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: our ability to control costs and meet our labor needs in a rising wage, inflationary, and/or supply chain constrained environment; the duration and spread of the COVID-19 pandemic, mitigating efforts deployed, including the effects of government stimulus on consumer spending, and the pandemic's overall impact on our operations, including our stores, supply chain and distribution processes, economic conditions, and financial market volatility; our ability to operate the recently acquired Shoe Station assets, retain Shoe Station employees and achieve expected operating results and other benefits from the Shoe Station acquisition within expected time frames, or at all; risks that the Shoe Station acquisition may disrupt our current plans and operations or negatively impact our relationship with our vendors and other suppliers; the potential impact of national and international security concerns, including those caused by war and terrorism, on the retail environment; general economic conditions in the areas of the continental United States and Puerto Rico where our stores are located; 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; our ability to successfully navigate the increasing use of online retailers for fashion purchases and the impact on traffic and transactions in our physical stores; the success of the open-air shopping centers where many of our stores are located and its impact on our ability to attract customers to our stores; our ability to attract customers to our e-commerce platform and to successfully grow our omnichannel sales; the effectiveness of our inventory management, including our ability to manage key merchandise vendor relationships and emerging direct-to-consumer initiatives; changes in our relationships with other key suppliers; changes in the political and economic environments in, the status of trade relations with, and the impact of changes in trade policies and tariffs impacting, China and other countries which are the major manufacturers of footwear; the impact of competition and pricing; our ability to successfully manage and execute our marketing initiatives and maintain positive brand perception and recognition; our ability to successfully manage our current real estate portfolio and leasing obligations; changes in weather, including patterns impacted by climate change; changes in 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 impact of natural disasters, other public health crises, political crises, civil unrest, and other catastrophic events on our operations and the operations of our suppliers, 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, including as a result of a cybersecurity breach; our ability to successfully execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability to identify, consummate or effectively integrate future acquisitions, our ability to implement and adapt to new technology and systems, 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; an increase in the cost, or a disruption in the flow, of imported goods; the impact of regulatory changes in the United States, including minimum wage laws and regulations, and the countries where our manufacturers are located; the resolution of litigation or regulatory proceedings in which we are or may become involved; continued volatility and disruption in the capital and credit markets; future stock repurchases under our stock repurchase program and future dividend payments. For a more detailed discussion of risk factors impacting us, see the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") 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 29, 2022 as filed with the SEC. This
section of this Quarterly Report on Form 10-Q generally discusses the first
quarter 2022 and the first quarter 2021 and year-over-year comparisons between
the first quarter 2022 and the first quarter 2021. However, given the
significant impact of the COVID-19 pandemic on our fiscal 2021 and fiscal 2020
results, we have included certain comparisons in this MD&A between the first
quarter 2022 and the first quarter 2019 to provide further context regarding our
first quarter 2022 results of operations.
Referred to herein the first quarter 2022 is the thirteen weeks ended April 30,
2022; the first quarter 2021 is the thirteen weeks ended May 1, 2021; the first
quarter 2020 is the thirteen weeks ended May 2, 2020; and the first quarter 2019
is the thirteen weeks ended May 4, 2019.
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Overview of our company
Shoe Carnival, Inc. is one of the nation's largest family footwear retailers.
After our acquisition of the physical stores and substantially all of the assets
and liabilities of Shoe Station, Inc. ("Shoe Station") on December 3, 2021, we
began operating under two banners: Shoe Carnival and Shoe Station. Our objective
is to be the omnichannel retailer-of-choice for on-trend branded and private
label footwear for the entire family. Our product assortment, whether shopping
in a physical store or on our e-commerce platform, includes dress, casual, and
work shoes, sandals, boots and a wide assortment of athletic shoes. Our typical
physical store carries shoes in two general categories - athletics and
non-athletics with subcategories for men's, women's, and children's, as well as
a broad range of accessories. In addition to our physical stores, our e-commerce
platform offers customers the same assortment of merchandise in all categories
of footwear with expanded options through direct-ship arrangements with certain
vendors.
Our stores under the Shoe Carnival banner combine competitive pricing with a
high-energy in-store environment that encourages customer participation.
