning of fiscal 2019,
including interim periods within that fiscal year, and will be applied on a modified retrospective basis. We are evaluating the
impact of this guidance on our consolidated financial position, results of operations and cash flows. The adoption of the guidance
will require us to recognize right-of-use assets and lease liabilities that will be material to our consolidated balance sheet.
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. We adopted the provisions of this
guidance on January 29, 2017. As a result of this adoption, all tax-related cash flows resulting from share-based payments in
fiscal 2017 are presented as operating activities on the statements of cash flows, as we elected to adopt this portion of the
guidance on a prospective basis. Additionally, we made an accounting policy election to account for forfeitures when they occur
rather than estimating the number of awards that are expected to vest. As a result of this election, we recorded a cumulative-effect
benefit of $188,000 to retained earnings as of the date of adoption.
In
November 2016, the FASB issued guidance for restricted cash classification and presentation on the statement of cash flows, requiring
restricted cash to be included within cash and cash equivalents on the statement of cash flows. The guidance will be effective
at the beginning of fiscal 2018, including interim periods within that fiscal year, and will be applied on a retrospective basis.
We do not believe the guidance will have a material impact on our condensed consolidated statement of cash flows.
In
May 2017, the FASB issued guidance which clarifies what constitutes a modification of a share-based payment award. The guidance
will be effective at the beginning of fiscal 2018, including interim periods within that fiscal year, with early adoption permitted.
The guidance requires adoption on a prospective basis for share-based payment awards modified on or after the adoption date. We
do not believe the guidance will have a material impact on our condensed consolidated financial position, results of operations
or 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 28, 2017,
January 28, 2017 and October 29, 2016. 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 28, 2017:
|
|
|
|
|
|
|
|
|
Cash
equivalents– money market account
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 28, 2017:
|
|
|
|
|
|
|
|
|
Cash
equivalents– money market account
|
|
$
|
114
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 29,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents – money market account
|
|
$
|
114
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
114
|
|
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 weeks ended October 28, 2017, we recorded impairments of $105,000 on long-lived assets. Subsequent to this impairment,
these long-lived assets had a remaining unamortized basis of $153,000. During the thirty-nine weeks ended October 28, 2017, we
recorded impairments of $1.7 million on long-lived assets. Subsequent to this impairment, these long-lived assets had a remaining
unamortized basis of $1.2 million. During the thirteen and thirty-nine weeks ended October 29, 2016, we recorded impairments of
$193,000 on long-lived assets. Subsequent to this impairment, these long-lived assets had a remaining unamortized basis of $337,000.
Note
5 - Stock-Based Compensation
At
our 2017 annual meeting of shareholders held on June 13, 2017, our shareholders approved a new equity incentive plan, the Shoe
Carnival, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which replaces our 2000 Stock Option and Incentive Plan,
as amended (the “2000 Plan”). According to the terms of the 2017 Plan, upon approval of the 2017 Plan by our shareholders,
no further awards may be made under the 2000 Plan. A maximum of 1,000,000 shares of our common stock are available for issuance
and sale under the 2017 Plan. In addition, any shares of our common stock subject to an award granted under the 2017 Plan, or
to an award granted under the 2000 Plan that was outstanding on the date our shareholders approved the 2017 Plan, that expires,
is cancelled or forfeited, or is settled for cash will, to the extent of such cancellation, forfeiture, expiration or cash settlement,
automatically become available for future awards under the 2017 Plan.
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 28, 2017, stock-based compensation expense for the employee stock purchase
plan was $10,000 before the income tax benefit of $4,000 and $30,000 before the income tax benefit of $12,000, respectively. 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.
No
stock options have been granted since fiscal 2008. All outstanding options had vested as of the end of fiscal 2011; therefore
no unrecognized compensation expense remains. In the first nine months of fiscal 2017 there were 3,500 options exercised and there
were 3,500 options outstanding and exercisable as of October 28, 2017.
