ITEM 1. BUSINESS
Shoe Carnival, Inc. (the "Company") is one of the nation's largest and fastest-growing family footwear retailers. The Company offers customers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with emphasis on national and regional name brands. The Company differentiates itself from its competitors by its distinctive, highly promotional in-store marketing effort and large stores that average 11,600 square feet, generate an average of approximately $2.7 million in annual sales and house an average inventory of approximately 30,000 pairs of shoes per location. As of February 1, 2003, the Company operated 207 stores in 23 states in the Midwest, South and Southeast regions of the United States.
The Company makes available free of charge through the Investor Relations portion of its Internet website at www.shoecarnival.com its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission.
Business Strategy
The Company's goal is to continue to grow its net sales and earnings by strengthening its position as the logical destination store for its customers' footwear needs. Key elements of the Company's business strategy are as follows:
The Company offers a distinctive shopping experience. The Company's stores combine competitive pricing with a highly promotional, in-store marketing effort that encourages customer participation and creates a fun and exciting shopping experience. The Company promotes a high-energy retail environment by decorating with bright lights and bold colors, and by featuring a stage and barker as the focal point in each store. Through the use of a microphone, this barker, or "mic-person," advertises current specials, organizes contests and games, and assists and educates customers with the features and location of merchandise. The Company's mic-person offers limited-duration promotions throughout the day, encouraging the customers to take immediate advantage of its value pricing. Management believes this highly promotional atmosphere results in various competitive advantages, including increased multiple unit sales, the building of a loyal, repeat customer base, the creation of word-of-mouth advertising and enhanced sell through of in-season goods.
The Company offers a broad merchandise assortment. The Company's objective is to be the destination store-of-choice for a wide range of consumers seeking moderately priced, current season name brand and private label footwear. The Company's product assortment includes dress and casual shoes, sandals, boots and a wide assortment of athletic shoes for the entire family. The average store carries an average of approximately 30,000 pairs of shoes in four general categories -- men's, women's, children's and athletics. In addition to footwear, the Company's stores carry selected accessory items complementary to the sale of footwear. In fiscal year 2002, more than 90% of the Company's sales represented name brand products. The Company places significant emphasis on visual merchandising and the promotion of nationally recognized name brands. The Company communicates the importance of these brands through creative signage and other visual aids on the fixtures throughout the stores.
The Company believes that by offering a wide selection of both athletic and non-athletic footwear, it is able to reduce its exposure to shifts in fashion preferences between those categories. The Company's ability to identify and react to fashion changes has been a key factor in its sales and earnings performance in recent years.
The Company offers value to its customers. The Company's marketing effort targets middle income, value-conscious consumers seeking name brand footwear for all age groups. Management believes that by offering a wide selection of popular styles of name brand merchandise at competitive prices, the Company generates broad customer appeal. Additionally, the time-conscious customer appreciates the convenience of one-stop shopping for the entire family. Management also believes that the Company's highly promotional in-store shopping environment contributes to a reputation of value pricing throughout the store.
The Company maintains an efficient store level cost structure. The Company's cost-efficient store operations and real estate strategy enable it to price products competitively and earn attractive store level returns. Low labor costs are achieved by housing merchandise directly on the selling floor in an open-stock format, enabling customers who so choose to serve themselves. This reduces the staffing required to assist customers and reduces store level labor costs as a percentage of sales. The Company prefers to locate stores predominantly in strip shopping centers in order to take advantage of lower occupancy costs and maximize its exposure to value-oriented shoppers.
The Company relies heavily on information technology. The Company has invested significant resources in information technology. The Company's proprietary inventory management and point-of-sale systems provide corporate management, buyers and store managers with the timely information necessary to monitor and control all phases of operations. The Company's store managers are able to monitor sales and gross profit margins on a real-time basis throughout the day. Reacting to sales trends, the Company's mic-people utilize this information to choose from among a number of product promotions supplied by its centralized merchandising staff. The Company's data warehouse enables the buying staff to analyze sales, margin and inventory levels by store, by day, down to the size of shoe if necessary. Utilizing this information, the Company's merchandise managers meet regularly with vendors to compare their product sales, gross margins and return on inventory investment against previously stated objectives. Management believes timely access to key business data has enabled the Company to drive annual comparable store sales increases, manage the Company's markdown activity and improve inventory turnover.
Growth Strategy
Key elements of the Company's growth strategy are as follows:
The Company will continue to grow its store base. The majority of the Company's sales and earnings growth is expected to continue to be generated by the opening of new stores. Management expects to open approximately 40 stores in 2003. Thereafter, the Company intends to expand at a rate of approximately 20% per year. During fiscal 2003, new stores are expected to be located primarily within the 23 states we currently operate. New states the Company will enter in 2003 include Colorado and possibly Pennsylvania. The Company intends to enter larger markets (populations greater than 400,000) by opening two or more stores at approximately the same time. In smaller markets that can only support a single store, the Company generally will seek locations in reasonably close proximity to other existing markets. This strategy supports more efficient management and reduces distribution costs. In addition to new market expansion and consistent with this clustering approach, the Company has targeted certain existing markets for additional new stores when appropriate store locations become available. Management believes that the advantages of clustering stores in existing markets will lead to cost efficiencies and overall incremental sales gains that should more than offset any adverse effect on sales of existing stores.
One of the Company's major goals is to improve its operating margins. The Company is focused on improving its operating margins by increasing its gross margin and leveraging general and administrative expenses against a higher sales base. A primary focus to increase the gross margin is to rejuvenate its women's non-athletic category. Women's product has historically achieved the highest gross margin. Management believes the Company can further enhance its gross margin by increasing its sales of women's product as a percent of total sales. To achieve this goal, the Company is improving its women's branded merchandise assortment, particularly for professional women, by offering more prominent national brands and by introducing a new store design that highlights the women's non-athletic product through better visibility within the store.
Merchandising
The Company's merchandising strategy is designed to provide a large selection of moderately priced footwear for the entire family. The Company's stores carry an average of approximately 30,000 pairs of shoes featuring a broad assortment of current-season name brand footwear, supplemented with private label merchandise and select name brand close-outs. The Company's stores also carry complementary accessories such as handbags, wallets, shoe care items and socks. The mix of merchandise and the brands offered in a particular store are based upon the demographics of each market, among other factors.
The Company's mic-person offers limited-duration promotions throughout the day, encouraging customers to take immediate advantage of value pricing. The Company emphasizes brand merchandise to customers with creative signage and by prominently displaying selected brands on end caps, focal walls and within the aisles. These displays may highlight a product offering of a single vendor or may make a seasonal or lifestyle statement by highlighting similar footwear from multiple vendors. These visual merchandise techniques make it easier for customers to shop and focus attention on key name brands. Expenses for signage and visual displays highlighting a particular brand will typically be partially or fully reimbursed by the vendor.