Footwear in our Shoe Carnival physical stores is organized by category and
brand, creating strong brand statements within the aisles. These brand
statements are underscored by branded signage on endcaps and in-line signage
throughout the store. Our signage may highlight a vendor's product offerings or
sales promotions, or may highlight seasonal or lifestyle statements by grouping
similar footwear from multiple vendors. Certain of our Shoe Carnival stores have
athletic shops that highlight leading athletic brands, and we expect to continue
growing our "athletic shop" in-store concept and other shop-in-shop concepts
across our fleet in the years ahead.
The addition of the Shoe Station banner and retail locations creates a
complementary retail platform to serve a broader family footwear customer base
across both urban and suburban demographics. The Shoe Station concept targets a
more affluent family footwear customer and has a strong track record of
capitalizing on emerging footwear fashion trends and introducing new brands. See
Note 2 - "Acquisition of Shoe Station" to our Notes to Condensed Consolidated
Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on
Form 10-Q and Note 3 - "Acquisition of Shoe Station" to our Notes to
Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual
Report on Form 10-K for the fiscal year ended January 29, 2022, for further
discussion.
We believe our distinctive shopping experiences give us 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.
Critical accounting policies
We use judgment in reporting our financial results. This judgment involves estimates based in part on our historical experience and incorporates 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, accounting for business combinations, leases, and income taxes. The accounting policies that require more significant judgment are discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, and there have been no material changes to those critical accounting policies.
Summary of operating results
Number of Stores
Square foot store
Beginning End of Net End Comparable
Quarter Ended Of Period Opened Closed Period Change of Period Store Sales(1)
April 30, 2022 393 2 0 395 31,000 4,450,000 (10.6 )%
May 1, 2021 383 0 6 377 (46,000 ) 4,100,000 125.8 %
(1)
Comparable store sales is a key performance indicator for us. Comparable store
sales include stores that have been open for 13 full months after such stores'
grand opening or acquisition prior to the beginning of the period, including
those stores that have been relocated or remodeled. Therefore, all Shoe Station
sales (physical store and e-commerce) are excluded from our comparable store
sales. In addition, sales related to any Shoe Carnival bannered physical stores
recently opened or closed are not included in comparable store sales. We do
include e-commerce sales sold using the Shoe Carnival brand in our comparable
store sales as a result of our omnichannel retailer strategy. We view these
e-commerce sales as an extension of our physical stores.
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The following table presents our results of operations expressed as a percentage of net sales for the periods indicated:
Thirteen Thirteen
Weeks Ended Weeks Ended
April 30, 2022 May 1, 2021
Net sales 100.0 % 100.0 %
Cost of sales (including buying, distribution and
occupancy costs) 64.5
60.4
Gross profit 35.5
39.6
Selling, general and administrative expenses 24.4
22.1
Operating income 11.1
17.5
Interest expense (income), net 0.0 0.0 Income tax expense 2.6 4.3 Net income 8.5 % 13.2 % The shares outstanding and net income per share information for the first quarter of 2021 throughout this MD&A has been adjusted retroactively as a result of a two-for-one stock split of the outstanding shares of our common stock held by shareholders of record on July 6, 2021 that was completed on July 19, 2021. See Note 1 - "Basis of Presentation" to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on Form 10-Q for additional information on the stock split.
Executive summary for the first fiscal quarter ended April 30, 2022
During the first quarter 2022, our customers shopped for footwear without the
pandemic-related government stimulus received in 2021 and without the
pandemic-related retail store closures experienced in 2020. Our customers
returned to a more normal, pre-pandemic shopping pattern, with the mix of sales
being more balanced between the athletic and non-athletic categories. Our first
quarter 2022 results demonstrated the structural profit transformation and
increased scale our strategic plans have achieved compared to pre-pandemic
results. This quarter we continued to achieve gross profit margins in the
mid-thirties, double-digit operating income margin and trailing twelve-month
store productivity above $300 per square foot, despite the current economic
headwinds and continuing global uncertainty.
For the first quarter 2022, diluted net income per share was $0.95, the second
highest first quarter in our history and only surpassed by the stimulus-enhanced
first quarter 2021. The $0.95 per share earned was more than double the amount
earned pre-pandemic in the first quarter 2019. Net sales in the first quarter
2022 were $317.5 million. Excluding the stimulus-enhanced first quarter 2021,
the first quarter 2022 net sales were also the highest in our history,
surpassing any other first quarter by more than 20%. As an indicator of the
strength of our first quarter 2022 results against the pre-pandemic first
quarter 2019, net sales increased 25.1% and comparable store sales increased
16.8%. Our physical store comparable store sales increased 9.1% and e-commerce
net sales increased 154.4%.
