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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: February 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 0-21360
SHOE CARNIVAL, INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of incorporation or organization)
35-1736614
(I.R.S. Employer Identification No.)
8233 Baumgart Road
Evansville, Indiana 47725
(Address of principal executive offices) (Zip Code)
(812) 867-6471
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $. 01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant of Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No ___
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the last sale price for such stock at August 2, 2002 (the
last business day of the Registrant's most recently completed second fiscal
quarter) was approximately $126,515,389 (assuming solely for the purposes of
this calculation that all Directors and executive officers of the Registrant are
"affiliates").
Number of Shares of Common Stock, $.01 par value, outstanding at April 24, 2003
were 12,634,753.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Definitive Proxy Statement for the Annual
Meeting of Shareholders of Registrant to be held on June 12, 2003 is
incorporated by reference into Part III hereof.
Shoe Carnival, Inc.
Evansville, Indiana
Annual Report to Securities and Exchange Commission
February 1, 2003
PART I
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.
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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.
3
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.
Fiscal Year 2002 2001 2000
----------- ----------- ----------
Women's 25% 25% 27%
Men's 16 16 17
Children's (1) 16 17 16
Athletic (2) 39 37 35
Accessories and Miscellaneous Items 4 5 5
----------- ----------- ----------
100% 100% 100%
=========== =========== ==========
------------
(1) Children's includes children's athletic shoes.
(2) Includes men's and women's sizes only.
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.
4
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:
Fiscal Year 2002 2001 2000
----------- ---------- ----------
Stores open at beginning of year 182 165 138
Opened during year 25 18 32
Closed during year 0 1 5
----------- ---------- ----------
Stores open at end of year 207 182 165
=========== ========== ==========
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.
5
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
6
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. 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. 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.
7
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
Name Age Position
- ---- --- --------
J. Wayne Weaver 68 Chairman of the Board and Director
Mark L. Lemond 48 President, Chief Executive Officer and Director
Timothy T. Baker 46 Executive Vice President - Store Operations
Clifton E. Sifford 49 Executive Vice President - General Merchandise Manager
W. Kerry Jackson 41 Senior Vice President - Chief Financial Officer and Treasurer
David A. Kapp 39 Vice President - Merchandise Allocation and Secretary
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.)
8
PART II
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:
High Low
------------- -------------
Fiscal Year 2002
First Quarter $ 21.19 $ 13.00
Second Quarter 22.44 16.55
Third Quarter 20.20 10.00
Fourth Quarter 16.62 12.76
Fiscal Year 2001
First Quarter $ 11.00 $ 8.22
Second Quarter 13.00 9.30
Third Quarter 13.85 8.60
Fourth Quarter 14.70 8.40
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.
9
ITEM 6. Selected Financial Data
(In thousands, except share and operating data)
Fiscal years (1) 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Income Statement Data:
Net sales $ 519,699 $ 476,556 $ 418,164 $ 339,929 $ 280,157
Cost of sales (including buying,
distribution and occupancy costs) 369,912 341,425 298,233 238,097 196,141
------------ ------------ ------------ ------------ ------------
Gross profit 149,787 135,131 119,931 101,832 84,016
Selling, general and
administrative expenses 123,658 112,736 100,692 80,888 66,464
------------ ------------ ------------ ------------ ------------
Operating income 26,129 22,395 19,239 20,944 17,552
Interest expense 785 2,275 3,168 1,010 507
------------ ------------ ------------ ------------ ------------
Income before income taxes 25,344 20,120 16,071 19,934 17,045
Income tax expense 9,504 7,545 6,348 7,973 6,818
------------ ------------ ------------ ------------ ------------
Net income $ 15,840 $ 12,575 $ 9,723 $ 11,961 $ 10,227
============ ============ ============ ============ ============
Net income per share:
Basic $ 1.26 $ 1.04 $ .79 $ .90 $ .78
Diluted $ 1.22 $ 1.01 $ .78 $ .88 $ .76
Average shares outstanding:
Basic 12,561 12,124 12,354 13,284 13,150
Diluted 12,976 12,483 12,455 13,578 13,429
Selected Operating Data (2):
Stores open at end of year 207 182 165 138 111
Square footage of store space
at year-end (000's) 2,401 2,104 1,911 1,590 1,274
Average sales per store (000's) $ 2,675 $ 2,743 $ 2,744 $ 2,744 $ 2,791
Average sales per square foot $ 232 $ 237 $ 237 $ 238 $ 250
Comparable store sales (0.4)% 3.0% 2.5% 1.4% 3.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital(3) $ 96,248 $ 93,327 $ 89,345 $ 69,672 $ 48,720
Total assets 219,275 201,919 187,351 162,853 120,761
Long-term debt and other indebtedness 15,503 27,672 41,137 22,338 1,361
Total shareholders' equity 130,891 112,102 96,313 93,345 82,667
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The Company's fiscal year is a 52/53 week year ending on the Saturday
closest to January 31. Unless otherwise stated, references to years 2002,
2001, 2000, 1999, and 1998 relate respectively to the fiscal years ended
February 1, 2003, February 2, 2002, February 3, 2001, January 29, 2000,
and January 30, 1999. Fiscal year 2000 consisted of 53 weeks and the other
fiscal years consisted of 52 weeks.
