UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended November 2, 1996 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to _____________ Commission File Number: 0-21360 Shoe Carnival, Inc. (Exact name of registrant as specified in its charter) Indiana 35-1736614 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 8233 Baumgart Road Evansville, Indiana 47711 (Address of principal executive offices) (Zip Code) (812) 867-6471 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Common Stock, no par value, 13,027,656 shares outstanding as of November 30, 1996.
1 Shoe Carnival, Inc. Index to Financial Statements Page ---- Part I Financial Information Item 1 - Financial Statements (Unaudited) Condensed Balance Sheets 3 Condensed Statements of Income 4 Condensed Statement of Shareholders' Equity 5 Condensed Statements of Cash Flows 6 Notes to Condensed Financial Statements 7-8 Item 2 - Management's Discussion and Analysis 9-13 Part II Other Information Item 6. Exhibits and Reports on Form 8-K 14 Signature 15 2
2 SHOE CARNIVAL, INC. CONDENSED BALANCE SHEETS Unaudited November 2, February 3, October 28, 1996 1996 1995 ----------- ----------- ----------- (In thousands) ASSETS Current Assets: Cash and cash equivalents $ 1,414 $ 900 $ 1,083 Accounts receivable 930 986 676 Notes receivable from shareholders 40 40 42 Merchandise inventories 65,759 62,699 70,979 Deferred income tax benefit 797 1,820 941 Other 333 4,660 1,870 -------- -------- -------- Total Current Assets 69,273 71,105 75,591 Property and equipment-net 30,686 31,160 30,579 -------- -------- -------- Total Assets $ 99,959 $102,265 $106,170 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 14,239 $ 12,783 $ 10,051 Accrued and other liabilities 6,601 7,504 4,414 Current portion of long-term debt 676 612 581 -------- -------- -------- Total Current Liabilities 21,516 20,899 15,046 Long-term debt 12,398 18,922 18,737 Deferred lease incentives 1,514 1,948 1,962 Deferred income taxes 910 925 2,122 -------- -------- -------- Total Liabilities 36,338 42,694 37,867 -------- -------- -------- Shareholders' Equity: Common stock, no and $.10 par value, 50,000 shares authorized, shares issued and outstanding 13,028 at November 2, 1996 and 13,019 at February 3, 1996 and October 28, 1995 0 1,302 1,302 Additional paid-in capital 61,378 60,035 60,035 Retained earnings (deficit) 2,243 (1,766) 6,966 -------- -------- -------- Total Shareholders' Equity 63,621 59,571 68,303 -------- -------- -------- Total Liabilities and Shareholders' Equity $ 99,959 $102,265 $106,170 ======== ======== ======== See Notes to Condensed Financial Statements 3
3 SHOE CARNIVAL, INC. CONDENSED STATEMENTS OF INCOME Unaudited Thirteen Thirteen Thirty-nine Thirty-nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended November 2, October 28, November 2, October 28, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- (In thousands, except per share data) Net sales $ 63,882 $ 60,166 $ 179,687 $ 170,712 Cost of sales (including buying, distribution and occupancy costs) 44,864 43,882 128,392 125,388 ---------- ---------- ---------- ---------- Gross profit 19,018 16,284 51,295 45,324 Selling, general and administrative expenses 15,047 14,784 43,482 41,451 ---------- ---------- ---------- ---------- Operating income 3,971 1,500 7,813 3,873 Interest expense, net 248 367 1,019 1,201 ---------- ---------- ---------- ---------- Income before income taxes 3,723 1,133 6,794 2,672 Income taxes 1,526 499 2,785 1,130 ---------- ---------- ---------- ---------- Net income $ 2,197 $ 634 $ 4,009 $ 1,542 ========== ========== ========== ========== Net income per share $ .17 $ .05 $ .31 $ .12 ========== ========== ========== ========== Weighted average common shares and common equivalent shares outstanding 13,027,648 13,028,582 13,022,427 13,034,574 ========== ========== ========== ========== See Notes to Condensed Financial Statements 4
4 SHOE CARNIVAL, INC. CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY Unaudited Common Stock Additional Retained ---------------- Paid-In Earnings Shares Amount Capital (Deficit) Total ------ ------ ------- -------- ----- (In thousands) Balance at February 3, 1996 13,019 $1,302 $60,035 $(1,766) $59,571 Employee Stock Purchase Plan purchases 9 41 41 Elimination of par value (1,302) 1,302 Net income 4,009 4,009 ------ ------ ------- ------- ------- Balance at November 2, 1996 13,028 $ 0 $61,378 $ 2,243 $63,621 ====== ====== ======= ======= ======= See Notes to Condensed Financial Statements 5