Our first quarter 2022 results were positively impacted by growth in our
customer base and the transformation of our gross profit margin. During the
quarter, we surpassed 29 million Shoe Perks loyalty program members,
representing an increase in new customers of 10% compared to the first quarter
2021 and growth of over 25% compared to the first quarter 2019. Gross profit
margin during the first quarter 2022 was 35.5%, a near 600 basis point increase
compared to the first quarter 2019, driven primarily by changes to our customer
relationship management and promotional strategies, offset by increased
transportation and fuel costs.
Compared to the stimulus-enhanced first quarter 2021, net sales were down 3.3%
and comparable store sales declined 10.6%. These results compared to a net sales
increase of 122.7% and a comparable store sales increase of 125.8% in the first
quarter 2021 compared to the first quarter 2020 when our stores were closed for
about half of the quarter. Due to the current global supply chain issues and
inflation, we incurred significantly higher transportation and fuel costs in the
first quarter 2022 compared to the first quarter 2021, which reduced our
merchandise margin by 150 basis points and increased our distribution costs by
190 basis points. Excluding the 150 basis point increase in transportation and
fuel costs, our merchandise margin would have increased in the first quarter
2022 compared to the first quarter 2021. Also compared to the first quarter
2021, these additional costs decreased our diluted net income per share by
$0.29.
We ended the first quarter 2022 with inventory of $345.0 million, an increase of
$76.4 million compared to the first quarter 2021, or 22.6% on a per store basis.
The majority of the increase was due to accelerated receipts of merchandise in
an effort to mitigate supply chain issues for the back-to-school shopping
period, and approximately 40% of the increase was due to the addition of Shoe
Station stores.
We had no borrowings outstanding under our credit facility, which was amended
and restated during the first quarter 2022, and we ended the first quarter 2022
with $97.1 million of cash, cash equivalents and marketable securities. Our new
credit facility expires on March 23, 2027.
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We are currently in the process of modernizing our stores and plan to have over
50% of our stores modernized by the summer of 2023 and the full program complete
by the end of fiscal 2024. Through the first quarter 2022, 31% of the fleet is
complete.
Two new stores were opened in the first quarter 2022 and no stores were closed.
We aim to open approximately 10 new stores in fiscal 2022 and expect no store
closures and for store count to exceed 400 stores by the end of fiscal 2022.
Operating results for the first quarter ended April 30, 2022 Compared to the first quarter ended May 1, 2021
Net sales
Net sales were $317.5 million during the first quarter 2022 and decreased 3.3% compared to the first quarter 2021. The change in net sales was primarily a result of a 10.6% comparable store sales decline due primarily to the impact of government stimulus dollars in the first quarter 2021 offset by revenues attributable to new stores, including the Shoe Station stores. E-commerce sales were approximately 11% of merchandise sales in the first quarter 2022, compared to 12% in the first quarter 2021.
Gross profit
Gross profit was $112.9 million during the first quarter 2022, a decrease of $17.3 million compared to the first quarter 2021. Gross profit margin in the first quarter 2022 was 35.5% compared to 39.6% in the first quarter 2021. Merchandise margin decreased 1.3% and buying, distribution and occupancy costs increased 2.8% as a percentage of net sales compared to the first quarter 2021. The changes were primarily a result of inflation on transportation and fuel costs in the first quarter 2022.
Selling, general and administrative (“SG&A”) expenses
SG&A increased $4.9 million in the first quarter 2022 to $77.5 million compared to $72.6 million in the first quarter 2021. The overall increase in SG&A during the first quarter 2022 was primarily attributable to continued investment in advertising and store level wages, partially offset by lower levels of incentive compensation. As a percentage of net sales, SG&A was 24.4% in the first quarter 2022 compared to 22.1% in the first quarter 2021.
Income taxes
The effective income tax rate for the first quarter 2022 was 23.8% compared to 24.8% for the first quarter 2021. Our provision for income taxes is based on the current estimate of our annual effective tax rate and is adjusted as necessary for quarterly events. The lower quarterly effective tax rate was primarily due to a lower level of expected non-deductible compensation in fiscal 2022. For the full 2022 fiscal year, we expect our tax rate to be between 24% and 25% compared to the 25.3% effective tax rate recognized during the full 2021 fiscal year.