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
28, 2017
|
|
|
964,858
|
|
|
$
|
22.63
|
|
Granted
|
|
|
274,346
|
|
|
|
24.09
|
|
Vested
|
|
|
(119,107
|
)
|
|
|
24.27
|
|
Forfeited
or expired
|
|
|
(168,937
|
)
|
|
|
18.46
|
|
Restricted stock
at October 28, 2017
|
|
|
951,160
|
|
|
$
|
23.59
|
|
The
weighted-average grant date fair value of stock awards granted during the thirty-nine week periods ended October 28, 2017, and
October 29, 2016, was $24.09 and $24.98, respectively. The total fair value at grant date of restricted stock awards that vested
during the first nine months of fiscal 2017 was $2.9 million. The total fair value at grant date of restricted stock awards that
vested during the first nine months of fiscal 2016 was $854,000. Of the 168,937 shares of restricted stock that were forfeited
or that expired in the first nine months of fiscal 2017, 135,000 shares were restricted stock awards that expired unvested in
the first quarter of fiscal 2017, as the performance measures were not achieved. These awards represented the three tiers of the
restricted stock awards granted on March 15, 2011.
The
following table summarizes information regarding stock-based compensation expense recognized for restricted stock awards:
(In thousands)
|
|
Thirteen
Weeks
Ended
October
28,
2017
|
|
Thirteen
Weeks
Ended
October
29,
2016
|
|
Thirty-nine
Weeks
Ended
October
28,
2017
|
|
Thirty-nine
Weeks
Ended
October
29,
2016
|
Stock-based
compensation before the recognized income tax effect
|
|
$
|
996
|
|
|
$
|
1,295
|
|
|
$
|
2,140
|
|
|
$
|
3,197
|
|
Income
tax effect
|
|
$
|
398
|
|
|
$
|
482
|
|
|
$
|
830
|
|
|
$
|
1,208
|
|
The
$2.1 million of expense recognized in the first nine months of fiscal 2017 was comprised of compensation expense of $3.1 million,
partially offset by income of $916,000. The income was attributable to the reversal of the cumulative prior period expense for
performance-based awards, which were deemed by management to be no longer probable to vest prior to their expiration.
As
of October 28, 2017, approximately $4.9 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
1.7 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 28, 2017
|
|
|
|
111,300
|
|
|
$
|
24.26
|
|
|
|
|
|
Forfeited
|
|
|
|
(3,500
|
)
|
|
|
24.26
|
|
|
|
|
|
Exercised
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
Outstanding
at October 28, 2017
|
|
|
|
107,800
|
|
|
$
|
24.26
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at October 28, 2017
|
|
|
|
62,991
|
|
|
$
|
24.26
|
|
|
|
2.4
|
|
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 common 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 re-measured, 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 28, 2017 and October 29,
2016 was $3.22 and $4.53, respectively.
The
fair value was estimated using a trinomial lattice model with the following assumptions:
|
|
October
28, 2017
|
|
October
29, 2016
|
Risk free interest
rate yield curve
|
|
|
1.01%
- 2.06%
|
|
|
|
0.18%
- 1.33%
|
|
Expected
dividend yield
|
|
|
1.4
|
%
|
|
|
1.1
|
%
|
Expected volatility
|
|
|
37.34
|
%
|
|
|
35.06
|
%
|
Maximum life
|
|
|
2.4
Years
|
|
|
|
3.4
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 common stock. The exercise multiple and employee
exit rate were based on historical option data.
The
following table summarizes information regarding stock-based compensation recognized for SARs:
(In thousands)
|
|
Thirteen
Weeks
Ended
October
28,
2017
|
|
Thirteen
Weeks
Ended
October
29,
2016
|
|
Thirty-nine
Weeks
Ended
October
28,
2017
|
|
Thirty-nine
Weeks
Ended
October
29,
2016
|
Stock-based
compensation before the recognized income tax effect
|
|
$
|
140
|
|
|
$
|
12
|
|
|
$
|
(97
|
)
|
|
$
|
208
|
|
Income
tax effect
|
|
$
|
56
|
|
|
$
|
4
|
|
|
$
|
(38
|
)
|
|
$
|
79
|
|
As of October 28, 2017, approximately $23,000 in unrecognized compensation expense remained related to non-vested SARs. This
expense is expected to be recognized over the five month period following the third quarter of fiscal 2017.