The table below sets forth the Company's percentage of sales by product category for fiscal 2002, 2001 and 2000.
Women's, men's and children's non-athletic footwear categories are further divided into dress, casual, sport, sandals and boots. Athletic shoes are classified by functionality, such as running, basketball or fitness shoes. In 2002, athletic styles, including children's sizes, represented slightly more than half of the Company's footwear sales. During 2001 and 2002, the Company liquidated its athletic apparel which was included in the Accessories and Miscellaneous category and does not intend to carry this product in the future.
Pricing
The Company's pricing strategy is designed to emphasize value. By combining current season name brand product with promotional pricing, management feels that it creates a better value for customers. Initial pricing decisions are guided by gross profit margin targets which vary by merchandise category and depend on whether the item is name brand or private label merchandise. Markdowns are centrally managed by the buying staff and communicated to the stores through information systems as needed.
In-store signage is used extensively to highlight sales promotions and to advertise promotional pricing to meet or beat competitors' sale prices.
Advertising and Promotion
In-store promotions are a key element in the Company's marketing effort. Although most promotions are pre-planned, store managers are encouraged to use their own creativity in devising on-the-spot promotional activities, such as contests and games. For example, the first person to correctly answer a trivia question may win a chance to grab for coupons or cash in the "Money Machine" where the customer attempts to catch cash and coupons during a 30-second period inside a transparent booth. With a spin of the Spin-N-Win(TM) Wheel, a customer purchasing multiple pairs of shoes may win instant discounts and other small prizes. Both of these promotions exemplify the Company's emphasis on fun and excitement in order to enhance the customer's total shopping experience.
The Company uses various forms of media advertising to communicate the exceptional values offered on specific shoes or entire product categories. The Company directs approximately 53% of its total advertising budget to television and radio. Print media (including newspaper ads, inserts and direct mail) and outdoor advertising account for the balance of the budget. A special effort is made to utilize the cooperative advertising dollars offered by vendors whenever possible. Major promotions during the grand openings and peak selling periods allow customers to win prizes such as cruises, computers, merchandise or cash.
The Company strives to make each store opening a major retail event. Grand openings feature an inflatable theme park, contests, cash and prize giveaways, special celebrity appearances and live musical performances. The Company believes its grand openings help to establish the high-energy, promotional atmosphere that develops a loyal, repeat customer base and generates word-of-mouth advertising.
Store Location and Design
The number of stores opened and closed for 2002, 2001 and 2000 are as follows:
At February 1, 2003, the Company had 207 stores located in 23 states, primarily in the Midwest, South and Southeastern regions of the United States. Although seven stores are located in enclosed malls, the Company prefers strip shopping center locations, where occupancy costs are typically lower and the Company enjoys greater operating freedom to implement its non-traditional retail methods. Management feels that the target customers enjoy the convenience offered by strip shopping centers as opposed to enclosed malls.
All of the Company's stores are leased rather than owned. Management believes that the flexibility afforded by leasing allows the Company to avoid the inherent risks of owning real estate, particularly with respect to under-performing stores. Prior to entering a new market, the Company performs a market, demographic and competition analysis to evaluate the suitability of the potential market. Potential store site selection criteria include, among other factors, market demographics, traffic counts, the tenant mix of a potential strip shopping center, visibility within the center and from major thoroughfares, overall retail activity of the area and proposed lease terms. The time required to open a store after signing a lease depends primarily upon the landlord's ability to deliver the premises. After the Company accepts the premises from the landlord, it can generally open a store within 45 days.
Critical to the success of opening new stores in larger markets or geographic areas is the Company's ability to cluster stores. Clustering involves the operation of multiple locations in a particular metropolitan area or in several smaller markets located in reasonable proximity to one another. The clustering of stores creates cost efficiencies by enabling us to leverage store expenses with respect to advertising, distribution and management costs.
As of February 1, 2003, the Company's stores averaged approximately 11,600 square feet, ranging in size (with the exception of one smaller store) from 6,600 to 26,500 square feet. The Company's current store prototype utilizes between 8,000 and 15,000 square feet, depending upon, among other factors, the location of the store and the population base the store is expected to service. The sales area of most stores is approximately 85% of the gross store size.
The Company's stores are designed and fixtured to reflect the high energy level of its retail concept. Stores are typically equipped with a sound system, microphone and entertainment devices such as the Spin-N-Win(TM) Wheel. With an open stock format, merchandise is typically displayed within a store by category, with athletic footwear generally located in the center of the store to provide a transition between women's and men's footwear.
Updated Store Design. The store design and logo in most of the existing stores was introduced in 1996. This design conveyed a carnival-like atmosphere by utilizing distinctive signs, flashing colored lights, large mirrors and bold colors. While Management believes the existing design will continue to be successful into the future, a new store design will be utilized in all new stores beginning in 2003. Existing stores will incorporate the new design when they would naturally be scheduled for a remodel. The new design will incorporate the excitement and high energy that makes Shoe Carnival distinctive, but will feature a contemporary look and feel by utilizing a more muted color scheme, larger-than-life sized graphics, better visual displays and an improved way finding system. In addition, the Shoe Carnival logo has been redesigned to reflect the store's new color scheme and contemporary look.
Store Operations
Management of store operations is the responsibility of the Company's Executive Vice President - Store Operations, who is assisted by divisional vice presidents, regional managers and the individual store managers. There are two divisions designated as the North and South Divisions. Each divisional vice president is responsible for approximately twelve regions, but is ultimately expected to manage up to fifteen regions. Each regional manager is responsible for the operation of between three and fourteen stores and is required to visit each store periodically, concentrating more heavily on under-performing stores. Regional managers meet regularly with their respective divisional vice president on a monthly basis, except during peak sales periods, and quarterly with the Executive Vice President - Store Operations and other members of senior management to discuss strategies, merchandise, advertising, financial performance and personnel requirements.
Each store has a general manager and up to four assistant managers, depending on sales volume. General managers and most assistant managers are paid a salary, while all other store employees are paid on an hourly basis. The Company provides an incentive compensation plan for all regional and general managers based primarily upon the attainment of sales, expense control and profitability goals.
Administrative functions are centrally controlled from corporate headquarters. These functions include accounting, purchasing, store maintenance, information systems, advertising, distribution and pricing. Regional and general managers are expected and encouraged to provide feedback to all corporate departments to improve efficiencies. Regional and general managers are charged with making certain merchandising decisions necessary to maximize sales and profits primarily through merchandise placement, signage and timely clearance of slower selling items.
