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 August 2, 1997 [ ] 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 incorporation or organization) Number) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value, 13,047,287 shares outstanding as of September 1, 1997.
SHOE CARNIVAL, INC. INDEX TO FINANCIAL STATEMENTS Part I Financial Information Page 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 Item 2 - Management's Discussion and Analysis................ 8-11 Part II Other Information Item 4. Submission of Matters to Vote of Security Holders... 12 Item 6. Exhibits and Reports on Form 8-K.................... 12 Signature.................................................... 13 2
<TABLE> <CAPTION> SHOE CARNIVAL, INC. CONDENSED BALANCE SHEETS Unaudited August 2, February 1, August 3, 1997 1997 1996 ---------- ----------- --------- (In thousands) ASSETS <S> <C> <C> <C> Current Assets: Cash and cash equivalents........... $ 1,902 $ 1,625 $ 1,584 Accounts receivable................. 852 916 1,036 Notes receivable from shareholders.. 22 22 40 Merchandise inventories............. 68,819 59,240 64,662 Deferred income tax benefit......... 483 400 811 Other............................... 1,220 906 3,360 --------- --------- --------- Total Current Assets................... 73,298 63,109 71,493 Property and equipment-net............. 31,451 30,817 31,192 --------- --------- --------- Total Assets........................... $ 104,749 $ 93,926 $ 102,685 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.................... $ 14,960 $ 12,159 $ 18,596 Accrued and other liabilities....... 4,335 5,172 5,928 Current portion of long-term debt... 717 688 664 --------- --------- --------- Total Current Liabilities.............. 20,012 18,019 25,188 Long-term debt......................... 14,355 9,621 13,472 Deferred lease incentives.............. 1,404 1,458 1,624 Deferred income taxes.................. 1,207 1,056 1,001 --------- --------- --------- Total Liabilities...................... 36,978 30,154 41,285 --------- --------- --------- Shareholders' Equity: Common stock, no par value, 50,000 shares authorized, 13,045, 13,032, 13,022 shares issued and outstanding at August 2, 1997, February 1, 1997 and August 3, 1996................. 0 0 0 Additional paid-in capital.......... 61,616 61,398 61,353 Retained earnings................... 6,155 2,374 47 --------- --------- --------- Total Shareholders' Equity............. 67,771 63,772 61,400 --------- --------- --------- Total Liabilities and Shareholders' Equity.............................. $ 104,749 $ 93,926 $ 102,685 ========= ========= ========= </TABLE> See Notes to Condensed Financial Statements 3
<TABLE> <CAPTION> SHOE CARNIVAL, INC. CONDENSED STATEMENTS OF INCOME Unaudited Thirteen Thirteen Twenty-six Twenty-six Weeks Ended Weeks Ended Weeks Ended Weeks Ended August 2, August 3, August 2, August 3, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- (In thousands, except per share data) <S> <C> <C> <C> <C> Net sales.................. $ 62,393 $ 57,597 $ 121,721 $ 115,805 Cost of sales (including buying, distribution and occupancy costs).... 44,271 41,669 85,269 83,528 --------- --------- --------- --------- Gross profit............... 18,122 15,928 36,452 32,277 Selling, general and administrative expenses. 14,575 14,086 29,619 28,435 --------- --------- --------- --------- Operating income........... 3,547 1,842 6,833 3,842 Interest expense, net...... 247 332 478 771 --------- --------- --------- --------- Income before income taxes. 3,300 1,510 6,355 3,071 Income taxes............... 1,337 619 2,574 1,259 --------- --------- --------- --------- Net income................. $ 1,963 $ 891 $ 3,781 $ 1,812 ========= ========= ========= ========= Net income per share....... $ .15 $ .07 $ .29 $ .14 ========= ========= ========= ========= Weighted average common shares and common equivalent shares outstanding............. 13,286 13,021 13,170 13,020 ========= ========= ========= ========= </TABLE> See Notes to Condensed Financial Statements 4
<TABLE> <CAPTION> SHOE CARNIVAL, INC. CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY Unaudited Additional Common Stock Paid-In Retained Shares Amount Capital Earnings Total ------ ------ ---------- -------- -------- (In thousands) <S> <C> <C> <C> <C> <C> Balance at February 1, 1997.... 13,032 $ 0 $ 61,398 $ 2,374 $ 63,772 Employee stock purchase plan purchases.......... 13 60 60 Payment on stock purchase.... 158 158 Net income................... 3,781 3,781 ------- ---- ---------- -------- --------- Balance at August 2, 1997..... 13,045 $ 0 $ 61,616 $ 6,155 $ 67,771 ======= ==== ========== ======== ========= </TABLE> See Notes to Condensed Financial Statements 5
