Shoe Carnival - 10-Q quarterly report FY

Form 10-Q

Note 1 - Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company and the results of its operations and its cash flows for the periods presented. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted according to the rules and regulations of the Securities and Exchange Commission, although the Company believes 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto contained in the Company's Annual Report on Form 10-K for its fiscal year ended February 1, 2003.

Note 2 - Net Income Per Share

Net income per share of common stock is based on the weighted average number of shares and common share equivalents outstanding during the period. The following table presents a reconciliation of the Company's basic and diluted weighted average common shares outstanding as required by Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share":

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. Management has determined that the adoption of this statement will have no impact on the Company's consolidated financial statements.

Note 5 - Reclassifications

Certain amounts in the condensed consolidated financial statements have been reclassified to conform to the current presentation.

It is necessary for management to include certain judgements in the reported financial results of the Company. These judgements involve estimates that are inherently uncertain and actual results could differ materially from these estimates. The accounting policies that require the more significant judgements by management are:

Merchandise Inventories - Merchandise inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. In determining market value, management estimates the future sales price of items of merchandise contained in the inventory as of the balance sheet date. Factors considered in this determination include among others, current and recently recorded sales prices, the length of time product has been held in inventory and quantities of various product styles contained in inventory. The ultimate amount realized from the sale of certain product could differ materially from management's estimates. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Valuation of Long-lived Assets - The Company reviews long-lived assets whenever events or circumstances indicate the carrying value of an asset may not be recoverable and annually when no such event has occurred. Management evaluates the ongoing value of assets associated with retail stores that have been open longer than one year. When undiscounted cash flows estimated to be generated by those assets are less than the carrying value of those assets, impairment losses are recorded. When events such as these occur, the impaired assets are adjusted to estimated fair value and an impairment loss is recorded in selling, general and administrative expenses. Management's assumptions and estimates used in the evaluation of impairment, including current and future economic trends for stores, are subject to a high degree of judgement and if actual results or market conditions differ from those anticipated, additional losses may be recorded.

Deferred Income Taxes - The Company calculates income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to the Company's operations. No valuation allowance has been provided for the deferred tax assets. The Company anticipates that future taxable income will be able to recover the full amount of the net deferred tax assets. The Company's effective tax rate considers management's judgmen t of expected tax liabilities in the various taxing jurisdictions within which it is subject to tax. The Company has also been involved in domestic tax audits. At any given time, multiple tax years are subject to audit by various taxing authorities.

Gross profit increased $1.2 million to $37.0 million in the second quarter of 2003, a 3.3% increase over gross profit of $35.8 million in the comparable prior year period. The Company's gross profit margin decreased to 27.5% from 28.7%. As a percentage of sales, the merchandise gross profit margin decreased 0.4% and buying, distribution and occupancy costs increased 0.8% as compared to the same period last year. The decrease in the merchandise gross profit margin was primarily due to higher promotional activity during the quarter. The increase in buying, distribution and occupancy costs as a percentage of sales was primarily due to the deleveraging effect of negative comparable store sales.

Gross profit increased $3.0 million to $77.8 million in the first half of 2003, a 4.0% increase over gross profit of $74.8 million in the comparable prior year period. The Company's gross profit margin decreased to 28.7% from 29.5% for the first six months of 2002. As a percentage of sales, the merchandise gross profit margin decreased 0.1% and buying, distribution and occupancy costs increased 0.7%. The increase in buying, distribution and occupancy costs as a percentage of sales was primarily due to the deleveraging effect of negative comparable store sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $4.4 million to $34.3 million in the second quarter of 2003 from $29.9 million in the comparable prior year period. As a percentage of sales, these expenses increased to 25.5% from 24.0% last year. During the second quarter of 2003, the Company opened 11 stores as compared to nine stores opened in the second quarter of 2002. Total pre-opening costs in the second quarter of 2003 were $828,000 or 0.6% of sales, as compared to $663,000 or 0.5% of sales, for the second quarter of 2002. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to the general deleveraging effect of the negative comparable store sales and higher advertising expense.