Distribution
The Company operates a single 200,000 square foot distribution facility in Evansville, Indiana. Management estimates that with only a moderate investment in additional equipment and technology, the existing distribution facility can service up to 350 stores.
The distribution center processes virtually all merchandise prior to shipping to the stores. At a minimum, this includes count verification, price and bar code labeling of each unit (when not performed by the manufacturer), redistribution of an order into size assortments and allocation of shipments to individual stores. Once a distribution order form is received from the buying staff, the remainder of the distribution process, including packing, allocating, storing and shipping is essentially paperless. Merchandise is shipped to each store from one to two times a week, depending on store volume, proximity to other stores and proximity to the distribution center. The majority of shipments are handled by a dedicated carrier, with occasional use of common carriers.
Buying Operations
Maintaining fresh, fashionable merchandise is critical to the Company's success. The Company's buyers stay in touch with evolving trends by shopping fashion-leading markets, attending national trade shows, gathering vendor input and monitoring the current styles shown in leading fashion and lifestyle magazines. Management of the purchasing function is the responsibility of its Executive Vice President - General Merchandise Manager. Regional managers are expected to provide input to the Company's merchandising staff regarding market specific fashion trends.
The Company purchases merchandise from over 170 footwear vendors. In 2002, three suppliers, Nike, Inc, Reebok International Ltd., and Skechers USA, Inc. each accounted for more than 10% of net sales and together accounted for approximately 36% of net sales. A loss of any of the Company's key suppliers in certain product categories could have a material adverse effect on its business. As is common in the industry, the Company does not have any long-term contracts with suppliers.
Information Systems
The Company has devoted significant resources to expand its sophisticated information technology systems. The Company's network connects its corporate office to every store, providing up-to-date sales and inventory information as required. Each store has an independent point-of-sale controller, with two to 12 point-of-sale terminals per store. To provide maximum flexibility and maintain data integrity, the Company's information systems are based upon relational database technology. The Company's distribution facility utilizes a spread spectrum radio frequency network to assure accurate, real-time information throughout the distribution operation. Each member of the buying and distribution staff has on-line access to up-to-date sales and inventory
information broken down by store, style, color, size and width. Additional data analysis can be quickly provided on demand by using either a fourth generation language programming tool or personal computer tools that access the Company's database.
A state of the art point-of-sales system utilizes bar code technology to capture sales, gross margin and inventory information. The system provides, in addition to other features, full price management (including price look-up), promotional tracking capabilities (in support of the spontaneous nature of the in-store price promotions), real-time sales and gross margin analysis by product category at the store level and customer tracking.
Competition
The retail footwear business is highly competitive. The Company believes that the principal competitive factors in its industry are merchandise selection, price, fashion, quality, location, store environment and service. The Company competes primarily with department stores, shoe stores, sporting goods stores and mass merchandisers.
The Company typically competes with department stores and traditional shoe stores by offering lower prices. The Company competes with off-price retailers, mass merchandisers and discount stores by offering a wider and deeper selection of merchandise.
Many of the Company's competitors are significantly larger and have substantially greater financial and other resources. However, management believes that its distinctive retail format, in combination with its wide merchandise selection, competitive prices and low operating costs, enable the Company to compete effectively.
Employees
At February 1, 2003, the Company had approximately 3,200 employees, of which approximately 1,700 were employed on a part-time or seasonal basis. The number of employees fluctuates during the year primarily due to seasonality. None of the Company's employees is represented by a labor union.
Management attributes a large portion of the Company's success in various areas of cost control to its inclusion of virtually all management level employees in incentive compensation plans. The Company also contributes all or a portion of the cost of medical, disability and life insurance coverage for those employees who are eligible to participate in company-sponsored plans. All employees also receive discounts on Company merchandise. The Company considers its relationship with its employees to be satisfactory.
Trademarks
The Company owns the following federally registered trademarks and servicemarks: Shoe Carnival(R), The Carnival(R), Nuff Said(R), Donna Lawrence(R), Oak Meadow(R), Victoria Spenser(R), Chase and Brittney's(R), Via Nova(R), Fresh Stuff(R), Innocence(R) and Carnival Lites(R). The Company believes these marks are valuable and, accordingly, intends to maintain the marks and the related registrations. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use its marks.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases all existing stores and intends to lease all future stores. All leases for existing stores provide for fixed minimum rentals and most provide for contingent rental payments based upon various specified percentages of sales above minimum levels. Certain leases also contain escalator clauses for increases in minimum rentals, operating costs and taxes.
The Company owns its headquarters and distribution center which are located at 8233 Baumgart Road, Evansville, Indiana. See ITEM 1 "Business--Distribution."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the conduct of its business. Management does not expect that any such proceedings will have a material adverse effect on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the fourth quarter of the 2002 fiscal year.
Executive Officers of the Company
Mr. Weaver is the Company's principal shareholder and has served as Chairman of the Board of the Company since March 1988. From 1978 until February 2, 1993, Mr. Weaver had served as president and chief executive officer of Nine West Group Inc., a designer, developer and marketer of women's footwear. He has over 40 years of experience in the footwear industry. Mr. Weaver is a former director of Nine West Group Inc. Mr. Weaver serves as chairman and chief executive officer of Jacksonville Jaguars, LTD and chairman and chief executive officer of LC Footwear, LLC.
Mr. Lemond has been employed by the Company as President and Chief Executive Officer since September 1996. From March 1988 to September 1996, Mr. Lemond served as Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary. On February 3, 1994, Mr. Lemond was promoted to the position of Chief Operating Officer. Mr. Lemond has served as a director of the Company since March 1988. Prior to March 1988, he served in similar officer capacities with Russell's Shoe Biz, Inc. Prior to joining Russell's Shoe Biz, Inc. in 1987, Mr. Lemond was a partner with a public accounting firm. He is a Certified Public Accountant.
Mr. Baker has been employed by the Company as Executive Vice President - Store Operations since June 2001. From March 1994 to June 2001, Mr. Baker served as Senior Vice President - Store Operations. From May 1992 to March 1994, Mr. Baker served as Vice President - Store Operations. Prior to that time, he served as a Regional Manager of the Company. From 1983 to June 1989, Mr. Baker held various retail positions with Payless ShoeSource.
Mr. Sifford has been employed by the Company as Executive Vice President - General Merchandise Manager since June 2001. From April 13, 1997 to June 2001, Mr. Sifford served as Senior Vice President - General Merchandise Manager. Prior to joining the Company, Mr. Sifford served as merchandise manager-shoes for Belk Store Services, Inc.