<TABLE> <CAPTION> SHOE CARNIVAL, INC. CONDENSED STATEMENTS OF CASH FLOWS Unaudited Twenty-six Twenty-six Weeks Ended Weeks Ended August 2, August 3, 1997 1996 ----------- ---------- (In thousands) <S> <C> <C> Cash flows from operating activities: Net income........................................... $ 3,781 $ 1,812 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................... 2,840 2,538 Loss on retirement of assets....................... 190 219 Deferred income taxes.............................. 68 1,084 Compensation for forgiveness of debt............... 158 0 Other ............................................ (54) (84) Changes in operating assets and liabilities: Merchandise inventories.......................... (9,579) (1,963) Accounts receivable.............................. 64 (50) Accounts payable and accrued liabilities......... 2,135 5,273 Other............................................ (315) 1,299 --------- --------- Net cash (used in) provided by operating activities..... (712) 10,128 --------- --------- Cash flows from investing activities: Purchases of property and equipment.................. (3,850) (3,661) Lease incentives..................................... 0 (241) Other................................................ 16 2 --------- --------- Net cash used in investing activities................... (3,834) (3,900) --------- --------- Cash flows from financing activities: Borrowings under line of credit...................... 67,425 97,025 Payments on line of credit........................... (62,325) (102,275) Payments on capital lease obligations................ (337) (310) Proceeds from issuance of stock...................... 60 16 --------- --------- Net cash provided by (used in) financing activities..... 4,823 (5,544) --------- --------- Net increase in cash and cash equivalents............... 277 684 Cash and cash equivalents at beginning of period........ 1,625 900 --------- --------- Cash and cash equivalents at end of period.............. $ 1,902 $ 1,584 ========= ========= Supplemental disclosures of cash flow information: Cash paid during period for interest................. $ 473 $ 815 Cash paid (refunded) during period for income taxes.. $ 2,379 $ (2,046) Supplemental disclosure of noncash investing activities: Capital lease obligations incurred................... $ 0 $ 162 </TABLE> See Notes to Condensed Financial Statements 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 1996 Annual Report. Note 2 - 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. Eight stores were closed during fiscal years 1995 and 1996, with the remaining store being closed in February 1997. During the first half of 1997 charges applied against the restructuring reserve include cash expenditures of $107,000 for store closing costs and $171,000 for equipment and leasehold improvement write-offs. The remaining reserve of $40,000 will be utilized primarily for lease termination costs. 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 materially from the amounts recorded if management is unable to negotiate an acceptable lease termination agreement with the landlord. 7
<TABLE> <CAPTION> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Comparable Number of Stores Store Square Footage Store Sales Beginning End of Net End Increase Quarter Ended Of Period Opened Closed Period Decrease of Period (Decrease) - ------------- --------- ------- ------- ------- --------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> May 3, 1997 93 0 2 91 (19,000) 1,007,000 4.4% August 2, 1997 91 0 0 91 5,000 1,012,000 8.8% Year-to-date 93 0 2 91 (14,000) 1,012,000 6.0% 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%) Year-to-date 95 4 6 93 0 1,024,000 (3.8%) </TABLE> The following table sets forth the Company's results of operations expressed as a percentage of net sales for the periods indicated: <TABLE> <CAPTION> Thirteen Thirteen Twenty-six Twenty-six Weeks Ended Weeks Ended Weeks Ended Weeks Ended August 2, August 3, August 2, August 3, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales.................. 100.0% 100.0% 100.0% 100.0% Cost of sales (including buying, distribution and occupancy costs).... 70.9 72.3 70.1 72.1 --------- --------- --------- --------- Gross profit............... 29.1 27.7 29.9 27.9 Selling, general and administrative expenses. 23.4 24.5 24.3 24.6 --------- --------- --------- --------- Operating income........... 5.7 3.2 5.6 3.3 Interest expense........... .4 .6 .4 .6 --------- --------- --------- --------- Income before income taxes. 5.3 2.6 5.2 2.7 Income taxes............... 