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 and hurricane recovery in Puerto Rico on sales at, and cash flows of, our stores located in Puerto
Rico; the effects and duration of economic downturns and unemployment rates; changes in the overall retail environment and
more specifically in the apparel and footwear retail sectors; our ability to generate increased sales at our stores; our
ability to successfully navigate the increasing use of on-line retailers for fashion purchases and the impact on traffic
and transactions in our physical stores; our ability to attract customers to our e-commerce website and to successfully grow
our e-commerce sales; the potential impact of national and international security concerns on the retail environment; changes
in our relationships with key suppliers; the impact of competition and pricing; our ability to successfully manage and
execute our marketing initiatives and maintain positive brand perception and recognition; changes in weather patterns,
consumer buying trends and our ability to identify and respond to emerging fashion trends; the impact of disruptions in
our distribution or information technology operations; the effectiveness of our inventory management; the impact of natural
disasters on our stores, as well as on consumer confidence and purchasing in general; risks associated with the seasonality
of the retail industry; the impact of unauthorized disclosure or misuse of personal and confidential information about our
customers, vendors and employees; our ability to manage our third-party vendor relationships; our ability to successfully
execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability
to open new stores in a timely and profitable manner, including our entry into major new markets, and the availability of
sufficient funds to implement our business plans; higher than anticipated costs associated with the closing of
underperforming stores; the inability of manufacturers to deliver products in a timely manner; changes in the political and
economic environments in, and continued favorable trade relations with, China and other countries which are the
major manufacturers of footwear; the impact of regulatory changes in the United States and the countries where our
manufacturers are located; the resolution of litigation or regulatory proceedings in which we are or may become involved; our
ability to meet our labor needs while controlling costs; the impact of any tax reform; 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 28, 2017.
General
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information to assist the reader
in better understanding and evaluating our financial condition and results of operations. We encourage you to read this in conjunction
with our Condensed Consolidated Financial Statements and the notes thereto included in Part I, Item 1 of this Quarterly Report
on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, as filed with the SEC.
Overview
of Our Business
Shoe
Carnival, Inc. is one of the nation’s largest family footwear retailers, providing the convenience of shopping at any of
our store locations or online at shoecarnival.com. Our stores combine competitive pricing with a promotional, in-store marketing
effort that encourages customer participation and injects fun and surprise into every shopping experience. We believe this fun
and promotional atmosphere results in various competitive advantages, including increased multiple unit sales; the building of
a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell-through of in-season goods. A similar
customer experience is reflected in our e-commerce site through special promotions and limited time sales, along with relevant
product stories featured on our home page.
Our
objective is to be the destination retailer-of-choice for a wide range of consumers seeking value priced, current season name
brand and private label footwear. Our product assortment includes dress and casual shoes, sandals, boots and a wide assortment
of athletic shoes for the entire family, which we classify in four general categories - women’s, men’s, children’s and athletics.
Our e-commerce site offers customers an opportunity to choose from a large selection of products in all of the same categories
of footwear with a depth of sizes and colors that may not be available in some of our smaller stores, and introduces our concept
to consumers who are new to Shoe Carnival, in both existing and new markets.
In
addition to footwear, our stores carry complementary accessories such as socks, belts, shoe care items, handbags, sport bags,
backpacks, jewelry, scarves and wallets. Our e-commerce site also carries certain accessories such as handbags, sport bags and
backpacks.
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 28, 2017.
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 28, 2017. 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 29, 2017
|
|
|
415
|
|
|
|
7
|
|
|
|
5
|
|
|
|
417
|
|
|
|
7,000
|
|
|
|
4,533,000
|
|
|
|
(3.9
|
)%
|
July 29, 2017
|
|
|
417
|
|
|
|
5
|
|
|
|
4
|
|
|
|
418
|
|
|
|
(12,000
|
)
|
|
|
4,521,000
|
|
|
|
0.4
|
%
|
October 28, 2017
|
|
|
418
|
|
|
|
7
|
|
|
|
1
|
|
|
|
424
|
|
|
|
37,000
|
|
|
|
4,558,000
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date 2017
|
|
|
415
|
|
|
|
19
|
|
|
|
10
|
|
|
|
424
|
|
|
|
32,000
|
|
|
|
4,558,000
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
10,000
|
|
|
|
4,541,000
|
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date 2016
|
|
|
405
|
|
|
|
15
|
|
|
|
5
|
|
|
|
415
|
|
|
|
76,000
|
|
|
|
4,541,000
|
|
|
|
0.9
|
%
|
Comparable
store sales for the periods indicated include stores that have been open for 13 full months after such stores’ grand opening
prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores opened or
closed during the periods indicated are not included in comparable store sales. We include e-commerce sales in our comparable
store sales. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores.