Cash and capital resources
Our primary sources of liquidity are $97.1 million of cash, cash equivalents and marketable securities on hand at the end of the first quarter 2022, cash generated from operations and availability under our $100 million credit facility. While the effects of the COVID-19 pandemic and other economic uncertainty associated with inflation, constrained supply chains and the Eastern European conflict, among other macroeconomic uncertainty, make our operating cash flow less predictable, we believe our 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 normally for working capital, which are principally inventory purchases, investments in our stores, such as new stores, remodels and relocations, distribution center initiatives, lease payments associated with our real estate leases, potential dividend payments, potential share repurchases under our share repurchase program and the financing of capital projects, including investments in new systems. As part of our growth strategy, we may also pursue strategic acquisitions of other footwear retailers.
Cash Flow – Operating Activities
Net cash generated from operating activities was $17.7 million in the first
quarter 2022 compared to $76.5 million during the first quarter 2021. The change
in operating cash flow was primarily driven by increased earnings in the first
quarter 2021 and timing of inventory purchases.
Working capital increased on a year-over-year basis and totaled $271.8 million
at April 30, 2022 compared to $262.3 million at May 1, 2021. The increase was
primarily attributable to higher merchandise inventory levels offset by lower
cash balances due to the acquisition of Shoe Station and share repurchases. Our
current ratio was 2.4 as of April 30, 2022 compared to 2.3 as of May 1, 2021.
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Cash Flow – Investing Activities
Our cash outflows for investing activities are normally tied to capital expenditures. During the first quarters of 2022 and 2021, we spent $26.9 million and $4.1 millionrespectively, for the purchase of property, plant and equipment, mainly related to our store portfolio modernization plan.
We invest in publicly traded mutual funds designed to mitigate income statement volatility associated with our nonqualified deferred compensation plan. The balance of these marketable securities was $11.0 million at April 30, 2022. Additional information can be found in Note 4 - "Fair Value Measurements" to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on Form 10-Q.
Treasury – Financing activities
Our cash outflows for financing activities are typically for cash dividend payments, share repurchases or payments on our credit facility. Shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of stock-based compensation awards that are settled in shares. Our cash inflows from financing activities generally reflect stock issuances to employees under our Employee Stock Purchase Plan and borrowings under our credit facility. During the first quarter 2022, net cash used in financing activities was $25.1 million compared to $4.3 million during the first quarter 2021. The increase in net cash used in financing activities was primarily due to the repurchase of $20.5 million of shares in the first quarter 2022 associated with our Board of Directors' authorized share repurchase program.
Capital expenditure
Capital expenditures for fiscal 2022, including actual expenditures in the first quarter 2022 , are expected to be between $55 million and $65 million, with approximately $50 million to $55 million to be used for new stores, relocations and remodels and approximately $5 million to $10 million for upgrades to our e-commerce platform, various other store improvements, continued investments in technology and normal asset replacement activities. The resources allocated to these projects are subject to near-term changes depending on the impacts associated with COVID-19, ongoing supply chain disruptions, and other macroeconomic uncertainty. Furthermore, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, the number of stores relocated, the amount of lease incentives, if any, received from landlords and the number of stores remodeled. The number of new store openings and relocations 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.
Store portfolio
We opened one Shoe Carnival branded store and one Shoe Station branded store in the first quarter 2022. Increasing market penetration by adding new stores is a key component of our growth strategy. Through a combination of both organic and acquired store growth, we aim to add approximately 10 new stores in fiscal 2022, over 20 new stores in fiscal 2023, and over 25 new stores annually by fiscal 2024, across both banners. We believe our current store footprint provides for growth in new markets within the United States as well as fill-in opportunities within existing markets. In the near term, we expect to pursue fill-in opportunities for store growth across large and mid-size markets as we continue to leverage customer data from our customer relationship management program. We believe more attractive real estate options will be available with the addition of the Shoe Station retail concept to our portfolio. However, our future store growth may continue to be impacted by the COVID-19 pandemic and other macroeconomic uncertainty. Over the last several years, we performed a store rationalization and performance improvement plan. As part of the plan, which is now complete, we identified underperforming stores and worked to address the performance of these stores through renegotiation of lease terms, relocation or closure. While we continue to actively monitor the store portfolio, we do not expect any further significant closures over the next several years.