5 SHOE CARNIVAL, INC. CONDENSED STATEMENTS OF CASH FLOWS Unaudited Thirty-Nine Thirty-Nine Weeks Ended Weeks Ended November 2, October 28, 1996 1995 ----------- ----------- (In thousands) Cash flows from operating activities: Net income $ 4,009 $ 1,542 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,870 3,410 Loss on retirement of assets 274 0 Deferred income taxes 1,008 257 Other (132) (185) Changes in operating assets and liabilities: Merchandise inventories (3,060) (609) Accounts receivable 3,582 (114) Accounts payable and accrued liabilities 1,765 (176) Other 799 1,578 -------- -------- Net cash provided by operating activities 12,115 5,703 -------- -------- Cash flows from investing activities: Purchases of property and equipment (4,719) (3,010) Notes from shareholders 0 32 Lease incentives (303) 444 Other 2 7 -------- -------- Net cash used in investing activities (5,020) (2,527) -------- -------- Cash flows from financing activities: Borrowings under lines of credit 138,900 81,425 Payments on lines of credit (145,050) (84,825) Payments on capital lease obligations (472) (452) Proceeds from issuance of stock 41 0 -------- -------- Net cash used in financing activities (6,581) (3,852) -------- -------- Net increase (decrease) in cash and cash equivalents 514 (676) Cash and cash equivalents at beginning of period 900 1,759 -------- -------- Cash and cash equivalents at end of period $ 1,414 $ 1,083 ======== ======== Supplemental disclosures of cash flow information: Cash paid during period for interest $ 1,096 $ 1,377 Cash paid (refunded) during period for income taxes $ (2,207) $ 534 Supplemental disclosure of noncash investing activities: Capital lease obligations incurred $ 162 $ 146 See Notes to Condensed Financial Statements 6
6 SHOE CARNIVAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Unaudited Note 1 - Basis of Presentation - ------------------------------ In the opinion of management, the accompanying unaudited condensed 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 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. It is suggested that these financial statements be read in conjunction with the financial statements and financial notes thereto included in the Company's 1995 Annual Report. Note 2 - Long-Term Debt - ----------------------- During fiscal 1995, the Company had an unsecured $40 million credit agreement (the "Credit Agreement") with a bank group which provided for a $30 million revolving line of credit and a $10 million line of credit reserved for the issuance of letters of credit. The Company was in violation of certain financial ratio covenants contained in the Credit Agreement for the year ended February 3, 1996. These covenant violations were waived by the bank group on April 3, 1996. On April 10, 1996, the Credit Agreement, including the financial covenants contained therein, was amended, reducing the total credit facility to $35 million. Sublimits for cash borrowings and letter of credit issuances were eliminated under the amended Credit Agreement. Borrowings are based on eligible inventory and bear interest, at the Company's option, at the agent bank's prime rate or the applicable London Inter-Bank Offered Rate (LIBOR) plus from 1.0% to 2.0%, depending on the Company's achievement of certain performance criteria. A commitment fee of .25% per annum is charged on the unused portion of the first $30 million of the bank group's commitment. The Credit Agreement contains various restrictive and financial covenants, including the maintenance of specific financial ratios, and a limitation on the payment of dividends. The most restrictive covenant limits capital expenditures to $8 million in fiscal 1996. The Company was in compliance with all covenants in the amended agreement for the first three quarters of 1996, and expects to maintain compliance for the remainder of fiscal 1996. The Credit Agreement expires on November 14, 1997. 7