Mr. Jackson has been employed by the Company as Senior Vice President - Chief Financial Officer and Treasurer since June 2001. From September 1996 to June 2001, Mr. Jackson served as Vice President - Chief Financial Officer and Treasurer. From January 1993 to September 1996, Mr. Jackson served as Vice President - Controller and Chief Accounting Officer. Prior to January 1993, Mr. Jackson held various accounting positions with the Company. Prior to joining the Company in 1988, Mr. Jackson was associated with a public accounting firm. He is a Certified Public Accountant.
Mr. Kapp has been employed by the Company since March 1988, most recently as Vice President - Merchandise Allocation and Secretary. Prior to assuming his current position, Mr. Kapp held various accounting and retail positions with the Company and its predecessor.
Executive officers of the Company serve at the discretion of the Board of Directors. There is no family relationship between any of the directors or executive officers of the Company.
(Pursuant to General Instruction G(3) of Form 10-K, the foregoing information is included as an unnumbered Item in Part I of this Annual Report in lieu of being included in the Company's Proxy Statement for its 2003 Annual Meeting of Shareholders.)
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock has been quoted on the Nasdaq Stock Market under the trading symbol "SCVL" since March 16, 1993.
The quarterly high and low trading prices for 2002 and 2001 are as follows:
As of April 4, 2003, there were approximately 207 holders of record of the Common Stock.
The Company does not currently intend to pay cash dividends on its Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions.
No unregistered equity securities were sold by the Company during fiscal 2002.
The information required by this Item concerning securities authorized for issuance under the Company's equity plans is set forth in or incorporated by reference into Part III, Item 12 of this report.
ITEM 6.
ITEM 6. Selected Financial Data
(In thousands, except share and operating data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year consists of a 52/53 week period ending on the Saturday closest to January 31. Unless otherwise stated, references to the years 2002, 2001 and 2000 relate respectively to the fiscal years ended February 1, 2003, February 2, 2002, and February 3, 2001. Fiscal years 2002 and 2001 consisted of 52 weeks and fiscal year 2000 consisted of 53 weeks.
Critical Accounting Policies
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 Statement of Financial Accounting Standards 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 bases. 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 judgment 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.
Results of Operations
The following table sets forth the Company's results of operations expressed as a percentage of net sales for the following fiscal years:
2002 Compared to 2001
Net Sales
Net sales increased $43.1 million to $519.7 million in 2002, a 9.1% increase over net sales of $476.6 million in 2001. The increase was attributable to the sales generated by the 25 stores opened in 2002 and the effect of a full year's worth of sales for the 17 stores opened in 2001 (net of one store closed), partially offset by a comparable store sales decrease of 0.4%. The decrease in comparable store sales resulted from the discontinuation of athletic apparel in all stores and handbags in certain stores. Footwear sales in comparable stores were up 0.1% for the year.
Gross Profit
Gross profit increased $14.7 million to $149.8 million in 2002, a 10.9% increase from gross profit of $135.1 million in 2001. The Company's gross profit margin increased to 28.8% from 28.4% in 2002. As a percentage of sales, the merchandise gross profit margin increased 0.6% and buying, distribution and occupancy costs increased 0.2%. The increase in the merchandise gross profit margin was primarily driven by increases in our women's non-athletic category and our adult athletic category. The fiscal 2002 key merchandise strategy of lowering merchandise inventory levels of seasonal fashion product in order to reduce our exposure to markdowns has proven successful in strengthening our overall gross profit margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $11.0 million to $123.7 million in 2002 from $112.7 million in 2001. As a percentage of sales, these expenses increased 0.1% in 2002 primarily as a result of higher pre-opening costs. The aggregate of pre-opening expenses for the 25 new stores in 2002 was approximately $2.0 million, or 0.4% of sales, and $1.2 million, or 0.3% of sales, for the 18 new stores in 2001.
Interest Expense
Interest expense decreased to $785,000 (net of interest income of $35,000) in 2002 from $2.3 million (net of interest income of $72,000) in 2001. The decrease was attributable to substantially lower average borrowings outstanding and a lower effective interest rate. The weighted average interest rate on total debt was 4.1% in 2002 and 5.6% in 2001.
Income Taxes
The effective income tax rate was 37.5% in 2002 and 2001. The effective income tax rate for both years differed from the statutory rate due primarily to state and local income taxes, net of the federal tax benefit.
2001 Compared to 2000
Net Sales
Net sales increased $58.4 million to $476.6 million in 2001, a 14.0% increase over net sales of $418.2 million in 2000. The increase was attributable to the sales generated by the 18 stores opened in 2001, the effect of a full year's worth of sales for the 27 stores opened in 2000 (net of five stores closed) and a comparable store sales increase of 3.0%. Partially offsetting the sales increase was an additional week of sales included in 2000. Excluding the impact of the extra week of sales, total sales increased 15.5% from the year 2000 to the year 2001. The increase in comparable store sales was generated by athletic footwear and children's non-athletic footwear.
Gross Profit
Gross profit increased $15.2 million to $135.1 million in 2001, a 12.7% increase from gross profit of $119.9 million in 2000. The Company's gross profit margin decreased to 28.4% from 28.7% in 2000 due to a decrease in the merchandise gross profit margin. Buying, distribution and occupancy costs, as a percentage of sales, were flat with the prior year. The decrease in merchandise margins resulted from a decline in the gross profit margins realized from the sale and liquidation of fall and winter product during the fourth quarter. Due to unseasonably warm weather and a very competitive retail environment throughout the fourth quarter, it was necessary to take substantial markdowns, particularly in the seasonal dress and casual shoes, and boots.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $12.0 million to $112.7 million in 2001 from $100.7 million in 2000. As a percentage of sales, these expenses decreased 0.4% in 2001 primarily as a result of lower pre-opening costs. The aggregate of pre-opening expenses for the 18 new stores in 2001 was approximately $1.2 million, or 0.3% of sales, and $2.4 million, or 0.6% of sales, for the 32 new stores in 2000.
Interest Expense
Interest expense decreased to $2.3 million (net of interest income of $72,000) in 2001 from $3.2 million (net of interest income of $49,000) in 2000. The decrease was attributable to a lower effective interest rate. Partially offsetting the benefit of the lower interest rates was a slight increase in the average borrowings outstanding over the prior year. The weighted average interest rate on total debt was 5.6% in 2001 and 8.2% in 2000.
Income Taxes
The effective income tax rate decreased to 37.5% for 2001 from 39.5% for 2000. The decrease resulted from lower state income taxes. The effective income tax rate for both years differed from the statutory rate due primarily to state and local income taxes, net of the federal tax benefit.