The
following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:
|
|
Thirteen
Weeks Ended
October 28, 2017
|
|
Thirteen
Weeks Ended
October 29, 2016
|
|
Thirty-nine
Weeks Ended
October 28, 2017
|
|
Thirty-nine
Weeks Ended
October 29, 2016
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of sales (including buying, distribution and occupancy costs)
|
|
|
70.2
|
|
|
|
70.1
|
|
|
|
70.9
|
|
|
|
70.7
|
|
Gross profit
|
|
|
29.8
|
|
|
|
29.9
|
|
|
|
29.1
|
|
|
|
29.3
|
|
Selling,
general and administrative expenses
|
|
|
23.6
|
|
|
|
24.3
|
|
|
|
24.3
|
|
|
|
24.2
|
|
Operating income
|
|
|
6.2
|
|
|
|
5.6
|
|
|
|
4.8
|
|
|
|
5.1
|
|
Interest
(income) expense, net
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Income before income
taxes
|
|
|
6.2
|
|
|
|
5.6
|
|
|
|
4.8
|
|
|
|
5.1
|
|
Income
tax expense
|
|
|
2.5
|
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
1.9
|
|
Net
income
|
|
|
3.7
|
%
|
|
|
3.5
|
%
|
|
|
2.9
|
%
|
|
|
3.2
|
%
|
Executive
Summary for Third Quarter Ended October 28, 2017
We
were pleased with the start of the third quarter of fiscal 2017 as our back-to-school selections resonated well with our
customers. We stocked key items and styles that helped us achieve high single-digit comparable store sales early in the
quarter. As the quarter progressed, we experienced traffic declines particularly in the hurricane affected areas of
Texas, Florida and Puerto Rico. However, despite a low single-digit decline in traffic for the quarter, we posted increases
in units per transaction, average sales per transaction and conversion, and ended the quarter with a comparable store sales
increase of 4.4 percent. These increases, combined with our ongoing commitment and ability to effectively manage expenses and
the decrease in shares outstanding due to our share repurchases, resulted in a 22 percent increase in quarterly earnings per
diluted share. Highlights for the third quarter of fiscal 2017 are as follows:
|
•
|
Net
sales increased $12.9 million, or 4.7%, in the third quarter of fiscal 2017 compared
to the same period last year. We experienced increases in average sales per transaction,
average units per transaction and conversion during the quarter. Store traffic declined
low-single digits compared to the third quarter of fiscal 2016.
|
|
•
|
Our
gross profit margin decreased 0.1 percent to 29.8 percent compared to 29.9 percent in
the third quarter of fiscal 2016. Our merchandise margin decreased 0.8 percent and was
partially offset by buying, distribution and occupancy expenses, which decreased 0.7
percent as a percentage of net sales compared to the third quarter of fiscal 2016.
|
|
•
|
Inventory
was down 4.3 percent on a per-store basis and we ended the quarter with no outstanding
debt under our credit facility.
|
|
•
|
We
opened seven stores and closed one store during the third quarter of fiscal 2017, ending
the quarter with 424 stores.
|
|
•
|
We
continue to review our store portfolio for underperforming stores that do not meet our
minimum contribution levels. Based on our review to date, we have identified 30 to 35
stores that we plan to close in fiscal 2018 if we cannot improve the performance of those
stores. See “Store Openings and Closings” under the Liquidity and Capital
Resources section of this Form 10-Q for further discussion of this strategy.
|
Results
of Operations for the Third Quarter Ended October 28, 2017
Net
Sales
Net
sales increased $12.9 million to $287.5 million during the third quarter of fiscal 2017, a 4.7% increase over the prior year’s
third quarter net sales of $274.5 million. Of this increase in net sales, $11.9 million was attributable to the 4.4% increase
in comparable store sales and $6.6 million was attributable to sales generated by the 26 new stores opened since the beginning
of the third quarter of fiscal 2016. These increases were partially offset by a loss in sales of $5.5 million from the 15 stores
closed since the beginning of the third quarter of fiscal 2016.