7 Note 3 - Restructuring Charge - ----------------------------- In the fourth quarters of 1995 and 1994, the Company recorded restructuring charges related to its plan to close a total of nine unprofitable stores. Of the nine stores, one was closed in January 1995, six in the first half of 1996 and one in September 1996. The remaining store is expected to be closed during the fourth quarter of 1996. An analysis of the amounts charged against the reserve are outlined in the following table: Thirteen Weeks Ended November 2, 1996 ---------------- (In thousands) Restructuring reserve at August 3, 1996 $1,303 Costs applied against reserve: Store closing and lease termination costs (286) Equipment and leasehold improvements write-offs (177) ------ Restructuring reserve at November 2, 1996 $ 840 ====== Sales generated by the eight stores which have either been closed or are expected to be closed were $373,000 in the third quarter of 1996 and $3.6 million for the first nine months of 1996, compared to $2.7 million in the third quarter of 1995 and $7.2 million for the first nine months of 1995. An aggregate loss of approximately $120,000 was incurred in the operation of these eight stores in the third quarter of 1996 and $1.3 million for the first nine months of 1996, compared to an aggregate loss of approximately $300,000 incurred by these stores in the third quarter of 1995 and $1.0 million for the first nine months of 1995. The restructuring charges include management's best estimates of amounts required to be paid for store closing and lease termination costs. The total amount of the cash payments ultimately required could differ from the amounts recorded. Note 4 - Stock Option and Incentive Plan - ---------------------------------------- On September 19, 1996, the Stock Option Committee granted options for an aggregate of 327,500 shares of the Company's common stock to certain officers and key employees. Each option was granted at an exercise price of $5.375, which was market price at the date of grant and has a term of 10 years. The options become exercisable in thirds on April 1 of 1997, 1998 and 1999. In conjunction with the stock option grant, previously granted options for 226,000 shares of the Company's common stock with exercise prices ranging from $7.00 to $14.50 were canceled. 8
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------- RESULTS OF OPERATIONS - --------------------- Number of Stores Store Square Footage ------------------------------ -------------------- Beginning End Of Net End of Comparable Quarter Ended of Period Opened Closed Period Change Period Store Sales - -------------- --------- ------ ------ ------ ------- --------- ----------- May 4, 1996 95 2 4 93 (2,000) 1,022,000 (4.4%) August 3, 1996 93 2 2 93 2,000 1,024,000 (3.2%) November 2, 1996 93 1 1 93 2,000 1,026,000 2.7% Year-to-date 95 5 7 93 2,000 1,026,000 (1.6%) April 29, 1995 87 3 1 89 22,000 962,000 (9.2%) July 29, 1995 89 0 0 89 0 962,000 (5.4%) October 28, 1995 89 2 0 91 20,000 982,000 (10.4%) Year-to-date 87 5 1 91 42,000 982,000 (8.2%) Restructuring - ------------- In the fourth quarter of 1995 the Company's management adopted a plan to close eight unprofitable stores during its 1996 fiscal year. Seven stores have been closed in the first nine months of 1996. The reserve established for expected restructuring costs was $3.5 million at February 3, 1996. Costs incurred by the Company and applied against such reserve were $2.6 million in the first nine months of 1996, including $1.2 million for the write-off of fixed assets. Cash expenditures for lease termination and store closing costs and the repayment of lease incentives were $1.7 million in the first nine months. (See Note 3 of Notes to Condensed Financial Statements) The restructuring charges include management's best estimates of amounts required to be paid for store closing and lease termination costs. The total amount of the cash payments ultimately required could differ from the amounts recorded. 9
9 The following table sets forth the Company's results of operations expressed as a percentage of net sales for the periods indicated: Thirteen Thirteen Thirty-nine Thirty-nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended November 2, October 28, November 2, October 28, 1996 1995 1996 1995 -------------- ------------- -------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales (including buying, distribution and occupancy costs) 70.2 72.9 71.4 73.5 ------ ------ ------ ------ Gross profit 29.8 27.1 28.6 26.5 Selling, general and administrative expenses 23.6 24.6 24.2 24.2 ------ ------ ------ ------ Operating income 6.2 2.5 4.4 2.3 Interest expense .4 .6 .6 .7 ------ ------ ------ ------ Income before income taxes 5.8 1.9 3.8 1.6 