Liquidity and Capital Resources
The Company's sources and uses of cash are summarized as follows:
The Company's primary sources of funds are cash flows from operations and borrowings under its revolving credit facility. Cash provided from operating activities was $27.7 million, $22.3 million and $3.1 million in 2002, 2001 and 2000, respectively. Excluding changes in operating assets and liabilities, $29.2 million, $24.3 million and $21.5 million was provided by operating activities in 2002, 2001 and 2000, respectively. Merchandise inventories increased $10.5 million to $146.1 million at February 1, 2003 compared with $135.6 million at February 2, 2002. The net increase in merchandise inventories resulted primarily from the 25 additional stores operated at February 1, 2003 offset in part by a per-store inventory reduction of 5%.
Working capital was $96.2 million at February 1, 2003 and $93.3 million at February 2, 2002. The current ratio at February 1, 2003 was 2.6 as compared to 2.8 at February 2, 2002. The decrease from the prior year was primarily a result of an increase in accounts payable and accrued and other liabilities. Long-term debt as a percentage of total capital (long-term debt plus shareholders' equity) decreased to 10.6% at February 1, 2003 as compared to 19.8% at February 2, 2002. Cash generated by operations in 2002 was used to pay down long-term debt.
Capital expenditures, net of lease incentives, were $17.8 million in 2002, $9.8 million in 2001 and $13.8 million in 2000. These amounts include $47,000, $440,000, and $783,000 of capital lease obligations incurred in 2002, 2001 and 2000, respectively. Of the fiscal 2002 expenditures incurred, $9.1 million was for fiscal 2002 new stores, $1.2 million for stores to open in fiscal 2003, $1.1 million for remodeling and relocation of existing stores, $2.7 million on computer software and hardware, and $600,000 for additional conveyors and technology for our distribution center. The remaining capital expenditures in 2002 were primarily for various store improvements, loss prevention and technology.
Capital expenditures, including assets acquired through leasing arrangements but net of lease incentives, are expected to be $17 million to $19 million in fiscal 2003. The actual amount of cash required 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.
In fiscal 2003, the Company intends to open approximately 40 stores at an expected aggregate cost of between $12.5 million and $13 million. The remaining capital expenditures are expected to be incurred for store remodels, visual presentation enhancements and various other store improvements along with continued investments in technology.
The Company's current store prototype utilizes between 8,000 and 15,000 square feet depending upon, among other factors, the location of the store and the population base the store is expected to service. Net capital expenditures for new stores in 2003 are expected to average approximately $320,000. An updated store design, which will be used in all new stores in 2003 and beyond, will lower the cost to build a store by approximately 10% from historical levels. The average inventory investment in a new store is expected to range from $450,000 to $750,000, 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 and supplies, are expected to average approximately $67,000 per store. On a per-store basis, for the 25 stores opened during 2002, the initial inventory investment averaged $604,000, capital expenditures averaged $349,000 and pre-opening expenses averaged $79,000.
The Company's unsecured credit facility provides for up to $70 million in cash advances on a revolving basis and commercial letters of credit. Borrowings under the revolving credit line are based on eligible inventory. Cash generated by operations in 2002 was partially used to reduce the outstanding borrowings under this facility by $11.8 million. Borrowings outstanding under the credit facility were $15.2 million at February 1, 2003 and $27.0 million at February 2, 2002. Letters of credit outstanding at February 1, 2003 were $9.0 million. As of February 1, 2003, $45.8 million was available to the Company for additional borrowings under the credit facility. On March 12, 2003, the credit agreement was amended to extend the maturity date to March 31, 2005.
The Company anticipates that its existing cash and cash flow from operations, supplemented by borrowings under its revolving credit line, will be sufficient to fund its planned expansion and other operating cash requirements for at least the next 12 months.
Significant contractual obligations as of February 1, 2003 and the periods in which payments are due include:
See Note 5 for a discussion of long-term debt and Note 6 for a discussion of leases.
The Company has other commercial commitments in the form of letters of credit where payment is contingent upon the occurrence of certain events. As of February 1, 2003, letters of credit outstanding were $9.0 million.
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 the opening of a new store are charged to expense as incurred. Therefore, the Company's results of operations may be adversely affected in any quarter in which the Company incurs pre-opening expenses related to the opening of new stores.
The Company has three distinct peak selling periods: Easter, back-to-school and Christmas.
Factors That May Affect Future Results
This Annual 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 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 manufacturers 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 relationships between China and the United States.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in that the interest payable on the Company's credit facility 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 facility would have resulted in interest expense fluctuating by approximately $184,000 in 2002 and $335,000 in 2001.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
Management of the Company is responsible for the preparation, integrity and objectivity of the financial information included in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and necessarily include amounts which are based upon estimates and judgments by management.
Management maintains internal accounting control systems designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and the accounting records may be relied upon for the preparation of financial statements and other financial information. This system of internal controls has been designed and is maintained in recognition of the concept that the cost of controls should not exceed the benefit derived therefrom.
The Audit Committee of the Board of Directors meets periodically with management and the independent auditors to review matters relating to the Company's financial reporting, the adequacy of internal control systems and the scope and results of the annual audit. Representatives of the independent auditors have free access to the Audit Committee and the Board of Directors.
The Company's consolidated financial statements have been audited by Deloitte & Touche LLP, whose report, which follows, expresses an opinion as to the fair presentation of the financial statements and is based on an independent audit performed in accordance with generally accepted auditing standards.
Independent Auditors' Report
To the Board of Directors and Shareholders of Shoe Carnival, Inc. Evansville, Indiana
We have audited the accompanying consolidated balance sheets of Shoe Carnival, Inc., and subsidiaries as of February 1, 2003 and February 2, 2002 and the related consolidated statements of income, shareholders' equity and cash flows for the years ended February 1, 2003, February 2, 2002 and February 3, 2001. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Shoe Carnival, Inc., and subsidiaries as of February 1, 2003 and February 2, 2002 and the results of their operations and their cash flows for the years ended February 1, 2003, February 2, 2002 and February 3, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Francisco, California March 7, 2003 (March 12, 2003 as to Note 5)
Shoe Carnival, Inc. Consolidated Balance Sheets
See notes to consolidated financial statements
Shoe Carnival, Inc. Consolidated Statements of Income
(In thousands, except per share data) Fiscal years ended
See notes to consolidated financial statements
Shoe Carnival, Inc. Consolidated Statements of Shareholders' Equity
(In thousands)
See notes to consolidated financial statements
Shoe Carnival, Inc. Consolidated Statements of Cash Flows (In thousands)
See notes to consolidated financial statements
Shoe Carnival, Inc. Notes to Consolidated Financial Statements
Note 1 - Organization and Description of Business
The consolidated financial statements include the accounts of Shoe Carnival, Inc. and its wholly-owned subsidiaries SCHC, Inc. and Shoe Carnival Ventures, LLC. (collectively the "Company"), and SCLC, Inc., a wholly-owned subsidiary of SCHC, Inc. All significant intercompany accounts and transactions have been eliminated. The Company's primary activity is the sale of footwear and related products through Company-operated retail stores in the Midwest, South and Southeastern regions of the United States.