Gross
Profit
Gross profit increased $3.7 million to $85.7 million during the third quarter of fiscal 2017 primarily due to the increase
in net sales. Our gross profit margin for the third quarter of fiscal 2017 decreased to 29.8 percent compared to 29.9 percent
in the third quarter of fiscal 2016. The merchandise margin decreased 0.8 percent and was partially offset by buying, distribution
and occupancy expenses, which decreased 0.7 percent as a percentage of net sales compared to the third quarter of fiscal 2016.
Our merchandise margin decreased primarily due to promotional selling during the quarter and a shift in merchandise sold from
boots to athletic footwear. Historically, our boot categories have driven higher margins than our athletic footwear. The decrease
in buying, distribution and occupancy expenses as a percentage of sales was primarily due to lower occupancy costs and the
leveraging effect of higher comparable store sales. The decrease in occupancy costs was primarily due to the stores we have
closed since the third quarter of fiscal 2016 or plan to close in future periods.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased $1.2 million in the third quarter of fiscal 2017 to
$67.8 million compared to $66.6 million in the third quarter of fiscal 2016. As a percentage of sales, these expenses decreased
to 23.6% in the third quarter of fiscal 2017 from 24.3% in the third quarter of fiscal 2016. The overall increase in selling, general
and administrative expenses during the third quarter of fiscal 2017 was primarily
due
to increases in incentive compensation, consulting fees related to our customer relationship management (“CRM”) initiative
and our retirement savings plans. These increases were partially offset by lower advertising expense for the quarter.
Pre-opening
costs included in selling, general and administrative expenses were $209,000 in the third quarter of fiscal 2017 compared to $351,000
in the third quarter last year. We opened seven new stores in the third quarter of fiscal 2017 compared to three new stores in
the third quarter of fiscal 2016. The decrease in pre-opening costs was primarily due to higher advertising expense incurred in
the prior quarter related to opening stores in larger markets. 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 included in selling, general and administrative expenses were $519,000, or 0.2% as a percentage of sales, in the
third quarter of fiscal 2017. Store closing costs were $335,000 in the third quarter last year. One store was closed in the third
quarter of fiscal 2017 compared to one store closing in the third quarter of fiscal 2016. Store closing costs increased in the
third quarter compared to the prior year third quarter primarily due to an increase in expected future store closings of underperforming
stores.
Income
Taxes
The
effective income tax rate for the third quarter of fiscal 2017 was 40.0% as compared to 37.2% for the same time period in
fiscal 2016. 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. The increase in the effective tax rate between periods was primarily due to the
accounting change adopted in the first quarter of fiscal 2017, which requires us to record the tax effects of stock awards to
the income statement when awards vest or are settled, and an increase in permanent items related to the vesting of
service-based restricted stock awards.
Results
of Operations for Nine Month Period Ended October 28, 2017
Net
Sales
Net
sales increased $9.0 million to $775.9 million for the nine-month period ended October 28, 2017, a 1.2% increase compared to net
sales of $766.9 million for the nine-month period ended October 29, 2016. Of this increase in net sales, $3.2 million was attributable
to the 0.4% increase in comparable store sales and $18.3 million was attributable to sales generated by the 38 new stores opened
since the beginning of fiscal 2016. These increases were partially offset by a loss in sales of $12.5 million from the 19 stores
closed since the beginning of fiscal 2016.
Gross
Profit
Gross
profit increased $1.3 million to $226.1 million in the first nine months of fiscal 2017 primarily due to the increase in net sales.
Our gross profit margin for the nine months of fiscal 2017 decreased to 29.1% compared to 29.3% in the first nine months of fiscal
2016. The merchandise margin decreased 0.2%, while buying, distribution and occupancy costs remained flat as a percentage of sales
compared to the same period last year. Our merchandise margin decreased primarily due to an increase in expense related to our
multi-channel sales initiatives.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased $3.1 million in the first nine months of fiscal 2017
to $188.5 million compared to the same period last year. As a percentage of sales, these expenses increased to 24.3% in the first
nine months of fiscal 2017 from 24.2% in the first nine months of fiscal 2016. The overall increase in selling, general and administrative
expenses during the first nine months of fiscal 2017 was primarily due
to increases in impairments of long-lived assets, employee health care, consulting fees related to our CRM initiative and incentive
compensation. These increases were partially offset by decreases in stock-based compensation and advertising expense.