(2) Selected Operating Data has been adjusted to a comparable 52 week basis
for 2000.
(3) Historical periods have been reclassified to conform to the fiscal 2002
presentation.
10
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.
11
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 2001 2000
---------------- --------------- ---------------
Net sales 100.0% 100.0% 100.0%
Cost of sales (including buying,
distribution and occupancy costs) 71.2 71.6 71.3
---------------- --------------- ---------------
Gross profit 28.8 28.4 28.7
Selling, general and
administrative expenses 23.8 23.7 24.1
---------------- --------------- ---------------
Operating income 5.0 4.7 4.6
Interest expense 0.2 0.5 0.8
---------------- --------------- ---------------
Income before income taxes 4.8 4.2 3.8
Income tax expense 1.8 1.6 1.5
---------------- --------------- ---------------
Net income 3.0% 2.6% 2.3%
================ =============== ===============
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.
12
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.
13
Liquidity and Capital Resources
The Company's sources and uses of cash are summarized as follows:
(000's)
Fiscal years 2002 2001 2000
---------- -------- ---------
Net income plus depreciation and amortization $ 28,324 $ 23,747 $ 20,069
Deferred income taxes 296 116 1,237
Working capital increases (1,515) (1,992) (18,428)
Other operating activities 616 459 232
---------- -------- ---------
Net cash provided by operating activities 27,721 22,330 3,110
Net cash used in investing activities (17,724) (9,369) (12,979)
Net cash used to repurchase common shares 0 0 (7,576)
Net cash (used in) provided by other financing activities (9,674) (10,729) 18,997
---------- -------- ---------
Net increase in cash and cash equivalents 323 2,232 1,552
Cash and cash equivalents at beginning of year 5,459 3,227 1,675
---------- -------- ---------
Cash and cash equivalents at end of year $ 5,782 $ 5,459 $ 3,227
========== ======== =========
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
14
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:
(000's) Payments Due By Period
---------------------------------------------------------------------------
Less Than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ----------------------- ---------------------------------------------------------------------------
Line of credit $ 15,225 $ 15,225
Capital lease obligations 761 $ 468 293
Operating leases 201,649 29,358 53,702 $ 48,689 $ 69,900
----------- ----------- --------- --------- ---------
Total Contractual Cash Obligations $ 217,635 $ 29,826 $ 69,220 $ 48,689 $ 69,900
=========== =========== ========= ========== =========
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.
15
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.
16
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)
17
Shoe Carnival, Inc.