Note 2 - Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year consists of a 52/53 week period ending on the Saturday closest to January 31. Unless otherwise stated, references to the years 2002, 2001 and 2000 relate respectively to the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001. Fiscal years 2002 and 2001 consisted of 52 weeks and fiscal 2000 consisted of 53 weeks.
Cash and Cash Equivalents
The Company considers all certificates of deposit and other short-term investments with an original maturity date of three months or less to be cash equivalents.
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.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of property, equipment and leasehold improvements are provided on the straight-line method over the shorter of the estimated useful lives of the assets or the applicable lease terms. Lives used in computing depreciation and amortization range from two to 30 years. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures which materially increase values, improve capacities or extend useful lives are capitalized. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in operations.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that full recoverability is questionable. Factors used in the evaluation include, but are not limited to, management's plans for future operations, recent operating results and projected cash flows. Impaired assets are written down to estimated fair value with fair value generally being determined based on discounted expected future cash flows.
Deferred Lease Incentives
All incentives received from landlords for leasehold improvements and fixturing of new stores are recorded as deferred income and amortized over the life of the lease on a straight-line basis as a reduction of rental expense.
Revenue Recognition
Revenue from sales of the Company's merchandise is recognized at the time of sale, net of any returns.
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
Store Opening Costs
Non-capital expenditures, such as advertising, payroll and supplies, incurred prior to the opening of a new store are charged to expense in the period they are incurred.
Advertising Costs
Print, radio and television communication costs are generally expensed when incurred. Internal production costs are expensed when incurred and external production costs are expensed in the period the advertisement first takes place. Advertising expenses included in selling, general and administrative expenses were $25.7 million in 2002, $22.8 million in 2001 and $19.7 million in 2000.
Segments of an Enterprise and Related Information
The Company has one business segment that offers the same principal product and service throughout the Midwest, South and Southeastern regions of the United States. Based on the current organizational structure of the Company, the financial information presented is in compliance with the applicable accounting pronouncement.
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 year. 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":
Options to purchase 251,000, 424,000 and 679,000 shares of common stock in fiscal 2002, 2001 and 2000, respectively, were not included in the computation of diluted shares because the options' exercise prices were greater than the average market price for the period.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", requires that companies either recognize compensation expense for grants of stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income and net income per share in the notes to the financial statements. At February 1, 2003, the Company has three stock-based compensation plans, which are described more fully in Note 9. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, no compensation cost has been recognized under SFAS No. 123 for the Company's employee stock option plans. Had compensation cost for the awards under those plans been
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
determined based on the grant date fair values, consistent with the method required under SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
The weighted-average fair value of options granted was $9.61, $6.82 and $3.68 for 2002, 2001 and 2000, respectively. The fair value of these options was estimated at grant date using Black-Scholes option pricing model with the following weighted average assumptions:
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (the "FASB"), issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe that the adoption of SFAS No. 143 will have a significant impact on the Company's consolidated financial statements.
Effective February 4, 2002, the Company adopted SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 has not had a significant impact on the financial position or results from operations of the Company.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 primarily affects the reporting requirements and classification of gains and losses from the extinguishment of debt, rescinds the transitional accounting requirements for intangible assets of motor carriers and requires that certain lease modifications with economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 is effective for financial statements issued after April 2002, with the exception of the provisions affecting the accounting for lease transactions, which should be applied for transactions entered into after May 15, 2002, and the provisions affecting classification of gains and losses from the extinguishment of debt, which should be applied in fiscal years beginning after May 15, 2002. Management has determined that the adoption of SFAS No. 145 will have no impact on the Company's consolidated financial statements.
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized and the recognition of discontinued operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", an interpretation of SFAS No. 5, 57 and 107 and rescission of FASB Interpretation No. 34, was issued. FIN No. 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The recognition provisions of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002. Management does not believe that the adoption of FIN No. 45 will have a significant impact on the Company's consolidated financial statements.
In November 2002, the EITF reached a consensus on EITF Issue 02-16 "Accounting by a Reseller for Cash Consideration Received from a Vendor". This EITF addresses the classification of cash consideration received from vendors in a reseller's statement of operations. The guidance related to income statement classification is to be applied in annual and interim financial statements for periods beginning after January 1, 2003. The Company is in the process of reviewing the effect, if any, that the application of Issue No. 02-16 will have on its financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123", which amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for stock-based compensation to employees under APB Opinion No. 25 and related interpretations. The Company adopted the disclosure requirements of this statement as of February 1, 2003, as reflected above in Note 2.
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin 51, was issued. The primary objectives of FIN No. 46 are to provide guidance on the identification and consolidation of variable interest entities ("VIE"), which are entities for which control is achieved through means other than through voting rights. The Company does not have VIEs.
Use of Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions management is required to make. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the fiscal 2001 and 2000 consolidated financial statements have been reclassified to conform to the fiscal 2002 presentation.
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
Note 3 - Property and Equipment - Net
The following is a summary of property and equipment:
Note 4 - Accrued and Other Liabilities
Accrued and other liabilities consisted of the following:
Note 5 - Long-Term Debt
Long-term debt consisted of the following:
The Company has an unsecured credit agreement (the "Credit Agreement") with a bank group, which allows for both cash advances and the issuance of letters of credit. The maximum available under the credit facility is $70 million. On March 12, 2003, the Credit Agreement was amended to extend the maturity date to March 31, 2005.
Borrowings under the amended facility are based on eligible inventory and bear interest, at the Company's option, at the agent bank's prime rate (4.25% at February 1, 2003) minus 0.5% or LIBOR plus from 0.75% to 1.5%, depending on the Company's achievement of certain performance criteria. A commitment fee is charged, at the Company's option, at 0.3% per annum on the unused portion of the bank group's commitment or 0.15% per annum of the total commitment. The Credit Agreement contains various restrictive and financial covenants, including the maintenance of specific financial ratios. Outstanding letters of credit at the end of 2002 were approximately $9.0 million. As of February 1, 2003, $45.8 million was available to the Company for additional borrowings under the credit facility.
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
Note 6 - Leases
The Company leases all of its retail locations and certain equipment under operating leases expiring at various dates through 2015. One hundred and eighty-nine leases provide for contingent rental payments of between 2% and 5% of sales in excess of stated amounts. Certain leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes. In addition, the Company leases equipment under capitalized leases expiring at various dates through 2005.
Rental expense for the Company's operating leases consisted of:
Future minimum lease payments at February 1, 2003 are as follows:
The present value of minimum lease payments for equipment under capital lease is included in long-term debt (see Note 5).