Selling, general and administrative expenses increased $7.3 million to $66.9 million in the first half of 2003 from $59.6 million in the comparable prior year period. As a percentage of sales, these expenses increased to 24.7% from 23.5% last year. Total pre-opening costs in the first half of 2003 were $1.6 million or 0.6% of sales, as compared to $1.1 million or 0.4% of sales, in the first half of 2002. Twenty-four stores were opened in the first half of 2003 and 15 stores were opened in the first half of 2002. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to higher advertising and pre-opening costs along with the deleveraging effect from negative same store sales.

Interest Expense

Net interest expense decreased to $176,000 in the second quarter of 2003 from $200,000 in the second quarter of the prior year. For the first six months of 2003, net interest expense decreased to $342,000 from $464,000 for the first six months of 2002. The decrease experienced in both periods was primarily as a result of a lower effective interest rate.

Income Taxes

The effective income tax rate was 37.5% in the second quarter and the first six months of 2003 and for the same time periods in 2002. The effective income tax rate differed from the statutory federal rates due primarily to state and local income taxes, net of the federal tax benefit.

Liquidity and Capital Resources

The Company's primary sources of funds are cash flows from operations and borrowings under its revolving credit facility. For the first six months of 2003, cash generated by operating activities was $746,000 compared with an increase in cash from operations of $13.5 million for the first six months of last year. The decrease in cash generated from operations resulted from a $2.6 million decrease in net income, a $1.2 million increase in accounts receivable and a $9.0 million increase in inventory net of accounts payable. In 2002, given the difficult retail environment, the Company limited the growth of inventory to 2.9% even though the store base grew by 10.7% as of the end of the second quarter. This resulted in a decrease in inventory of 7.1% on a per-store basis. In 2003, the Company has continued to maintain the lower per-store inventories established in 2002. As of the end of the second quarter of 2003, the 17.3% increase in merchandise inventories was just slightly faster than th e increase in the number of stores operated at the end of the quarter of 16.2%, resulting in an inventory increase on a per-store basis of 0.9%. It is management's intention to maintain this lower per-store inventory position until a consistently stronger retail environment materializes.

This report on Form 10-Q contains certain forward looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: general economic conditions in the areas of the United States in which the Company's stores are located; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; the potential impact of national and international security concerns on the retail environment; the impact of competition and pricing; changes in weather patterns, consumer buying trends and the ability of the Company to identify and respond to emerging fashion trends; risks associated with the seasonality of the retail industry; the availability of desirable store locations at acceptable lease terms and the ability of the Company to open new stores in a timely manner; higher than anticipated costs associated with the closing of underperforming stores; the inability of ma nufacturers to deliver products in a timely manner; and changes in the political and economic environments in the People's Republic of China, a major manufacturer of footwear, and the continued favorable trade relations between China and the United States.

ITEM  3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk in that the interest payable on the Company's Credit Agreement is based on variable interest rates and therefore is affected by changes in market rates. The Company does not use interest rate derivative instruments to manage exposure to changes in market interest rates. A 1% change in the weighted average interest rate charged under the Credit Agreement would have resulted in interest expense fluctuating by approximately $109,000 for the first six months of 2003 and $100,000 for the first six months of 2002.

The Chief Executive Officer and the Chief Financial Officer of the Company have concluded, based on their evaluation as of August 2, 2003, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended August 2, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The annual meeting of the common shareholders of the Company was held June 12, 2003.

Election of a Director

Mr. William E. Bindley was elected at the annual meeting to serve as a Director of the Company for a three-year term. Mr. Bindley received 11,941,379 votes in favor, no votes were cast against and 365,783 abstentions were recorded with respect to such appointment.

In addition, the following Directors continue in office until the annual meeting of shareholders in the year indicated:

Deloitte & Touche LLP was appointed as auditor for the Company for 2003. Votes of 12,193,022 were cast in favor, 24,966 votes were cast against, 89,174 abstentions were recorded, and no broker non-votes were recorded with respect to such appointment.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed, on its behalf by the undersigned thereunto duly authorized.