In
the first nine months of fiscal 2017, pre-opening costs included in selling, general and administrative expenses were $726,000,
or 0.1% as a percentage of sales, compared to $815,000, or 0.1% 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 included in selling, general and administrative expenses were $3.2 million, or 0.4% as
a percentage of sales, in the first nine months of fiscal 2017. Store closing costs were $631,000, or 0.1% as a percentage of sales,
in the first nine months of last year. We closed ten stores in the first nine months of fiscal 2017 and five stores were closed
in the first nine months of fiscal 2016. Included in the store closing costs in the first nine months of fiscal 2017 and fiscal
2016 were impairments of long-lived assets of $1.7 million and $193,000, respectively, as more stores were impaired in fiscal 2017
compared to fiscal 2016.
Income
Taxes
The
effective income tax rate for the first nine months of fiscal 2017 was 38.8% compared to 37.8% for the same period in fiscal 2016.
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
Our
primary sources of liquidity are cash and cash equivalents on hand, cash generated from operations and availability under our
credit facility. We believe these resources will be sufficient to fund our cash needs, as they arise, for at least the next 12
months. Our primary uses of cash are for working capital, which are principally inventory purchases, store initiatives, potential
dividend payments, potential share repurchases under our share repurchase program, the financing of capital projects, including
investments in new systems, and various other commitments and obligations.
Cash
Flow - Operating Activities
Our
net cash provided by operating activities was $9.0 million in the first nine months of fiscal 2017 compared to $21.5 million in
the first nine months of fiscal 2016. 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 the timing of payments for accounts
payable and accrued liabilities.
Working
capital decreased to $256.9 million at October 28, 2017 from $268.7 million at October 29, 2016, primarily due to decreases in
cash and cash equivalents and merchandise inventory, partially offset by a decrease in accounts payable compared to the end of
the third quarter of the prior year. The current ratio was 4.2 as of October 28, 2017, compared to 4.0 at October 29, 2016.
Cash
Flow - Investing Activities
Our
cash outflows for investing activities are primarily for capital expenditures. During the first nine months of fiscal 2017, we
expended $16.7 million for the purchase of property and equipment, of which $11.0 million was for new stores, remodeling and relocations.
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. 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 have represented cash dividend payments, share repurchases and payments on our credit facility.
Shares of our common stock can be either acquired as part of a publicly announced share 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, purchases under our Employee
Stock Purchase Plan and borrowings under our credit facility.
During
the first nine months of fiscal 2017, net cash used in financing activities was $34.2 million compared to net cash used in financing
activities of $39.3 million in the first nine months of fiscal 2016. The decrease in cash used in financing activities between
the two respective periods was primarily attributable to a decrease of $5.6 million in common stock repurchased under our share
repurchase program compared to the first nine months of fiscal 2016.
Capital
Expenditures
Capital
expenditures for fiscal 2017, including actual expenditures during the first nine months, are expected to be between $20 million
and $21 million, with approximately $13 million to be used for new stores, relocations and remodels. The remaining capital expenditures
are expected to be incurred for continued investments in technology and normal asset replacement activities. Lease incentives
to be received from landlords during fiscal 2017, 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
aim to realize positive long-term financial performance for our store portfolio. We utilize a formal review process in our evaluation
of potential new store sites as well as for decisions surrounding leases on existing store locations. Our approach is both qualitative
and quantitative in nature. We look to continually enhance this process with tools such as real estate software used for portfolio
analysis that aid in identifying viable locations for future expansion and identifying potential store closings and relocations.
We opened 19 stores in the first nine months of fiscal 2017 and do not expect to open any stores in the fourth
quarter of fiscal 2017. Pre-opening expenses, including rent, freight, advertising, salaries and supplies, are expected to total
approximately $1.5 million for fiscal 2017, or an average of $79,000 per store. During fiscal 2016, we opened 19 new stores and
expended $1.6 million on pre-opening expenses, or an average of $85,000 per store.