Investment in equipment under capital lease, which is included in property and equipment, was:
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
Note 7 - Income Taxes
The provision for income taxes consisted of:
Included in other current assets are income tax receivables in the amounts of $34,000 and $263,000 as of February 1, 2003 and February 2, 2002, respectively. The Company realized a tax benefit of $730,000 in 2002, $464,000 in 2001 and $38,000 in 2000 as a result of the exercise of stock options.
A reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows:
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
Deferred income taxes are the result of temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources of these differences and the tax effect of each are as follows:
Note 8 - Employee Benefit Plans
Retirement Savings Plan
On February 24, 1994, the Company's Board of Directors approved the Shoe Carnival Retirement Savings Plan (the "Retirement Plan"). The Retirement Plan is open to all employees who have been employed for one year, are at least 21 years of age and who work at least 1,000 hours per year. The primary savings mechanism under the Retirement Plan is a 401(k) plan under which an employee may contribute up to 20% of earnings with the Company matching the first 4% at a rate of 50%.
Employee and Company contributions are paid to a trustee and invested in up to 16 investment options at the participants' direction. The Company contributions to the participants' accounts become fully vested upon completion of three years of participation in the Retirement Plan. Contributions charged to expense in 2002, 2001 and 2000 were $368,000, $304,000 and $334,000, respectively.
Stock Purchase Plan
On May 11, 1995, the Company's shareholders approved the Shoe Carnival, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan") as adopted by the Company's Board of Directors on February 9, 1995. The Stock Purchase Plan reserves 300,000 shares of the Company's common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes in the common stock) for issuance and sale to any employee who has been employed for more than a year at the beginning of the calendar year, and who is not a 10% owner of the Company's stock, at 85% of the then fair market value up to a maximum of $5,000 in any calendar year. During 2002, 12,000 shares of common stock were purchased by participants in the plan and proceeds to the Company for the sale of those shares were approximately $168,000.
Deferred Compensation Plan
In 2000, the Company established a non-qualified deferred compensation plan for certain key employees who, due to Internal Revenue Service guidelines, cannot take full advantage of the Company sponsored 401(k) plan. Participants in the plan elect on an annual basis to defer, on a pre-tax basis, portions of their current compensation until retirement, or earlier if so elected. While not required to, the Company can match a portion of the employees' contributions, which would be subject to vesting requirements. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. The plan is currently unfunded. Compensation expense for the Company's match and earnings on the deferred amounts for 2002 and 2001 were $59,000 and $65,000, respectively. Total deferred compensation liability at February 1, 2003 and February 2, 2002 was $640,000 and $331,000, respectively.
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
Note 9 - Stock Option and Incentive Plans
1993 Stock Option and Incentive Plan
Effective January 15, 1993, the Company's Board of Directors and shareholders approved the 1993 Stock Option and Incentive Plan (the "1993 Plan"). The 1993 Plan reserves for issuance 1,500,000 shares of the Company's common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes in the common stock) pursuant to any incentive awards granted by the Compensation Committee of the Board of Directors which administers the 1993 Plan. The 1993 Plan provides for the grant of incentive awards in the form of stock options or restricted stock to officers and other key employees of the Company. Stock options granted under the plan may be either options intended to qualify for federal income tax purposes as "incentive stock options" or options not qualifying for favorable tax treatment ("non-qualified stock options"). On January 14, 2003, the 1993 Plan expired and no further stock option grants will be made under the plan. Previously issued stock option grants can be exercised for up to 10 years from date of grant.
Outside Directors Stock Option Plan
Effective March 4, 1999, the Company's Board of Directors approved the Outside Directors Stock Option Plan (the "Directors Plan"). The Directors Plan reserves for issuance 25,000 shares of the Company's common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes to the common stock). The Directors Plan calls for each non-employee Director to receive on April 1st of each year an option to purchase 1,000 shares of the Company's common stock at the market price on the date of grant. The option will vest six months from the grant date and expire ten years from the date of grant. At February 1, 2003, 16,000 shares of unissued common stock were reserved for future grants under the plan.
2000 Stock Option and Incentive Plan
Effective June 8, 2000, the Company's Board of Directors and shareholders approved the 2000 Stock Option and Incentive Plan (the "2000 Plan"). The 2000 Plan reserves for issuance 1,000,000 shares of the Company's common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes in the common stock) pursuant to any incentive awards granted by the Compensation Committee of the Board of Directors which administers the 2000 Plan. The 2000 Plan provides for the grant of incentive awards in the form of stock options or restricted stock to officers and other key employees of the Company. Stock options granted under the plan may be either options intended to qualify for federal income tax purposes as "incentive stock options" or options not qualifying for favorable tax treatment ("non-qualified stock options"). At February 1, 2003, 453,169 shares of unissued common stock were reserved for future grants under the plan.
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
The following table summarizes the transactions pursuant to the stock option plans for the three-year period ended February 1, 2003:
The following table summarizes information regarding outstanding and exercisable options at February 1, 2003:
Note 10 - Shareholders' Equity
On January 7, 2000, the Company's Board of Directors authorized a share repurchase program that allowed the Company to purchase up to $10 million of the outstanding common stock. During 1999 the Company purchased 291,900 shares at an approximate cost of $2.4 million. An additional 1,153,450 shares were purchased in 2000 at an approximate cost of $7.6 million to complete the repurchase program.
Note 11 - Contingencies
Litigation
The Company is involved in various routine legal proceedings incidental to the conduct of its business, none of which is expected to have a material adverse effect on the Company's financial position.
Note 12 - Other Related Party Transactions
The Company's Chairman and Principal Shareholder and his son are principal shareholders of LC Footwear, LLC and PL Footwear, Inc. The Company purchases name brand merchandise from LC Footwear, LLC, while PL Footwear, Inc. serves as an import agent for the Company. PL Footwear, Inc. represents the Company on a commission basis in dealings with shoe factories in mainland China, where most of the Company's private label shoes are manufactured.
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - Continued
The Company purchased approximately $372,000, $146,000, and $352,000 of merchandise from LC Footwear, LLC in 2002, 2001 and 2000, respectively. Commissions paid to PL Footwear, Inc. were $1.2 million, $1.0 million, and $1.2 million in 2002, 2001 and 2000, respectively.