Consolidated Balance Sheets
February 1, February 2,
(In thousands) 2003 2002
----------------- -----------------
Assets
Current Assets:
Cash and cash equivalents $ 5,782 $ 5,459
Accounts receivable 1,134 1,298
Merchandise inventories 146,091 135,648
Deferred income tax benefit 901 449
Other 1,890 1,816
------------- -------------
Total Current Assets 155,798 144,670
Property and equipment-net 63,477 57,249
------------- -------------
Total Assets $ 219,275 $ 201,919
============= =============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 49,847 $ 42,108
Accrued and other liabilities 9,276 8,401
Current portion of long-term debt 427 834
------------- -------------
Total Current Liabilities 59,550 51,343
Long-term debt 15,503 27,672
Deferred lease incentives 5,262 4,197
Accrued rent 2,458 2,051
Deferred income taxes 4,971 4,223
Other 640 331
------------- -------------
Total Liabilities 88,384 89,817
------------- -------------
Shareholders' Equity:
Common stock, $.01 par value, 50,000 shares authorized
13,363 shares issued 134 134
Additional paid-in capital 65,828 64,752
Retained earnings 70,091 54,251
Treasury stock, at cost, 746 and 1,000 shares (5,162) (7,035)
------------- -------------
Total Shareholders' Equity 130,891 112,102
------------- -------------
Total Liabilities and Shareholders' Equity $ 219,275 $ 201,919
============= =============
See notes to consolidated financial statements
18
Shoe Carnival, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
Fiscal years ended
February 1, February 2, February 3,
2003 2002 2001
---------------- ---------------- ----------------
Net sales $ 519,699 $ 476,556 $ 418,164
Cost of sales (including buying,
distribution and occupancy costs) 369,912 341,425 298,233
--------------- -------------- --------------
Gross profit 149,787 135,131 119,931
Selling, general and administrative expenses 123,658 112,736 100,692
--------------- -------------- --------------
Operating income 26,129 22,395 19,239
Interest expense 785 2,275 3,168
--------------- -------------- --------------
Income before income taxes 25,344 20,120 16,071
Income tax expense 9,504 7,545 6,348
--------------- -------------- --------------
Net income $ 15,840 $ 12,575 $ 9,723
=============== ============== ==============
Net income per share:
Basic $ 1.26 $ 1.04 $ .79
Diluted $ 1.22 $ 1.01 $ .78
Average shares outstanding:
Basic 12,561 12,124 12,354
Diluted 12,976 12,483 12,455
See notes to consolidated financial statements
19
Shoe Carnival, Inc.
Consolidated Statements of Shareholders' Equity
(In thousands)
Common Stock Additional
------------------------- Paid-In Retained Treasury
Issued Treasury Amount Capital Earnings Stock Total
------- -------- ------ ----------- --------- -------- --------
Balance at January 29, 2000 13,345 (292) $ 133 $ 63,683 $ 31,953 $(2,424) $ 93,345
Exercise of stock options 18 17 1 605 90 696
Employee stock purchase plan purchases 22 125 125
Common stock repurchased (1,153) (7,576) (7,576)
Net income 9,723 9,723
------- ------- --------- ---------- --------- ------- --------
Balance at February 3, 2001 13,363 (1,406) 134 64,288 41,676 (9,785) 96,313
Exercise of stock options 392 464 2,622 3,086
Employee stock purchase plan purchases 14 128 128
Net income 12,575 12,575
------- ------- --------- ---------- --------- ------- --------
Balance at February 2, 2002 13,363 (1,000) 134 64,752 54,251 (7,035) 112,102
Exercise of stock options 242 1,001 1,705 2,706
Employee stock purchase plan purchases 12 75 168 243
Net income 15,840 15,840
------- ------- --------- ---------- --------- ------- --------
Balance at February 1, 2003 13,363 (746) $ 134 $ 65,828 $ 70,091 $(5,162) $130,891
======= ======= ========= ========== ========= ======= ========
See notes to consolidated financial statements
20
Shoe Carnival, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Fiscal years ended
February 1, February 2, February 3,
2003 2002 2001
---------------- ---------------- ---------------
Cash Flows From Operating Activities
Net income $ 15,840 $ 12,575 $ 9,723
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 12,484 11,172 10,346
Loss on retirement and impairment of assets 278 283 321
Deferred income taxes 296 116 1,237
Other 338 174 (88)
Changes in operating assets and liabilities:
Accounts receivable 381 (231) (373)
Merchandise inventories (10,443) (12,613) (18,305)
Accounts payable and accrued liabilities 8,627 11,254 515
Other (80) (400) (266)
------------ ----------- -------------
Net cash provided by operating activities 27,721 22,330 3,110
------------ ----------- -------------
Cash Flows From Investing Activities
Purchases of property and equipment (19,144) (10,395) (14,029)
Lease incentives 1,420 1,026 1,048
Other 0 0 2
------------ ----------- -------------
Net cash used in investing activities (17,724) (9,369) (12,979)
------------ ----------- -------------
Cash Flows From Financing Activities
Net (payments) borrowings under line of credit (11,775) (13,000) 19,000
Payments on long-term debt (848) (943) (824)
Proceeds from issuance of stock 2,949 3,214 821
Common stock repurchased 0 0 (7,576)
------------ ----------- -------------
Net cash (used in) provided by financing activities (9,674) (10,729) 11,421
------------ ----------- -------------
Net increase in cash and cash equivalents 323 2,232 1,552
Cash and cash equivalents at beginning of year 5,459 3,227 1,675
------------ ----------- -------------
Cash and Cash Equivalents at End of Year $ 5,782 $ 5,459 $ 3,227
============ =========== =============
Supplemental disclosures of cash flow information:
Cash paid during year for interest $ 985 $ 2,506 $ 2,013
Cash paid during year for income taxes 8,319 7,226 4,627
Capital lease obligations incurred 47 440 783
See notes to consolidated financial statements
21
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.