Income taxes 2.4 .8 1.6 .7 ------ ------ ------ ------ Net income 3.4% 1.1% 2.2% .9% ====== ====== ====== ====== Net Sales - --------- Net sales increased $3.7 million to $63.9 million in the third quarter of 1996, a 6.2% increase over net sales of $60.2 million in the comparable prior year period. The increase was attributable to sales generated by nine new stores opened in 1995 and the five new stores opened in 1996 and a comparable store sales increase of 0.2% when compared to the thirteen week quarter ended October 28, 1995, partially offset by the reduction in sales for the seven stores closed during the first nine months of 1996. Due to the inclusion of 53 weeks in the Company's 1995 fiscal year, the ending date of each quarter in 1996 is one week later than the ending date of each quarter in 1995. On a comparable week basis, comparable store sales increased by 2.7%. Comparable store sales results exclude in both years the sales generated by stores the Company has either closed or expects to close in 1996. Sales of private label and non-name brand footwear constituted 16.9% of total footwear sales in the third quarter of 1996 as compared with 16.7% in the prior year quarter. Net sales increased $9.0 million to $179.7 million in the first nine months of 1996, a 5.3% increase over net sales of $170.7 million in the comparable prior year period. The increase was attributable to the sales generated by the new stores opened in 1995 and 1996, partially offset by the reduction in sales for the seven stores closed during 1996 and a comparable store sales decrease of 1.6% when compared to the thirty-nine weeks ended October 28, 1995. On a 10
10 comparable week basis, comparable store sales declined by 1.6%. Sales of private label and non-name brand footwear constituted 17.4% of total footwear sales in the first nine months of 1996 as compared with 19.1% in the comparable prior year period. Gross Profit - ------------ Gross profit increased $2.7 million to $19.0 million in the third quarter of 1996, a 16.8% increase over gross profit of $16.3 million in the comparable prior year period. The Company's gross profit margin increased to 29.8% from 27.1%. As a percentage of sales, merchandise gross profit margin increased 2.3% and buying, distribution and occupancy costs decreased 0.4%. The increase in merchandise gross profit margin resulted primarily from increased gross profit margins on the sale of women's private label footwear and children's footwear. Gross profit increased $6.0 million to $51.3 million in the first nine months of 1996, an 13.2% increase over gross profit of $45.3 million in the comparable prior year period. The Company's gross profit margin increased to 28.6% from 26.5%. As a percentage of sales, merchandise gross profit margin increased 1.7% and buying, distribution and occupancy costs decreased 0.4%. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses increased $263,000 to $15.0 million in the third quarter of 1996 from $14.8 million in the comparable prior year period. As a percentage of sales, these expenses decreased 1.0% as a result of the positive effect of the increase in net sales and lower advertising costs. Total pre-opening costs for the one store opened in the third quarter of 1996 was $56,000 or 0.1% of sales, as compared to $128,000, or 0.2% of sales, for the two stores opened in the third quarter of 1995. Selling, general and administrative expenses increased $2.0 million to $43.5 million in the first nine months of 1996 from $41.5 million in the comparable prior year period. As a percentage of sales, these expenses did not change. Total pre-opening costs for the five stores opened in the first nine months of 1996 were $427,000 or 0.2% of sales, as compared to $286,000 or 0.2% of sales, for the five stores opened in the first nine months of 1995. 11