Credit facility
On March 23, 2022, we entered into a new $100 million Amended and Restated
Credit Agreement (the "New Credit Agreement"), which replaced our existing
credit agreement. The New Credit Agreement is collateralized by our inventory,
expires on March 23, 2027, and uses a Secured Overnight Financing Rate ("SOFR")
as quoted by The Federal Reserve Bank of New York as the basis for financing
charges. Material covenants associated with the New Credit Agreement require
that we maintain a minimum net worth of $250 million and a consolidated interest
coverage ratio of not less than 3.0 to 1.0. We were in compliance with these
covenants as of April 30, 2022.
The New Credit Agreement contains certain restrictions. However, as long as our
consolidated EBITDA is positive and there are either no or low borrowings
outstanding, we expect these restrictions would have no impact on our ability
pay cash dividends, execute share
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repurchases or facilitate acquisitions from cash on hand. The New Credit
Agreement stipulates that cash dividends and share repurchases of $15 million or
less per fiscal year can be made without restriction as long as there is no
default or event of default before and immediately after such distributions. We
are also permitted to make acquisitions and pay cash dividends or repurchase
shares in excess of $15 million in a fiscal year provided that (a) no default or
event of default exists before and immediately after the transaction and (b) on
a proforma basis, the ratio of (i) the sum of (A) our consolidated funded
indebtedness plus (B) three times our consolidated rental expense to (ii) the
sum of (A) our consolidated EBITDA plus (B) our consolidated rental expense is
less than 3.5 to 1.0. Among other restrictions, the New Credit Agreement also
limits our ability to incur additional secured or unsecured debt to $20 million.
The New Credit Agreement bears interest, at our option, at (1) the agent bank's
base rate plus 0.0% to 1.0% or (2) Adjusted Term SOFR plus 0.9% to 1.9%,
depending on our achievement of certain performance criteria. A commitment fee
is charged at 0.2% to 0.3% per annum, depending on our achievement of certain
performance criteria, on the unused portion of the lenders' commitment. During
the first quarter 2022, we did not borrow or repay funds under our prior credit
facility or the New Credit Agreement. Letters of credit outstanding were
$700,000 at April 30, 2022 and our borrowing capacity was $99.3 million.
The terms “net worth”, “consolidated interest coverage ratio”, “consolidated financial debt”, “consolidated rental expenses”, “consolidated EBITDA”, “base rate” and “adjusted term SOFR” are defined in the new credit contract.
Dividends
On March 10, 2022, the Board of Directors approved the payment of a first quarter 2022 cash dividend to our shareholders. The quarterly cash dividend of $0.090 per share was paid on April 18, 2022 to shareholders of record as of the close of business on April 4, 2022. In the first quarter 2021, the dividend paid was $0.070 per share. During the first quarters of 2022 and 2021, we returned $2.6 million and $2.1 million, respectively, to our shareholders through our quarterly cash dividends. 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, subject to restrictions as outlined above in the "Credit Facility" discussion. See Note 9 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 for a further discussion of our credit facility. Share Repurchase Program On December 16, 2021, our Board of Directors authorized a share repurchase program for up to $50.0 million of outstanding common stock, effective January 1, 2022 (the "2022 Share Repurchase Program"). The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2022 and in accordance with applicable laws, rules and regulations. The 2022 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, share repurchases 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 and economic factors and are subject to restrictions as outlined above in the "Credit Facility" discussion. See Note 9 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 for a further discussion of our credit facility. During the first quarter 2022, we repurchased 682,886 shares of common stock at a total cost of $20.5 million under the 2022 Share Repurchase Program. As of April 30, 2022, we had $29.5 million available for future repurchases. Due to uncertainty related to the COVID-19 pandemic, share repurchases were limited in fiscal 2021 and no repurchases were made in the first quarter 2021.
Seasonality
We have three distinct peak selling periods: Easter, back-to-school and
Christmas. Our operating results depend significantly upon the sales generated
during these periods. To prepare for our peak shopping seasons, we must order
and keep in stock significantly more merchandise than we would carry during
other periods of the year. Any unanticipated decrease in demand for our products
or a supply chain disruption that reduces inventory availability during these
peak shopping seasons in future periods could reduce our net sales and gross
profit and negatively affect our profitability.
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