22
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":
(000's)
Fiscal years 2002 2001 2000
------------- ------------- --------------
Basic shares 12,561 12,124 12,354
Dilutive effect of stock options 415 359 101
------------- ------------- ---------------
Diluted shares 12,976 12,483 12,455
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
23
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:
In thousands, except per share data
Fiscal years 2002 2001 2000
---------------- ---------------- -------------
Net Income as reported $ 15,840 $ 12,575 $ 9,723
Deduct: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (832) (861) (1,048)
---------------- ---------------- -------------
Pro forma net income $ 15,008 $ 11,714 $ 8,675
================ ================ =============
Basic net income per share
As reported $ 1.26 $ 1.04 $ .79
Pro forma $ 1.19 $ .97 $ .70
Diluted net income per share
As reported $ 1.22 $ 1.01 $ .78
Pro forma $ 1.16 $ .94 $ .70
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:
Fiscal years 2002 2001 2000
------------- ------------- ---------------
Risk free interest rate 4.7% 4.3% 5.9 %
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 61.3% 70.8% 71.5%
Expected term 5 Years 5 Years 5 Years
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.
24
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.
25
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - Continued
Note 3 - Property and Equipment - Net
The following is a summary of property and equipment:
(000's) February 1, February 2,
2003 2002
------------- -------------
Land $ 205 $ 205
Buildings 9,109 9,034
Furniture, fixtures and equipment 67,901 56,329
Leasehold improvements 43,335 37,607
Equipment under capital leases 2,386 4,259
------------- -------------
Total 122,936 107,434
Less accumulated depreciation
and amortization 59,459 50,185
------------- -------------
Property and equipment-net $ 63,477 $ 57,249
============= =============
Note 4 - Accrued and Other Liabilities
Accrued and other liabilities consisted of the following:
(000's) February 1, February 2,
2003 2002
------------- -------------
Employee compensation and benefits $ 4,457 $ 4,027
Other 4,819 4,374
------------- -------------
Total accrued and other liabilities $ 9,276 $ 8,401
============= =============
Note 5 - Long-Term Debt
Long-term debt consisted of the following:
(000's) February 1, February 2,
2003 2002
------------- -------------
Credit agreement $ 15,225 $ 27,000
Capital lease obligations (see Note 6) 705 1,506
------------- -------------
Total 15,930 28,506
Less current portion 427 834
------------- -------------
Total long-term debt, net of current portion $ 15,503 $ 27,672
============= =============
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.
26
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:
(000's)
Fiscal years 2002 2001 2000
------------- ------------- --------------
Rentals for real property $ 28,544 $ 25,670 $ 22,102
Equipment rentals 517 446 419
------------- ------------- ---------------
Total $ 29,061 $ 26,116 $ 22,521
============= ============= ===============
Future minimum lease payments at February 1, 2003 are as follows:
(000's) Operating Capital
Fiscal years Leases Leases
------------- -------------
2003 $ 29,358 $ 468
2004 27,741 235
2005 25,961 58
2006 24,839 0
2007 23,850 0
Thereafter to 2014 69,900 0
------------- -------------
Minimum lease payments $ 201,649 761
=============
Less imputed interest at rates
ranging from 7.9% to 9.3% 56
-------------
Present value of net minimum lease
payments of which $427 is
included in current liabilities $ 705
=============
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:
(000's) February 1, February 2,
2003 2002
------------- -------------
Equipment $ 2,386 $ 4,259
Less accumulated amortization 1,347 2,205
------------- -------------
Equipment under capital
lease-net $ 1,039 $ 2,054
============= =============
27
Shoe Carnival, Inc.