2.1 1.1 2.1 1.1 --------- --------- --------- --------- Net income................. 3.2% 1.5% 3.1% 1.6% ========= ========= ========= ========= </TABLE> Net Sales Net sales increased $4.8 million to $62.4 million in the second quarter of 1997, an 8.3% increase over net sales of $57.6 million in the comparable prior year period. The increase was attributable to an 8.8% comparable store sales increase and the sales generated by the five new stores opened in 1996, partially offset by the reduction in sales for the eight stores closed in 1996 and 1997. The comparable store sales increase was supported with increases in the majority of the product categories. Average footwear unit prices in comparable stores increased 9.5% while footwear unit sales decreased 1.1%. Sales of private label and non-name brand footwear constituted 17.7% of total footwear sales in the second quarter of 1997 as compared with 16.7% in the prior year quarter. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net sales increased $5.9 million to $121.7 million in the first half of 1997, a 5.1% increase over net sales of $115.8 million in the comparable prior year period. The increase was attributable to a 6.0% comparable store sales increase and the sales generated by the five new stores opened in 1996, partially offset by the reduction in sales for the eight stores closed in 1996 and 1997. The comparable store sales increase was supported with increases in all major product categories. Average footwear unit prices in comparable stores increased 10.5% while footwear unit sales decreased 4.3%. Sales of private label and non-name brand footwear constituted 17.2% of total footwear sales in the first half of 1997 as compared with 16.4% in the prior year. Gross Profit Gross profit increased $2.2 million to $18.1 million in the second quarter of 1997, a 13.8% increase over gross profit of $15.9 million in the comparable prior year period. The Company's gross profit margin increased to 29.1% from 27.7%. As a percentage of sales, buying, distribution and occupancy costs decreased 0.4%. The increase in merchandise gross profit margin of 1.0% of sales was broad based with all major product categories improving over the comparable prior year period. Gross profit increased $4.2 million to $36.5 million in the first half of 1997, a 12.9% increase over gross profit of $32.3 million in the comparable prior year period. The Company's gross profit margin increased to 29.9% from 27.9%. As a percentage of sales, buying, distribution and occupancy costs decreased .3%. The increase in merchandise gross profit margin of 1.7% of sales was broad based with all major product categories improving over the comparable prior year period. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $489,000 to $14.6 million in the second quarter of 1997 from $14.1 million in the comparable prior year period. As a percentage of sales, these expenses decreased 1.1%. Total pre-opening costs for the two stores opened in the second quarter of 1996 were $132,000 or 0.2% of sales. No stores were opened in the second quarter of 1997. Selling, general and administrative expenses increased $1.2 million to $29.6 million in the first half of 1997 from $28.4 million in the comparable prior year period. As a percentage of sales, these expenses decreased .3%. Total pre-opening costs for the four stores opened in the first half of 1996 were $371,000 or .3% of sales. No stores were opened in the first half of 1997. Interest Expense The reduction in net interest expense in the second quarter and the first six months of 1997 as compared with in the second quarter and the first six months of 1996 resulted from a combination of reduced borrowings and lower interest rates. Income Taxes The effective income tax rate of 40.5% and 41.0% in the second quarters and the first six months of 1997 and 1996 respectively differed from the statutory federal rates due primarily to state and local income taxes, net of the federal tax benefit. 