Note 13 - Quarterly Results (Unaudited)
Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year. All fiscal quarters in 2002 and 2001 include results for 13 weeks. The following table summarizes results for 2002 and 2001:
SHOE CARNIVAL, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's independent accountants on accounting or financial disclosures.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Directors and nominees for Director of the Company and concerning any disclosure of delinquent filers under Section 16(a) of the Exchange Act is incorporated herein by reference to the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year. Information concerning the executive officers of the Company is included under the caption "Executive Officers of the Company" at the end of Part I of this Annual Report. Such information is incorporated herein by reference, in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item concerning remuneration of the Company's officers and Directors and information concerning material transactions involving such officers and Directors is incorporated herein by reference to the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item concerning the stock ownership of management, five percent beneficial owners and equity compensation plans is incorporated herein by reference to the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item concerning certain relationships and related transactions is incorporated herein by reference to the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer of the Company have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Form 10-K, 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 were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a).1. Financial Statements:
The following financial statements of the Company are set forth in Part II, Item 8.
Report of Management
Independent Auditors' Report
Consolidated Balance Sheets at February 1, 2003 and February 2, 2002.
Consolidated Statements of Income for the years ended February 1, 2003, February 2, 2002, and February 3, 2001.
Consolidated Statements of Shareholders' Equity for the years ended February 1, 2003, February 2, 2002, and February 3, 2001.
Consolidated Statements of Cash Flows for the years ended February 1, 2003, February 2, 2002, and February 3, 2001.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
The following financial statement schedule of the Company is set forth in Part II, Item 8.
Schedule II Valuation and Qualifying Accounts
3. Exhibits:
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended February 1, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Shoe Carnival, Inc.
Date: May 1, 2003 By: /s/ Mark L. Lemond ------------------------------------ Mark L. Lemond President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ J. Wayne Weaver Chairman of the Board May 1, 2003 - ------------------------ and Director J. Wayne Weaver
/s/ Mark L. Lemond President, Chief Executive May 1, 2003 - ------------------------ Officer and Director Mark L. Lemond (Principal Executive Officer)
/s/ William E. Bindley Director May 1, 2003 - ------------------------ William E. Bindley
/s/ Gerald W. Schoor Director May 1, 2003 - ------------------------ Gerald W. Schoor
/s/ James A. Aschleman Director May 1, 2003 - ------------------------ James A. Aschleman
/s/ W. Kerry Jackson Senior Vice President - May 1, 2003 - ------------------------ Chief Financial W. Kerry Jackson Officer and Treasurer (Principal Financial and Accounting Officer)
SHOE CARNIVAL, INC. CERTIFICATIONS
I, Mark L. Lemond, certify that:
1. I have reviewed this annual report on Form 10-K of Shoe Carnival, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 1, 2003 By: /s/ Mark L. Lemond ------------------- Mark L. Lemond President and Chief Executive Officer
SHOE CARNIVAL, INC. CERTIFICATIONS
I, W. Kerry Jackson, certify that:
1. I have reviewed this annual report on Form 10-K of Shoe Carnival, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 1, 2003 By: /s/ W. Kerry Jackson --------------------- W. Kerry Jackson Senior Vice President and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Description - ---------- -----------------------------------------------------------------
3-A (1)(i) Restated Articles of Incorporation of Registrant
(2)(ii) Articles of Amendment of Restated Articles of Incorporation of Registrant
3-B (1)By-laws of Registrant, as amended to date
4 (3)(i) Amended and Restated Credit Agreement and Promissory Notes dated April 16, 1999, between Registrant and Mercantile Bank National Association, First Union National Bank and Old National Bank
(4)(ii) Amendment to Amended and Restated Credit Agreement and Promissory Notes dated March 24, 2000, between Registrant and Mercantile Bank National Association, First Union National Bank and Old National Bank
(5)(iii) Second Amendment to Amended and Restated Credit Agreement and Promissory Notes dated November 8, 2000, between Registrant and Firstar Bank N.A., First Union National Bank, Old National Bank and LaSalle Bank National Association
(1)(iv) Third Amendment to Amended and Restated Credit Agreement and Promissory Notes dated March 18, 2002, between Registrant and U.S. Bank National Association, First Union National Bank, Old National Bank and LaSalle Bank National Association
(v) Fourth Amendment to Amended and Restated Credit Agreement and Promissory Notes dated March 12, 2003, between Registrant and U.S. Bank National Association, Wachovia Bank National Association, Old National Bank and LaSalle Bank National Association
10-D* (6)1989 Stock Option Plan of Registrant and amendments to such Plan
10-E* (7)1993 Stock Option and Incentive Plan of Registrant, as amended
10-F* (6)Executive Incentive Compensation Plan of Registrant
10-G* (8)Outside Directors Stock Option Plan
10-I (6)Non-competition Agreement dated as of January 15, 1993, between Registrant and J. Wayne Weaver
10-K (6)Form of stock option exercise documents dated November 1, 1992, between Registrant and each of fourteen executive officers and key employees, including: (i) Exercise Notice; (ii) Subscription Agreement; (iii)Promissory Note; (iv) Pledge Agreement; (v) Stock Power
10-L* (7)Employee Stock Purchase Plan of Registrant, as amended
10-O* (9) 2000 Stock Option and Incentive Plan of Registrant
10-P* (10)Employment and Noncompetition agreement dated August 1, 2001, between Registrant and Timothy T. Baker
10-Q* (10)Employment and Noncompetition agreement dated August 1, 2001, between Registrant and Clifton E. Sifford
INDEX TO EXHIBITS - Continued
Exhibit No. Description - ---------- -----------------------------------------------------------------
10-R* (11)Employment and Noncompetition agreement dated July 1, 2002, between Registrant and Mark L. Lemond
21 A list of subsidiaries of Shoe Carnival, Inc.
23 Written consent of Deloitte & Touche LLP
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* The indicated exhibit is a management contract, compensatory plan or arrangement required to filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as the same exhibit number to the Company's Annual Report on Form 10-K for the year ended February 2, 2002 is incorporated herein by reference.
(2) The copy of this exhibit filed as exhibit number 3-A(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1998 is incorporated herein by reference.
(3) The copy of this exhibit as exhibit 4(i) to the Company's Annual Report on Form 10-K for the year ended January 30, 1999 is incorporated herein by reference.
(4) The copy of this exhibit filed as the same exhibit number to the Company's Annual Report on Form 10-K for the year ended January 29, 2000 is incorporated herein by reference.
(5) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended October 28, 2000 is incorporated herein by reference.
(6) The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form S-1 (Registration No. 33-57902) is incorporated herein by reference.
(7) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997 is incorporated herein by reference.
(8) The copy of this exhibit filed as exhibit number 4.4 to the Company's Registration Statement on Form S-8 (Registration No. 333-82819) is incorporated herein by reference.
(9) The copy of this exhibit filed as exhibit number 4.4 to the Company's Registration Statement on Form S-8 (Registration No.333-60114) is incorporated herein by reference.
(10) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended August 4, 2001 is incorporated herein by reference.
(11) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended August 3, 2002 is incorporated herein by reference.