11 Interest Expense - ---------------- The reduction in net interest expense in the third quarter and the first nine months of 1996 as compared with the third quarter and the first nine months of 1995 resulted from a combination of reduced borrowings and lower interest rates. Income Taxes - ------------ The effective income tax rate of 41.0% in the third quarters and the first nine months of 1996 and 1995 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. Net cash provided by operating activities was $12.1 million during the first nine months of 1996. Excluding changes in operating assets and liabilities, cash provided by operating activities was $9.0 million in the first nine months of 1996. The decrease in working capital to $47.8 million at November 2, 1996 from $50.2 million at February 3, 1996 resulted from the reduction of long-term debt of $6.6 million, including net payments against the revolving credit facility in the amount of $6.2 million. Long-term debt as a percentage of total capital was 16.3% at November 2, 1996, compared to 24.1% at February 3, 1996. Capital expenditures were $4.9 million in the first nine months of 1996 (including $162,000 of capital lease assets). Of these expenditures, approximately $1.7 million was incurred for new stores. The remaining capital expenditures in the first nine months of 1996 were primarily for the remodeling of certain stores and computer equipment. The Company has opened five stores in 1996, including the two stores opened in each of the first and second quarters and one store in the third quarter. The Company opened three stores in the first quarter of 1995 and two stores in the third quarter of 1995. The actual amount of the Company's cash requirements for capital expenditures depends in part on the number of new stores opened, the amount of lease incentives, if any, received from landlords and the number of stores remodeled. The opening of new stores will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending in areas the Company targets for expansion. The average inventory investment in a new store is expected to range from $550,000 to $850,000, depending on the size and sales expectations of the store and the timing of the new store opening. Capital expenditures for the 12
12 new stores are expected to average approximately $450,000, including point-of- sale equipment which is generally acquired through equipment leasing transactions. In addition, pre-opening expenses, such as advertising, salaries, supplies and utilities, typically average $60,000 to $70,000 per store. The Company's $35 million credit facility provides for a combination of cash advances on a revolving basis and the issuance of commercial letters of credit. Borrowings under the revolving credit line are based on eligible inventory. Borrowings and letters of credit outstanding under this facility at November 2, 1996 were $11.1 million and $4.1 million, respectively. The credit agreement to which the credit facility is subject contains certain restrictive and financial covenants, including the maintenance of specific financial ratios and a limitation on the payment of dividends. The most restrictive covenants limit capital expenditures to $8 million in fiscal 1996 and require a minimum net worth (as defined) of $59.5 million at the end of the first and second quarters and $60.0 million at the end of the third and fourth quarters of 1996. The Company was in compliance with all covenants for the first three quarters of fiscal 1996 and expects to maintain compliance for the remainder of the fiscal year. The Company anticipates that its existing cash and cash flow from operations, supplemented by borrowings under the credit facility will be sufficient to fund its planned expansion and other operating cash requirements for at least the next 12 months. Seasonality - ----------- The Company's quarterly results of operations have fluctuated, and are expected to continue to fluctuate in the future primarily as a result of seasonal variances and the timing of sales and costs associated with opening new stores. Non-capital expenditures, such as advertising and payroll, incurred prior to opening of a new store are charged to expense in the month the store is opened. Therefore, the Company's results of operations may be adversely affected in any quarter in which the Company opens new stores. The Company has three distinct selling periods: Easter, back-to-school and Christmas. 13
13 SHOE CARNIVAL, INC. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3-B) By-laws of Registrant, as amended to date p.16-31 (12) Financial Data Schedule p.32 (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended November 2, 1996. 14
14 SHOE CARNIVAL, INC. SIGNATURE 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. Date: December 16, 1996 SHOE CARNIVAL, INC. (Registrant) By: /s/ W. Kerry Jackson ______________________ W. Kerry Jackson Vice President and Chief Financial Officer 15
15