Notes to Consolidated Financial Statements - Continued
Note 7 - Income Taxes
The provision for income taxes consisted of:
(000's)
Fiscal years 2002 2001 2000
------------- ------------- ---------------
Current:
Federal $ 8,468 $ 6,845 $ 4,518
State 740 584 593
------------- ------------- ---------------
Total current 9,208 7,429 5,111
------------- ------------- ---------------
Deferred:
Federal 276 109 1,096
State 20 7 141
------------- ------------- ---------------
Total deferred 296 116 1,237
------------- ------------- ---------------
Total provision $ 9,504 $ 7,545 $ 6,348
============= ============= ===============
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:
Fiscal years 2002 2001 2000
------------- ------------- ---------------
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefit 2.0 1.9 5.0
Other 0.5 0.6 (0.5)
------------- ------------- ---------------
Effective income tax rate 37.5% 37.5% 39.5%
============= ============= ===============
28
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:
(000's) February 1, February 2,
2003 2002
------------- ------------
Deferred tax assets:
Accrued rent $ 921 $ 769
Accrued compensation 334 313
Accrued employee benefits 330 246
Federal net operating loss carryforward 0 41
Lease incentives 109 10
Other 143 180
------------- ------------
Total deferred tax assets $ 1,837 $ 1,559
============= ============
Deferred tax liabilities:
Depreciation $ 3,017 $ 2,246
Purchase accounting adjustments 654 654
Inventory valuation 822 1,075
Inventory purchase discounts 1,414 1,358
------------- ------------
Total deferred tax liabilities $ 5,907 $ 5,333
============= ============
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.
29
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.
30
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:
Weighted Average
Shares Exercise Price
------------------------- -------------------------
Outstanding Exercisable Outstanding Exercisable
----------- ----------- ----------- -----------
Balance at January 29, 2000 1,009,346 534,382 $ 8.60 $ 6.68
Granted 579,800 5.79
Cancelled (66,750) 9.80
Exercised (35,735) 8.96
--------- ------
Balance at February 3, 2001 1,486,661 656,131 7.50 $ 7.66
Granted 15,000 11.08
Cancelled (55,954) 6.97
Exercised (392,791) 6.68
--------- ------
Balance at February 2, 2002 1,052,916 681,741 7.89 $ 8.21
Granted 314,000 17.05
Cancelled (35,326) 11.09
Exercised (241,457) 8.48
--------- ------
Balance at February 1, 2003 1,090,133 653,247 $10.29 $ 8.09
========= ======
The following table summarizes information regarding outstanding and exercisable
options at February 1, 2003:
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Number Weighted Weighted Number Weighted
Range of of Options Average Average of Options Average
Exercise Price Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ----------------- ----------- -------------- -------------- ----------- --------------
$ 4.38-6.00 384,424 6.0 $ 4.85 296,560 $ 4.97
$ 8.25-10.88 121,152 6.7 $ 8.68 75,797 $ 8.68
$ 11.00-11.50 275,390 5.9 $ 11.09 269,890 $ 11.08
$ 11.63-19.56 309,167 9.1 $ 17.00 11,000 $ 14.79
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.
31
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:
(In thousands, except per share data)
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales $129,384 $124,626 $137,703 $127,986
Gross profit 39,082 35,761 40,465 34,479
Operating income 9,321 5,888 8,089 2,831
Net income 5,661 3,555 4,955 1,669
Net income per share - Basic $ .45 $ .28 $ .39 $ .13
Net income per share - Diluted $ .44 $ .27 $ .38 $ .13
(In thousands, except per share data)
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales $117,186 $113,986 $124,778 $120,606
Gross profit 34,956 32,254 36,813 31,108
Operating income 7,669 4,629 7,881 2,216
Net income 4,290 2,502 4,625 1,158
Net income per share - Basic $ .36 $ .21 $ .38 $ .09
Net income per share - Diluted $ .35 $ .20 $ .37 $ .09
32
SHOE CARNIVAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Charged
Balance at (Credited) to Balance at
Beginning Costs and End of
Descriptions of Period Expenses Period
------------ --------------- ------------------- -----------------
Year ended February 3, 2001
Reserve for sales returns and allowances $ 114,492 $ 0 $ 114,492
Inventory reserve $ 1,600,000 $ 550,000 2,150,000
Year ended February 2, 2002
Reserve for sales returns and allowances $ 114,492 $ 0 $ 114,492
Inventory reserve $ 2,150,000 $ (100,000) $ 2,050,000
Year ended February 1, 2003
Reserve for sales returns and allowances $ 114,492 $ 0 $ 114,492
Inventory reserve $ 2,050,000 $ 500,000 $ 2,550,000
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.
33
PART III
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. 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. 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. 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. 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.
34
PART IV
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.
35
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)
36
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
37
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
38
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
39
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.
40