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 used in operating activities was $712,000 during the first half of 1997. Excluding changes in operating assets and liabilities, cash provided by operating activities was $7.0 million in the first half of 1997. An increase in merchandise inventories of $9.6 million and a reduction in accounts payable and accrued liabilities of $2.1 million were partially offset by the $7.0 million in cash generated by operations before changes in operating assets and liabilities. The increase in merchandise inventories was primarily due to seasonal fluctuations. Working capital increased to $53.3 million at August 2, 1997 from $45.1 million at February 1, 1997 and the current ratio improved to 3.7 to 1 from 3.5 to 1. Long-term debt as a percentage of total capital was 17.5% at August 2, 1997, compared to 13.1% at February 1, 1997. Capital expenditures were $3.9 million in the first half of 1997. Of these expenditures, approximately $2.9 million was incurred for the remodeling of certain stores. The remaining capital expenditures in the first half of 1997 were primarily for technological improvements in the stores and distribution center. The Company intends to end fiscal 1997 with 91 stores after the opening of four stores in the second half of 1997 and the closing of four lower volume stores at the expiration of their leases. Two stores were closed in the first half of 1997. The Company opened four stores in the first half of 1996 and closed six stores. 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. As part of the Company's effort to upgrade the image of its stores, a new prototype design has been utilized in all new and remodeled stores since the fourth quarter of 1995. The size of stores utilizing the new prototype design has increased from 10,000 square feet to between 12,000 and 18,000 square feet depending upon, among other factors, the location of the store and the population base the store is expected to service. Accordingly, capital expenditures for new stores have increased to an average of approximately $450,000, including point-of-sale equipment which is generally acquired through equipment leasing transactions. The average inventory investment in a new store is expected to range from $550,000 to $850,000, depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as advertising, salaries, supplies and utilities, are expected to average $60,000 to $80,000 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. The credit agreement limits capital expenditures in 1997 to $12 million. Borrowings and letters of credit outstanding under this facility at August 2, 1997 were $13.6 million and $8.5 million, respectively. 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. 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Factors That May Effect Future Results This report 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 impact of competition, weather patterns, consumer buying trends and the ability of the Company to identify and respond to emerging fashion trends; the availability of desirable store locations and management's ability to negotiate acceptable lease terms and open new stores in a timely manner; and changes in the political and economic environments in the People's Republic of China, where most of the Company's private label products are manufactured, and the contiuned favorable trade relationships between China and the United States. 11
SHOE CARNIVAL, INC. PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders The annual meeting of the common shareholders of the Company was held June 11, 1997. Election of Director David H. Russell was elected at the annual meeting to serve as a Director of the Company for a three year term. Mr. Russell received 11,011,697 votes in favor of his election and none against. Other Matters Voted Upon at the Meeting Deloitte & Touche LLP was appointed as auditor for the Company for 1997. 11,834,360 votes were cast in favor, 19,150 votes were cast against and 9,587 abstentions were recorded with respect to such appointment. Shareholders approved various amendments to the Company's 1993 Stock Option and Incentive Plan including increasing the number of shares of the Company's Common Stock subject to issuance under the plan from 900,000 to 1,500,000. 6,630,195 votes were cast in favor, 2,327,498 votes were cast against, 19,641 abstentions and 2,885,763 broker non-votes were recorded with respect to such approval. Shareholders approved an amendment to the Company's Employee Stock Purchase Plan to allow officers of the Company to participate. 8,215,178 votes were cast in favor, 816,498 votes were cast against, 9,653 abstentions and 2,821,798 broker non-votes were recorded with respect to such approval. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10-E) 1993 Stock Option and Incentive Plan of Registrant (10-L) Employee Stock Purchase Plan of Registrant (27) Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K was filed by the Company on June 9, 1997 to announce the retirement and terms of retirement of David H. Russell, the Company's founder and Vice Chairman. 12
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: September 12, 1997 SHOE CARNIVAL, INC. (Registrant) By: /s/ W. Kerry Jackson W. Kerry Jackson Vice President and Chief Financial Officer 13