We
anticipate closing 26 stores in fiscal 2017. We closed ten stores during the first nine months of fiscal 2017. Five stores were
closed during the first nine months 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 long-lived
assets to be disposed of at closing and the cost incurred in terminating the lease.
We
believe that a continued, disciplined approach to new store openings is very important as we leverage our multi-channel strategy
and pursue opportunities for brick-and-mortar stores across large, mid and smaller markets. Over the past several years, we have
analyzed our entire portfolio of stores, with a concentration on underperforming stores, to meet our long-term goal of increasing
shareholder value through increasing operating income. Our objective is to identify and address underperforming stores that produce
low or negative contribution and either renegotiate lease terms, relocate or close the store. Based on this analysis, we have
identified 30 to 35 stores that we plan to close in fiscal 2018 if we cannot improve the performance of those stores to meet our
minimum contribution level. Even though this would reduce our overall net sales volume, we believe this strategy would realize
long-term improvement in operating income and diluted earnings per share. We expect new store openings for fiscal 2018 will be
in the low single digit range. We remain committed to long-term strategic store growth; however, with the changing landscape in
brick-and-mortar stores, we believe more attractive real estate opportunities will become available in the marketplace if we remain
diligent in our approach.
Dividends
On
September 7, 2017, our Board of Directors approved the payment of our third quarter cash dividend to our shareholders. The
dividend of $0.075 per share was paid on October 16, 2017, to shareholders of record as of the close of business on October 2,
2017.
The
declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results
of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. Our credit
agreement (described below) permits the payment of cash dividends as long as no default or event of default exists under the credit
agreement both immediately before and immediately after giving effect to the cash dividends, and the aggregate amount of cash
dividends for a fiscal year do not exceed $10.0 million.
Credit
Facility
On
March 27, 2017, we entered into a second amendment of our current unsecured credit agreement (as amended, the “Credit Agreement”)
to extend the expiration date by five years to March 27, 2022, and to renegotiate certain terms and conditions. The Credit Agreement
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 $50.0 million, without the
consent of any lender, if certain conditions are met. 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 $10.0 million; and (4) distributions in the form of redemptions
of our common stock may 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. We were in compliance with these covenants as of October 28, 2017.
Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest
at their discretion. The credit facility bears interest, at our option, at (1) the agent bank’s prime rate (as defined in
the Credit Agreement) plus 1%, with the prime rate defined as the greater of (a) the Federal Funds 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. As of October
28, 2017, there were no borrowings outstanding under the credit facility and letters of credit outstanding were $1.2 million.
As of October 28, 2017, $48.8 million was available to us for additional borrowings under the credit facility.
Share
Repurchase Program
On
December 6, 2016, our Board of Directors authorized a new share repurchase program for up to $50 million of outstanding common
stock, effective January 1, 2017. The purchases may be made in the open market or through privately negotiated transactions, from
time-to-time through December 31, 2017, and in accordance with applicable laws, rules and regulations. On January 27, 2017, 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 Securities Exchange Act of 1934, as amended (the “Rule 10b5-1 Plan”). The Rule
10b5-1 Plan was established pursuant to, and as part of, our share repurchase program and permitted 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 Rule 10b5-1 Plan was to expire on May 26, 2017, but we terminated the plan on May 17, 2017,
to ensure we remained in compliance with the covenant in our Credit Agreement regarding redemptions of our common stock described
above. Under the terms of our Credit Agreement, we are not permitted to repurchase any shares of our common stock while there
are outstanding borrowings under the Credit Agreement. Our 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 2017, we repurchased 24,000 shares of common stock at a total cost of $455,000 under the new share
repurchase program. As of October 28, 2017, approximately 1.5 million shares at an aggregate cost of $37.0 million had been repurchased
under the new share repurchase program. The amount that remained available under the share repurchase program at October 28, 2017,
was $13.0 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 and closing underperforming stores.
Non-capital expenditures, such as advertising and payroll, incurred prior to the opening of a new store are charged to expense
as incurred. The timing and actual amount of expense recorded in closing an individual 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. 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 or incur store closing costs related to the
closure of underperforming 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.